BRIAN KANTOR: What the markets have told us about GNU — and will continue to do so

You might have expected more volatile markets in this election year. Yet investors on the JSE and New York Stock Exchange have coped comfortably with the potential dangers. Daily volatility on both share markets — the scale of daily ups and downs in average share prices — has been unusually subdued, well below long-term averages in the US.

Electing a scoundrel or cognitively challenged US president has not made much of a difference to stability in the US markets. The coalition outcome in SA proved welcome, but not much of a surprise judging by volatility trends. The volatility index for the S&P 500 (VIX), also known as the fear index, has averaged 13 this year, well below the 2000-24 daily long-term average of 19. The equivalent construct for the JSE, the SA volatility index (SAVI) — with a similar long-term average of 21 — has also trended lower this year.

As may be easily observed, the chances of an index or well-traded share moving higher or lower on any day are about the same. The pattern is thus of a random walk, of ups being matched by downs of roughly the same average magnitude. Yet, happily for shareholders, these movements have come with a slight upward bias, above a daily average of zero, to provide shareholders with positive returns over the longer run. If they stayed invested in the share market the end result has been strongly positive annual returns over five- or 10-year periods rolled back each month.

When daily volatility is more elevated, share prices will change consistently in the opposite direction. When the VIX or SAVI go up, share prices go down most days. They do so to improve the chances of higher risk-adjusted returns — off a lower entry price — to compensate for more risk incurred, and vice versa. In 2024 it has been vice versa in the US and in SA — risks have fallen and values have improved. Extra risk comes with more returns and vice versa as nature intends. The average move for the JSE in the six months to June 2024 was an encouraging 0.27% a day. The S&P did only half as well, providing an average gain of 0.11% a day.

It is the quality of economic policy, more than the presumed certainty of such policies, good, bad or somewhere in-between, that will matter more for financial markets in the long run. Any willingness of investors to accord an SA-facing business an extended economic life will also add to present values. Provided the return on equity exceeds the opportunity cost of capital, a nation’s expected growth for the longer term can explode the present value of a share, and market multiples.

An accompaniment of lower return on equity and a lower discount rate attached to future surpluses would also add much market value to SA companies and to their willingness and ability to undertake and fund growth-enhancing capex and employment. Faster growth, if realised, will add to an extra flow of cash to the government, bringing less risk to the fiscal outlook. And it would be reflected in lower interest and discount rates across the board and higher share prices.

Extra wealth created in the bond and equity markets is a game played by all with formal employment and retirement plans, not only the richer few. The capital markets will provide an objective measure of the performance of the government of national unity (GNU). The score will be continuously kept and updated.

While investors have not been frightened by the GNU, they have still to give approval. Over to the GNU.

• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.