From Gareth Stokes, MoneyWeek editor,

Dear Money Morning Reader,

How would you describe stock market volatility? Some analysts compare equity returns to a rollercoaster ride. Investors enjoy periods of calm punctuated by mindshattering drops, rapid ascents and perplexing changes in direction. Today we’ll create a second analogy by comparing equity market returns to a favourite adrenaline-junky pastime – Bungee jumping. Participants in this extreme activity get their thrills by jumping off tall bridges with only a rubber band tied to their ankles. They experience a series of rapid ‘downs’ and ‘ups’ before eventually returning to an equilibrium position. Do equity markets really have anything in common with a bridge, a dope and a rubber cord? Read on below...

It’s a stretch (if you’ll pardon the pun); but we got the idea after reading an interesting analysis of consumer demand published by Profs Carel van Aardt and André Ligthelm of the Bureau of Market Research (BMR). The pair studied the impact of recession and income on consumer demand for goods and services, loosely defined as the income elasticity of demand. You see where we’re going with this – elasticity – rubber band – Bungee jumping? On a more serious note, the report is invaluable to businesses who “need to predict changes in demand, especially in recessionary conditions, [to ensure] business profitability and sustainability!” It also forms a starting point for understanding consumer behaviour through periods of severe income decline.

What can you learn about South African consumers through recession? One of the reports overarching findings is the income elasticity of a specific product varies with levels of household income. Low income households show a strong consumption focus on basic necessities including white bread, processed meat, baby food, new bicycles, bus transport and dining room and kitchen furniture. Middle income households prefer processed and ready-made foods, sports and entertainment and investment in education and medical aid. And affluent households spend more on books, photography, gardening and private schools as well as SUV vehicles, housing and luxury goods.

You can use this information to guide your investment decisions. Consumers, regardless of income, have to satisfy their basic food and clothing requirements. The best evidence in support of this statement is the performance of locally listed retailers. Companies such as Shoprite Checkers, Spar and Pick n’ Pay performed admirably through 2008/9, while many blue chip counters took strain. Retailers enjoy ‘protection’ on two fronts. First, they stock the basic goods and services all consumers require for survival – and second, their revenues are protected by the ability to hike prices in line with inflation. A domestic food retailer, given current consensus on CPI, can add 6% to the ‘top line’ this year. All management has to do to secure profit is to manage the cost side of operations. Analysts who argue retailers are too expensive shouldn’t lose sight of the positive impact of softer food price inflation on margins – these companies are past masters at benefiting in falling price conditions.

Can you count on prices falling further through 2010? The evidence suggests food prices are already correcting rapidly – with latest figures confirming inflation well inside the central bank’s target range. In this week's MoneyWeek Round Table we ask some of South Africa’s top economists for their views on inflation, interest rates and Reserve Bank policy. Click here to find out whether you’ll benefit from further interest rate cuts through 2010!

Turning to the markets...

The JSE all share index slumped 0.25% on Friday. The gold mining index slipped 0.24%. Resources fell 0.75%. Banks and financials weakened 0.34% and 0.23% respectively. Industrials bounced 0.26% and the platinum mining index jumped 0.77%.

London's FTSE100 climbed 0.6%. The Dow Jones traded flat, up 0.07% and the Nasdaq closed up 0.17%.

Tokyo's Nikkei closed down 1.27%. Hong Kong's Hang Seng lost 0.26%.

Brent crude is currently trading at $86.17 per barrel.

Spot gold's trading at $1,148.43 and platinum was last quoted at $1,748.00

And here's how the rand is performing against the major currencies:
R/$ 7.42
R/₤ 11.44
R/€ 9.95