South African policymakers have extensively invested in capital market liberalisation making the country one of the most integrated economies within emerging markets. This study analysed the impact that overall capital flows, foreign direct investment and foreign portfolio flows into and out of South Africa had on GDP and the Johannesburg Stock Exchange using quarterly data between 1995 and 2016. The study found that the Johannesburg All Share Index (ALSI) and South African gross domestic product (GDP) were both influenced by capital flows in the form of FDI and FPI as suggested by the cointegration tests. Further, it was observed that
JSE returns were mostly affected by both FDI and FPI in the short-run whilst GDP was mostly affected by capital flows in the long-run. The Markov switching model suggested that economic growth as measured by GDP was more responsive to both positive and negative economic cycles compared to ALSI returns.
