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The collapse of the Rand to around R17/$ no doubt caused a huge knee-jerk reaction among the SA public and corporations. Hedging against Rand depreciation by corporations skyrocketed, whilst private individuals shifted (and continue to shift) as much of their assets to Rand-hedge instruments or even fully fledged offshore ones.
We have seen this picture before. There’s a standing joke among seasoned forex traders that when state-owned enterprises (such as SAA) load up with Rand hedges to the max, you can bet the Rand has topped out and will strengthen. No different for the local investing public. It’s a classic contrarian trade.
As we have mentioned before, the SA economic cycle most likely emerged from a protracted, but shallow 34-month recession around the fourth quarter of 2016, and the commodities complex is in a full-blown bull market. This is a very dangerous time to be betting against the Rand. Despite foreigners dumping our stocks and bonds at an unprecedented rate in light of potential credit downgrades, there are much larger forces that are creating massive tailwinds for the Rand which we have discussed over here.
It is quite within the realms of feasibility that we see the Rand strengthening to R12.00 to the US dollar.
Here is a chart showing the percentage of time since 2008 that the Rand/$ has shown an inverse correlation to the resources sector on the JSE for various rolling time-period windows. It peaks at around 16-18months. This means that since 2008, the 16-18month inverse correlation between the Rand and the resources sector is present 84% of the time.
So there is a strong tendency (84% of the time over 16-18 month periods) for the Rand to strengthen (smaller exchange rate) when commodities rise. Here is the 18-month rolling correlation between the Rand/$ exchange rate and the J210 resources index on the JSE:
Not only is the Rand inversely correlated to the movement of the resources shares on the JSE for most of the time, it is also STRONGLY inversely correlated, currently sitting at about -0.75 at the moment.
Given that the resources bull is in its first year of a likely three-year or more bull market, the prognosis is hugely in favour (at least for the next 18 months) of forces conspiring to keep the Rand strong - precisely when SA corporations and private investors are sitting on the wrong side of that trade.
As negative as one is likely to get with all the political shenanigans, the remarkable tendency of our government to shoot itself in the foot, our perilous finances and sluggish economy, there are other more powerful forces afoot that are likely to be keeping the Rand at current strong levels, much to the surprise of the general public.
Now more importantly, you need to appreciate that with the JSE TOP40 heavily dominated with dual-listed, offshore Rand hedges, the very reason the JSE never collapsed (in Rands at least) in the last recession and bear market will now conspire to provide significant headwinds to the index. A strong Rand means the earnings of these counters (in Rands) are likely to come under pressure. The lack of a decent-size bear-market correction of 20% or more thus leaves the TOP40 with very little margin for safety. This bull market is likely going to be a stock/sector-pickers market and the index followers are going to be disappointed if they are expecting similar returns to the last bull market.
For an idea of which sectors performed the best coming out of the 2008 Great Recession, see "Shares that should recover best from this recession". For some techniques for picking JSE shares most likely to outperform the general indexes, see "The most investable shares on the JSE right now", "Top Dividend Yielding Stocks" and "Top-5 Stock Picks for 2017"
Our Sharenet Securities brokerage team also regularly provides some trading tips each morning in VIEWS, with their column "From the Trading Desk"
If you would like access to our video training library on USB memory stick, (filmed professionally at lectures provided at UCT) to help you prepare for the next bull market (a once-in–a-decade event) then contact firstname.lastname@example.org or phone 021-7004823. Each video ranges from 3-4 hours and covers "Introduction to the Markets", "Introduction to Technical analysis", "Advanced Trading & Investing Techniques" (that’s me!) and "Forex Trading with CycleTrends". The videos all have dual-tracks allowing you to view Presenter only, Slides Only or Presenter and Screen side by side as shown below:
Dwaine van Vuuren
RecessionAlert, PowerStocks Research
Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.