Macroeconomic indicators and the Johannesburg Stock Exchange Financial 15 Index nexus in South Africa

Abstract

This study explores the macroeconomic indicators and the JSE Financial 15 index in South Africa using quarterly data from 2004Q1 to 2024Q4. A Vector Error Correction Model (VECM) is used to model short- and long-run linkages between the variables of the study, after unit root and structural break tests; Granger causality is applied to identify predictive directions. Inflation (CPI) and interest rate (INT) are positively associated with the long-run JSE Financial 15 index (LJSE15), whereas exchange rates (EXR) and LGDP exhibit an inverse long-run relationship. In the short run, only CPI at lag 1 and INT at lag 2 significantly and positively affect changes in LJSE15. Granger causality runs from INT and EXR to LJSE15, indicating their usefulness for forecasting Financial 15 movements. The model excludes some standard financial determinants, such as money supply, which could refine stock price dynamics. From a structural perspective, the findings show how sensitive South Africa's financial sector is to macroeconomic conditions. Therefore, when the economy gets a shock, the financial sector plays a key role in how that shock spreads and how it assists in softening the impact. This suggests that clear, transparent and predictable interest rate signalling, as well as exchange rate stability to avoid sharp depreciations, is important for maintaining stability in financial sector equity valuations. The findings are expected to enhance insights for more informed investment decisions for pension funds, asset managers and investors aiming to optimize their portfolio allocation strategies. By focusing on the sector-specific JSE Financial 15 index rather than aggregate market indices, the study offers nuanced evidence to guide investors, researchers and policymakers in understanding macro financial linkages and designing informed investment and policy decisions.