Un­cer­tainty con­tin­ues as in­ter­na­tional in­vestors re­main wary be­cause of the is­sue of land ex­pro­pri­a­tion with­out com­pen­sa­tion

Financial Mail - Investors Monthly - - Contents - Petri Redel­inghuys

Dur­ing the course of this month global mar­kets ex­pe­ri­enced some tur­moil. The US mar­ket has pulled back from record highs, break­ing the up­trend that has been in place for most of the year.

This leads to a flight to safety, and safe-haven as­sets are likely to come into favour.

This means the rand should con­tinue to be frag­ile, so trad­ing a long po­si­tion on the USD/ZAR cur­rency pair seems like a fairly safe play.

You can choose to ei­ther trade it by buy­ing an ETN, like the New Wave USD Ex­change Traded Note, or you can buy a USD/ZAR cur­rency fu­ture or a con­tract for dif­fer­ence (CFD). The lower-risk op­tion would be to buy the ETN as there is no gear­ing on the in­stru­ment.

The view that the rand will re­main weak in the medium term is backed by a num­ber of dif­fer­ent cat­a­lysts.

First, there is the re­main­ing un­cer­tainty around ex­actly how the gov­ern­ment wants to im­ple­ment land ex­pro­pri­a­tion with­out com­pen­sa­tion.

This is a de­ter­rent to in­ter­na­tional in­vestors as they are not cer­tain what the im­pact will be on fixed prop­erty in­vest­ments.

We might know that pri­vate hous­ing and com­mer­cial prop­er­ties are likely to be un­af­fected by land ex­pro­pri­a­tion with­out com­pen­sa­tion, though in­ter­na­tional in­vestors and large funds will prob­a­bly not want to take that risk.

Sec­ond, we do not yet know what the fi­nal form of the new min­ing char­ter will look like. This is yet an­other source of un­cer­tainty.

It is likely that nei­ther of th­ese over­hangs will be re­solved to the sat­is­fac­tion of the out­side world be­fore the elec­tion in April 2019.

Third, we can­not ig­nore the fact that our econ­omy is in re­ces­sion and that we are be­ing badly af­fected by higher oil prices (though this has eased lately).

The Re­serve Bank mov­ing to in­crease in­ter­est rates might pro­vide some sup­port for the rand, though the knock-on ef­fect that could have on con- sumer spend­ing might just be big enough to stay its hand.

Fi­nally, tur­moil in other emerg­ing mar­kets and un­cer­tain­ties about Italy and its place in the Euro­pean Union are likely to keep driv­ing in­vestors to­wards safe havens.

In con­clu­sion, there are a great many fac­tors stacked against the rand at this stage and it ap­pears that for the next six to 12 months, things might not be so easy or turn around for our cur­rency.

There­fore, prof­it­ing from it los­ing value against the dol­lar seems like the only log­i­cal course of ac­tion.

Short — J212 (Fi­nan­cial 15 In­dex)

This will have to be a de­riv­a­tive trade as short­ing can­not be done with­out lever­age.

There are two main op­tions avail­able to traders who want to short this in­dex, ei­ther the J212 In­dex Fu­ture, or by tak­ing a short po­si­tion by mak­ing use of a CFD on the Sa­trix FINI Ex­change Traded Fund.

Once again, this trade is some­what fo­cused on the same theme of the con­tin­ued de­te­ri­o­ra­tion of the rand, though it looks to lock in profit by the fi­nan­cial and bank­ing sec­tors com­ing un­der pres­sure. The in­verse cor­re­la­tion be­tween fi­nan­cials and the per­for­mance of the rand is well known, though it is not the only rea­son why a short po­si­tion on fi­nan­cials has the po­ten­tial to be suc­cess­ful.

The Re­serve Bank does not have much room to in­crease in­ter­est rates, which is some re­lief to the banks at least as float­ing rate con­sumer debt (debt that is linked to the pre­vail­ing in­ter­est rate) does not come un­der more in­ter­e­strate-driven pres­sures, though it also does mean the in­creased mar­gins banks make on charg­ing higher in­ter­est rates will not aid the banks in terms of earn­ings.

Not only that, but with the seem­ingly never-ceas­ing in­crease in un­em­ploy­ment, we must start to won­der how much longer con­sumers will be able to ser­vice their debts.

The pos­si­bil­ity of an in­crease in de­faults among bank cus­tomers re­mains preva­lent.

In gen­eral, the fi­nan­cial sec­tor is deemed the bell­wether of the econ­omy, and things in the econ­omy are not look­ing good.

From a tech­ni­cal anal­y­sis stand­point, the Fi­nan­cial 15 in­dex might have made a new high this year (2018), though it is only slightly higher than the high reached dur­ing 2014 and there­fore can be seen as a po­ten­tial mul­ti­year dou­ble top.

If this is in fact the case, and fo­cus­ing on the Sa­trix FINI ETF, we could see the in­dex pull back be­low the lows of 2016 and drive the Sa­trix FINI ETF price down to the mid-to-low R12 re­gion, if not lower.

With the seem­ingly never-ceas­ing in­crease in un­em­ploy­ment, we must start to won­der how much longer con­sumers will be able to ser­vice their debts. The pos­si­bil­ity of an in­crease in de­faults among bank cus­tomers re­mains preva­lent

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