By Charl de Villiers, Head of Equities at Ashburton Investments

Given the US administration’s chaotic overhaul of global trade and their disregard of the impact of changes on existing geopolitical relationships and asset prices, volatility has remained front of mind this year.

Volatility in financial markets has many faces but simplistically, it is the rapid and unexpected variation in asset prices often due to the herding behaviour of market participants, which is linked to our fear and greed emotional responses. Both of which appear to be in abundance given heightened tariff anxiety, coupled with the stellar performance of equity markets, and in particular the US tech sector, over the past decade.

Elevated investor risk appetite in the face of uncertainty

Despite tariff anxiety, perversely, investor risk appetite remains elevated. In fact, the level of margin debt relative to money supply in the United States is now back at pre-global financial crisis (GFC) levels, indicating that despite current macro uncertainty, many US investors are still willing and able to use financial leverage to amplify their prospective returns!

Globally, technology has democratised equity market participation and many new retail equity market participants have yet to experience a prolonged market downturn or a permanent loss of capital. In fact, the US equity markethas proved to be a resilient wealth creator over the past decade for those with the means to participate. There is a lot of evidence showing risk appetite is at extreme levels.  Meme-led investment strategies (investments hyped by social media frenzies) are re-emerging and ‘buy the dip’ mentality continues to yield profitable results, as evidenced by the +40% rally of the Nasdaq index from its tariff-induced April sell-off, despite the macro environment deteriorating. These recent successes are further entrenching a culture of extreme risk-taking in the face of uncertainty, further amplifying the potential for future volatility in global financial markets.

A greater domestic appetite for speculation

Closer to home, South Africans have also shown an increased appetite for speculation amid this year’s elevated volatility. However, given lower levels of financial inclusion, many ordinary South Africans appear to have migrated their speculative activities to the more accessible local online gambling market.

National Gaming Board data shows that South Africans spent a staggering R1,1 trillion on gambling activities last year, which was close to 17% of GDP and implied +40% year-on-year growth. Two thirds of this annual gambling spend was directed into the growing sports betting sector. Given these stats, we can understand how several well-known South African online betting brands can afford to have their brands emblazoned across the chests of several English premier league football clubs matchday shirts.

A migration to precious metals

Our local equity market’s year-to-date volatility has been linked to the aggressive rally in the macro-led precious metals sector. This has been counterbalanced with the weakness across many South African domestic-facing counters as local macro fundamentals deteriorated and political sentiment weakened as our government of national unity honeymoon period ended. This has resulted in a ‘two-speed’ local equity market over the past six months as investors crowded into the precious metal trade and are not yet willing back government’s reform agenda - due to political instability and the uncertainty relating to US tariffs’ negative impact on the South African economy.

Volatility is not only bad

Financial markets have evolved to consider volatility and risk interchangeably, in the process implying that all volatility is undesirable. However, as with most things in life, a level of nuance is required. Not all volatility is bad. In fact, active managers rely heavily on the fact that markets are inefficient over the short term. Periods of asset price inefficiency are essential in providing opportunities for active managers to create value for their investors as the herd’s primal urges of fear or greed subside, and valuation led sanity returns.

As an example, there is no significant difference in the 10% per annum average total return of the JSE all-share index versus the JSE resource 10 index’s 11% average annual return over the past decade (to June 2025). However, the JSE resource index volatility of 27% is almost double that of the JSE all-share index’s 14% volatility over this same period. So, what does volatility of 27% actually mean? It implies that there is a decent probability that the resource index return will fall between -27% and +27% from this 11% average return in a typical year. This is close to double the typical variation we can expect from the JSE all-share index returns. This highlights why some risk averse investors prefer to steer away from investing in the more volatile resource sector.

Conclusion: Spotting drawdown opportunities

However, given a shrinking locally listed universe, South African active managers need to be flexible and use sector volatility and macro related drawdown opportunities to create value for clients. It is worth highlighting that the strongest three-year return intervals for all sectors typically come immediately after the largest sector drawdowns experienced over the past few decades. Unfortunately, sector drawdowns often come concurrently as they are typically caused by some major global macro risk off event. Examples of this were the global financial crisis and the more recent Covid lock-down induced market sell-off. During these periods, one’s ability to re-allocate assets intelligently from areas which have held up better during the selloffs, into areas which have borne the brunt of the extreme pessimism, is a major influence on how much long-term value can be extracted for clients’ benefit.