Effective strategies for South African traders

Effective strategies for South African traders. Image credit: Unsplash

Effective strategies for South African traders

The South African economy has been particularly hard hit by geopolitical events in recent months. Expert traders offer in-depth insights into the best trading strategies.

Effective strategies for South African traders

Effective strategies for South African traders. Image credit: Unsplash

The financial markets have been devastated by the ‘blunt force trauma’ effect of the pandemic, with its relentless, wavelike battering of equities, commodities, indices, and currency pairs. The Johannesburg Stock Exchange (JSE) is hovering around a return of 2.61%, with a 52-week low of 37,177.92 and a 52-week high of 59,104 .61. The 1-year return is -0.32%, on par with many European, American, and Asian financial markets. At the time of writing [July 2020], the South African economy is experiencing slumping retail sales, declining numbers of building permits, and low mining output. 

However, the South African Rand (ZAR) has clawed back some of its losses for the year, rising to multi-month highs against the USD and other currencies. Yet this pyrrhic victory for the rand is proving to be nothing more than a flash in the pan. Based on multi-month trends, the following performances of the ZAR are noted over the past 1 year:

  • ZAR/CAD – Down 13.05% (July 22, 2020)
  • ZAR/CHF – Down 19.69% (July 22, 2020)
  • ZAR/JPY – Down 15.97% (July 22, 2020)
  • ZAR/CZK – Down 15.45% (July 22, 2020)
  • ZAR/INR – Down 8.16% (July 22, 2020)

By contrast the major currencies have performed exceptionally well against the ZAR, with the following 1-year returns being generated:

  • USD/ZAR – Up 17.84% (July 22, 2020)
  • AUD/ZAR – Up 20.06% (July 22, 2020)
  • EUR/ZAR – Up 22.19% (July 22, 2020)
  • GBP/ZAR – Up 20.04% (July 22, 2020)

These trends clearly indicate a net long position on major currencies like the USD, GBP, EUR vis-a-vis the ZAR. With gains hovering around 17% – 20% over 1 year, it is clear that trading strategies like shorting emerging market economies are the norm.  That’s precisely what is currently taking place in South Africa.  Funds are being ploughed into relatively ‘safe’ economies like Europe, the US, Canada, and the United Kingdom. South Africa is regarded as a medium-to-high-risk market in a volatile global economy. Recent credit downgrades are a case in point. As such, traders and investors are exercising caution with respect to best-practice methodology.

Effective Strategies for Trading South African Securities

Source: Trading Economics USD/ZAR

Hedge investments such as gold tend to be viable during times of economic uncertainty. South Africa, as a major player in the gold market tends to generally gain favour with international investors for precisely this reason. The price of gold has been steadily rising, particularly in ZAR terms since the precious metal is priced in USD. An exchange rate between 16 – 19, to 1 US dollar makes returns on strongly performing gold stocks appear to be an attractive investment. 

However, many challenges plague the South African gold mining industry, not least of which are exceptionally high costs of extracting the gold ore from within South Africa’s mines. The deeper the miners have to dig, the more expensive the costs. This presents a Catch-22; the gold is there, but it costs too much to dig out. The current price of gold is $1,817 per ounce, or approximately R29,798. However, rising labour costs, production costs, mining costs, extraction costs, refining costs, and maintenance costs have made gold a tricky investment.

The Viability of Investing in South African Gold

Now that stock markets are staging a semi-recovery, gold is perceived as a ‘luke warm’ option, with slightly more bullish sentiment than bearish sentiment providing momentum. Globally, interest rates are hovering around 0%, and widespread quantitative easing measures are being used to kickstart economic activity. From a cursory perspective, the price of gold is certainly an enticement to invest in the South African gold mining sector. But, decades of unprecedented declines in gold production have rapidly eroded South Africa’s status as the premier producer of gold in the world. 

Foreign investors tend to shy away from South Africa’s gold markets for many reasons, including the gold mining union and its continuous strikes, demands for unreasonable increases in wages, poor productivity, increasing taxation burdens, and bureaucratic gobbledygook. Many rank and file companies have moved chunks of their operations out of South Africa including Anglo American, and even Anglo Gold Ashanti. While it is still feasible to generate profits off South African mining operations, unprecedented capital investment is required to kickstart operations. This strategy will only yield dividends over the long-term – it is not a short-term proposition.

Foreign gold stocks and ETFs remain a viable proposition however. Leading gold exchange traded fund, SPDR Gold Trust is currently trading around $174 per share, with a market capitalisation of $72.25 billion and a price/earnings ratio of 6.24. The year-to-date performance of SPDR Gold Trust is 18.15 %, with an annualized gain of 27.53%. Incidentally, this gold stock has generated strong annual total returns for 3 of the last 4 years, with the exception of 2018 when it posted a -1.54% loss. As a rule, gold tends to perform strongly when stocks start tanking. 

Other safe haven hedges include currency options like the USD, EUR, GBP, and JPY. At a time where ZAR is struggling as a currency, the import/export balance swings in favour of exporters who now pay less for South African produced goods and services. In an export-driven economy, GDP can grow and this provides many industries with the necessary momentum to increase production. Recent economic data from South Africa indicates that retail sales dropped 12% year-on-year, in May 2021, compared to May 2020. April was the worst month on record in recent history, with a decline of 50.4%.
Investment strategies in a bearish market tend to be lopsided in favour of short sell options in futures. By taking a negative perspective on the majority of stocks, indices, currencies, commodities, it is possible to short financial instruments and generate yields in futures markets.