• Investec Asset Management sees lower returns on valuations
  • Volatility spread with EM peers at highest level in six years

Options traders are betting that the worst start to a year for South African equities since 2009 isn’t over yet.

Three months of declines in the Johannesburg Stock Exchange’s benchmark index has them bulking up on protection on the country’s biggest shares, pushing the cost of options of a South African exchange-traded fund to the highest level on record compared with a similar emerging-market ETF when measured on a weekly basis, according to data compiled by Bloomberg.

The weekly spread of the iShares MSCI South Africa ETF over the iShares MSCI Emerging Markets ETF is widening.
The weekly spread of the iShares MSCI South Africa ETF over the iShares MSCI Emerging Markets ETF is widening.

An economy teetering on the edge of its second recession in seven years, the highest interest rates since 2010 and the risk of South Africa’s credit rating being reduced to junk is spurring investors to sell everything from retailers and owners of private schools to financial services and pharmaceutical companies. A currency that has weakened 26 percent over the past 12 months is also threatening to push inflation above the central bank’s target range, further crimping the spending power of consumers.

“It’s very hard to say whether we’re close to finding a bottom,” Rhynhardt Roodt, an analyst at Investec Asset Management Pty Ltd., which oversees about $105 billion, said by phone from Cape Town. “Sentiment has turned very sour in a very short period of time.”

The FTSE/JSE Africa All Share Index rose for the first time in five days on Friday, gaining 1.9 percent to pare weekly losses to 2.9 percent. The gauge, which is down 4.7 percent this year, is still trading at a premium to its emerging-market peers as the weaker rand spurs a rally in commodity stocks from precious metals to iron ore, which pay costs in the local currency and earn in dollars.

The All Share Index trades at 14.9 times future earnings, compared with 10.5 for the MSCI EM Index, which has declined 10 percent this year. The South African measure has slid 12 percent since its April peak, trading in a so-called correction.

The three-month implied volatility spread between the iShares MSCI South Africa ETF and the iShares MSCI Emerging Markets ETF widened to 16.9 basis points on Thursday, the highest since Bloomberg began compiling data in 2007. Daily three-month implied volatility on the South African measure rose to 48.2 on Thursday, trading above historical volatility of 46.2 for the second day.

“Coming into this year, we were telling most of our clients that they should be expecting far lower returns going forward because starting valuations are relatively high and we’re still in the process of some of those valuations unwinding, and the earnings outlook is fairly poor,” Roodt said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE