Izan de Bruin: What surge in market’s volatility means

Share market volatility has surged over the past week as both global and South African markets have been sliding fast, fuelling speculation that we might again be entering a fully fledged Bear phase after a period of highs. In this CNBC Africa Power Lunch interview Izan de Bruin, CEO of Xenium Financial Managers answers the big questions: what do the reverses of the past week really mean; are they justified; do they herald a longer-term decline; this is an opportunity to pile in; and what does this mean for South African shares? He also offers insights into Pick n Pay's results announcement today which saw its share price lose 6% before recovering its composure to trim that loss by half. – LF 

ALEC HOGG: Let's get a more in-depth view of how the market is trading today. We're joined by Izan de Bruin, the Chief Executive of Xenium Financial Managers. I made the mistake Izan, of looking at the JSE shortly after opening and thinking That's okay. It looks a bit green – maybe a dead cat bounce. But it went from one percent up to one percent down.

IZAN DE BRUIN: Yes, and very rapidly. After a two-and-a-half percent drop or whatever, you should expect a little bit of a bounce back. It seemed to come this morning and it looks like it's on the back of London, because they're down one-point-six-percent and we know that 60 percent of the JSE is quoted there.

ALEC HOGG: And as we were seeing, the future… America is looking at another weak opening today. Are they officially in bear market territory? This technical thing of 'ten percent off the peak was a bear market' and I think they've gone past that now.

IZAN DE BRUIN: Yes. There are new bottoms, etcetera. The European markets are in a bear. I'm not 100 percent sure about the Americans, but they must be very close if they're not.

ALEC HOGG: I suppose its technical. For example, technically in a recession or technically in a bear market. Does it feel like a bear market? I ask this because David Shapiro popped in to our studio yesterday. He's just come back from the United States. He came and paid us a visit, and said everything's booming there. He reckons that new skyscrapers are going up there in every second block in New York City. The Americans are excited and the real economy – Main Street – is doing well.

IZAN DE BRUIN: I believe that, I see that, I hear that, and I totally agree with that. However, this whole thing in Europe is drawing back on us a bit. Just the uncertainties that flow over into an emerging market, especially in South Africa and other African countries, with Ebola etcetera. The problem with Europe is that some of the historical problems are coming back, which we though had disappeared two years ago. They're talking about new credit difficulties there. That is very negative.

GUGULETHU MFUPHI: So from a local investor's perspective, should we expect our local market to dip slightly lower – maybe into that bear market, as Alec mentioned?

IZAN DE BRUIN: I do expect it to go down a bit more. It shouldn't be hugely so because we have done quite a big percentage already, but that doesn't go into anything. I think that sentiment in South Africa is still, not very good.

ALEC HOGG: Pick n Pay: six percent off on those results. Priced for perfection, it appears. The results aren't too bad.

IZAN DE BRUIN: When the market is negative, as it is now, they're just going to hit the share whether it's good or bad.

ALEC HOGG: Any new info…an excuse to sell…

GUGULETHU MFUPHI: But that sounds like an inappropriate reaction to me. Wouldn't you think that Pick n Pay shares would pick up? Is it because of the overall sentiment?

ALEC HOGG: I think the shares have probably been pushed too high.

IZAN DE BRUIN: Yes.

ALEC HOGG: Isn't that the reason there?

IZAN DE BRUIN: Yes, and if you look at the shareholder there in comparison to the other shares such as Shoprite and Massmart, those have come up very sharply over the last couple of months or so and this one hasn't come down enough. The results news is not necessarily the thing. Buy on rumour and sell on fact.

ALEC HOGG: The thing that surprised me is Sasol seems to be holding up quite well if you consider what's happened to the oil price. Of course, Sasol gets a Rand value of the oil price. At some point in time, we're going to pay less for petrol but Sasol's going to get less profit.

IZAN DE BRUIN: Yes, the one thing that is positive on the Sasol card is they are doing that restructuring and it's working well. There's a lot of people being retrenched, so their forward costs, in the longer term, is definitely going to be somewhat lower.

ALEC HOGG: You know, look at Sasol's numbers. It's the Rand price of oil. That's 90-percent of what they generate in profit.

IZAN DE BRUIN: That's true.

ALEC HOGG: If that moves the wrong way and it has moved the way.

IZAN DE BRUIN: It has moved the wrong way, so this one is holding a bit too much.

ALEC HOGG: I mention that because this week RECM said that they felt that Sasol was overpriced, before the decline in the oil price, so if this starts coming through. When do you guys redo your numbers? When do you redo your evaluations, of a stock like this?

IZAN DE BRUIN: Well, effectively what you should be doing is you should do a re-evaluation at all times on the macro level. If macro things come down everything should come down. That's the theory, while old markets will fall all at the same time, because everything is lower and your future cash flows are going to be reduced. If you, for some reason suspect that this one's future cash flow is not going to reduce as much as the others, for whatever reason that might be, that's the theory why that one holds up.

GUGULETHU MFUPHI: You touched on Europe earlier and that does seem to have impacted Mondi's quarterly-update, which they had today, with their profits taking a bit of a dip. From an investor's perspective, is it still one that you might put your money in?

IZAN DE BRUIN: For now, not. I'm slightly cautious, at this stage, well a little bit more than slightly cautious at this stage, but it's still a good share in the long term.

ALEC HOGG: What about the Vix (above), watching CNBC a little bit earlier, and again it is something that has been very low volatility on international markets. All of a sudden, the Viz is just shooting up, at 15 percent yesterday. Volatility…

IZAN DE BRUIN: I thought it was actually more than that at some stage. I think it was over 20-percent, at some stage but yes, it shows the volatility and how, all of a sudden the market is very frightened again. The vecs being the interesting one is that you can, it's the opposite of what the market does, effectively. You will see the investors go into that because it's a very good hedge, a very quick good hedge.

ALEC HOGG: Well, it effects being the volatility index, which reflects fear or comfort, so when volatility is low everybody is comfortable but the scary thing is that the vecs is shooting up, so fear is emerging again in investor's sentiment.

IZAN DE BRUIN: Yes, it is, there is definitely that, it's not going to run away to what we saw three-years ago, I'm very convinced of that. Bar, of course, unforeseen stuff at this moment but it is negative and the sentiment has been negative for two weeks, and it hasn't calmed yet. You don't quite feel the calmness in the gut yet.