The relationship between foreign portfolio equity flows and industry returns on the JSE

Abstract

This research study analyses the nature of the relationship between industry-specific foreign portfolio equity flows (FPEF) and the returns of these respective industry indices on the Johannesburg Stock Exchange (JSE). The primary aim of this study is to determine the predictability of one variable on the other by testing for Granger-causality in vector error correction (VEC) models and whether this effect can be exploited by identifying a FPEF style-based strategy that can outperform the benchmark. The time series consisted of FPEF and return data of the JSE All Share Index (ALSI) industry indices constituted by the 163 ALSI stocks from January 2009 to August 2016. The study demonstrates that the interaction between FPEF and industry returns on the JSE is dynamic and not only differs across industries, but also between the short-term and long-term effects thereof. Additionally, portfolio construction based on following FPEF patterns, reveal no persistency of superior returns relative to the buy-and-hold portfolio indicating that there is no apparent benefit of applying this investment style.