Equities enter less fearful terrain

2009-06-11 12:21

Johannesburg - After closing 2008 at an index level of 43.02, the South African Volatility Index (Savi) is now at a far less fearful 27.04. It had struck a worst this year of 47.69 on January 23, but the trend is heading towards more comfortable terrain.

The index had risen from a level of 27.62 at the beginning of September 2008 to a new high closing level of 57.97 on October 27, and then underwent a volatile spell until the lower trend set in.

The higher the volatility index, the greater the level of fear or uncertainty in the market, and the lower the index, the more complacency there is in the market.

And 2008 certainly showed high levels of fear as this index worsened from a trough of 20.63 on May 19 2008 to the peak of 57.97 on October 27 - reflecting a 181% turnaround in fear levels. The index had started 2008 at 26.88 and ended it at 43.02, a worsening in the fear stakes of 60%.

The credit crisis led to the heightened levels of fear between September and October, a period during which the index went from 27.62 to 52.14 at the end of October - a rise of 89%.

The Savi is based on emerging market equities and is thus generally expected to be more volatile than the Chicago Board of Options Exchange's volatility index - the Vix. This was not the case last year as the developed world struggled under the weight of the credit squeeze.

The developed world's fear gauge struck 18.810 on August 22 last year and then the party ended in dramatic fashion as it proceeded to increase by a whopping 326% to peak at 80.060 on October 27.

It too, though, has been coming off and was last at 28.460 after starting the week at 29.770 and this month at 30.040.

Analysts have said that the difference between these two indices can reflect a "fear premium" between the first and emerging worlds, but the events of last year did appear to reverse this premium in favour of a market like South Africa.

The Savi is gained from Top40 option prices and measures the expected level of volatility in the local equity market over an upcoming 90-day period.

- I-Net Bridge