An analysis of the co-movement between South African and global mining indices

Abstract

After the 2008 global financial crisis the need to understand the level of financial market integration has risen dramatically. Consideration has especially been given to investigating the link between commodities and stocks, since the former are now more frequently incorporated into portfolio allocations. Recent international events such as the British Referendum aimed at a decision to leave the European Union and the United States Presidential Election have emphasised the significance of understanding the degree of financial market integration. This argument becomes particularly relevant for South Africa when considering the dualistic nature of its market in terms of the country’s fiscal environment and sophisticated financial sector. The Johannesburg Stock Exchange is the second oldest bourse on the African continent and owes its existence to South Africa’s first gold rush at Witwatersrand during the late 1880s. Moreover, mining has been the country’s mainstay over the past 100 years. Furthering the argument, this study focuses specifically on examining the co-movement of South African mining indices with global mining indices. Although a vast body of literature exists on financial market integration, to the author’s knowledge no studies have examined the co-movement of mining indices in particular. The first objective of this study has been to establish the degree of integration for South African mining stocks and then to further identify possible idiosyncratic factors that may be able to explain the variation in returns for the country’s mining indices. An attempt is also made to link the common global factor with macro-economic variables that serve as prominent drivers for the various sectors during different stages in time. Three global samples are investigated, viz. Iron & Steel, Mining and Gold. Factor analysis is employed to empirically examine co-movement. This study addresses the dynamic nature of financial market integration by considering a rolling window approach. Empirical findings show that the South African Mining and Gold indices are more integrated with global markets, less so for Iron & Steel. Evidence of increasing market integration is observed for South African indices. It is apparent that idiosyncratic events are particularly influential in driving South African mining stocks at times. The Marikana events are an appropriate example of how local events can affect stock markets. It is also evident that different macro-economic variables become more substantial in describing the variation of global mining indices during various stages in time. Findings also show that significant economic events like the global financial crisis have a more profound impact on global indices that fall under the non-ferrous category. This is also observed for the South African indices.