Do Geopolitical Risk and Market Conditions Drive JSE Sector Returns?

Although equity markets contribute immensely to economic growth, they are susceptible to various risks, including geopolitical risks. Despite this, emerging markets such as South Africa have failed to examine geopolitical risk as a determinant of equity market returns under various market conditions. On this basis, this study aims to investigate the effect of geopolitical risk on South African sector returns under changing market conditions from February 1996 to December 2023. This study introduces the Markov regime-switching model, and the findings demonstrate that geopolitical risk has a regime-specific effect on the Johannesburg Stock Exchange (JSE) sector returns. Moreover, regardless of the effect of geopolitical risk, the consumable goods and consumables services index performed well. This implies that the JSE aggregated market can be used to track the performance of these two markets. The study concludes that the JSE All-share, Consumable goods, and Consumable services indices could be investors’ safe haven during geopolitical tension and equity market uncertainty. However, investors and portfolio managers should be strategic when investing in the JSE industrials and mining indices because they are highly volatile and produce the lowest returns.