Trading opportunities post the 2019 General Election
With the elections now over, we take a look at how local financial markets have been impacted and which trading opportunities may have been presented.
Election results have been finalized and the African National Congress has secured a 57.5% majority of South Africa’s registered vote. In turn the ruling party will have 219 of the 400 seats available in the National Assembly. While an ANC victory was expected, it was the margin of victory which was the key question for financial markets. The 57.5% majority assumes a stronger mandate for Cyril Ramapahosa (and the ANC) with no need for a coalition government. The governing party will therefore have license to continue and further implement much needed reforms to grow the South African economy, fix ailing state-owned entities and deal with corruption.
Whether or not government will be able to for fill this agenda remains to be seen, however, market assumptions leading into the elections, have been that a significant margin of victory would be positive for local financial markets, with the suggestion of more policy certainty to follow.
In a previous note, ‘Rand trades firmer as 2019 Election votes are tallied’ it was highlighted that the rand had outperformed its emerging market currency peers as election outcomes began to manifest, strengthening on the news, while its BRIC (Brazil, Russia, India & China) counterparts were weakening at the time. In the 2004 and 2009 South African general elections, a similar pattern was observed in the rand’s movement, with the ZAR weakening into the election and strengthening post the event. Against the dollar the rand is well on track towards reaching the R14/$ level, a break of which could call for further strength, possibly even R13.50/$ in the near term.
JSE Sector Moves
A strengthening domestic currency is expected to have a positive influence on locally listed banking, financial, retail and (SA focused) industrial counters. Inversely, a strengthening domestic currency Is expected to have a negative influence on companies which derive a large proportion of earnings outside of South Africa’s borders (rand hedge stocks), as well as export driven industries such as that of mining.
Obviously, the rand is not the sole cause for movements in local equity markets. Over the South African election period, global markets have had a lot to contend with, most notably the ongoing trade war between the US and China, a war which threatens economic growth around the world. That being said, the rand strength has had its influence on local equities, evidenced in the chart below, which highlights JSE sector moves in the two days after the vote occurred (8 May).
The South African Banking sector was the only sector which managed to etch out gains. General Retail, Financial and Industrial counters, were outperforming sectors on a relative basis, having declined a significant amount less over the two-day period than resource counters had. Gold, platinum and diversified resource counters, whilst having to contend with the trade war narrative, would have also have found a headwind in the strengthening ZAR.
Post elections, the best performing sector in the domestic market has been the banking sector. The graph above highlights post-election gains from the four major banks. Within the outperforming banking sector, Standard bank is the outperforming bank i.e. the strongest share in the strongest sector since the elections.
Standard Bank: Trading View
The red, green and blue lines on the chart above represent the 20, 50 and 200-day simple moving averages. The moving averages are suggesting that the short medium- and long-term trends for Standard Bank remain up. 20700 marks a short term high and level of resistance for the share. Traders might look for a close (break) above this level as a suggestion that the upward trend is continuing. In this situation 21780 becomes the next upside target from the move. Should the share price instead move to close below support at 19500, the bullish indications would be deemed to have failed.
Resource counters have been amongst the worst hit post-election, although this is primarily a result of the trade war narrative, with a minor influence from the currency move. Shares are now pricing in a risk premium relative to the ongoing US China conundrum, which is likely to deepen the longer it takes for the two nations to find resolve. However, should we see some liklihood of resolve from policy makers, they do have the potential to unwind losses as quickly as they came to fruition. With this in mind we prefer not to look for short entry into the sector but rather where there might be an opportunity for long positioning. For this we look to the resource counter which has shown the most resilience in the risk aversion witnessed post-election, Exxaro Resources.
Exxaro Resources: Trading View
The long-term price trend for Exxaro remains up, despite the short-term weakness we have seen. The retracement has brought the share price back to a confluence of trend line and horizontal support. Traders looking to join the longer-term uptrend might consider waiting for an upside breakout of the downward trendline. In this scenario, 17500 becomes the intial upside target, a break of which would consider the 18000 level as a further target. Should the upside breakout occur, a close below trend line support (roughly 15700) would be used as the failure level.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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