How to trade South Africa 40 Index: trading strategies and tips

This article looks to demystify trading the South Africa 40 Index as well as identify companies to watch, news flow, international market and currency influences as well as applying technical analysis to index trading.

JSE Source: Bloomberg

JSE top 40 index: what you need to know

The tradeable South Africa Top 40 index, derives its price from the futures price of the JSE Top 40 index. The JSE Top 40 index is a basket price or weighted average price for the top 42 shares on the Johannesburg Stock Exchange (JSE).

Ironically, it is 42 shares which make up the top 40 index, as some shares (Investec and Mondi) have multiple listings on the exchange.

A list of the shares constituents which makes up the JSE Top 40 Index (in alphabetical order) is as follows:

This makes way for other companies that have grown significantly on the broader JSE, to replace some of the companies (if any) which have declined significantly over the three-month period. The list above reflects the latest 'Top 40' list as of the last index rebalancing which took place in December 2018.

Because the index is weighted using the market capitalisation of each component share, the bigger the company, the more influence it has on movements in the index. Traders of the South Africa 40 Index might not need to follow the whole JSE Top 40 list as most of the weighting (and movement) can be attributed to the Top 10 shares in the Index.

A list of these shares and their respective weightings in the index (as of January 2019) are as follows:

JSE Top 10 Shares Top 40 Weighting
Naspers 21.60%
BHP Group 11.08%
Richemont 8.38%
Anglo American 5.58%
Sasol Ltd 4.15%
Standard Bank 4%
Firstrand Ltd 3.65%
MTN Group 2.81%
Sanlam 2.43%
British American Tobacco 2.08%

Traders of the South Africa 40 Index will want to keep a watchlist of these top 10 securities in lieu of the combined weighting of these shares accounting for over 60% of the JSE Top 40 Index.

Naspers

Naspers becomes by far the most important share to watch accounting for more than a 20% weighting in the index (at present). Naspers derives a major influence in its movements through its large investment in Tencent Holdings. Tencent Holdings is listed on the Hang Seng stock exchange in Hong Kong. The Tencent share price will have priced in most of its daily movements ahead of Naspers opening on the JSE. Movements in the Tencent share price are mostly reflected in the Naspers share price and in turn the benchmark index.

BHP Group

The BHP Group can also give an early indication as to how the index may be setting up for the day ahead. BHP trades on Australia’s All Ordinary Exchange, also ahead of BHP opening on the South African exchange. While not as heavy a weighting as Naspers in the index, it does help provide an early indication for the index price momentum early in the day.

Tips for trading South Africa 40 index

While looking at the top companies and news relating can help give traders of the South Africa 40 index a directional bias for the day, looking at shares Naspers and BHP ahead of the equity market open (9am) can help provide an early warning as to what to expect in the early hours of trade.

There are also other factors you should watch out when trading JSE top 40:

Be aware of movements on International Indices when trading the South Africa 40 Index

Major international indices, such as those from the US (Dow Jones Industrial Average and S&P 500) will often set the tone for movements on our local index. US and European equity markets are open past the close of South African markets, while Asian markets open well before the open of South African markets.

Traders of the SA 40 Cash Index might consider watching what’s happening in the global market place for context, direction and well as gauging a general sentiment for the trading day ahead.

How the rand can affect trading on the JSE Top 40 Index

Some of shares which form part of the Top 40 index earn their income in foreign denominated currencies, such as the US dollar, the British pound and the euro (to name but a few). A weaker rand would mean that when repatriating funds to South Africa, those companies would receive more of the domestic currency for their foreign currency.

Shares which derive most of their earnings in foreign currencies are known as rand hedge counters. More than 65% of earnings, from shares which make up the index, are derived in foreign currency.

In turn, a weaker rand can be considered positive influence on the Index as it would be considered positive for (rand) earnings in the shares that make up the index. Inversely, a stronger rand might be considered negative for these shares and in turn the index.

Notable rand hedge counters include the Naspers, Richemont, BHP and Sasol.

Looking at news flow for timing trades on The South Africa 40 Index

News flow is important when trading the index. News creates sentiment and that sentiment is often reflected in actions by traders and investors alike, both retail and institutional.

When planning the trading day, traders will often keep an eye on the economic and corporate calendars, as high impact news has the potential to have a high impact on the price of the index. Knowing when these catalysts are going to occur, gives us an expectation of when large moves may be realised in the market, giving the trader an opportunity to react.

When trading the South Africa 40 Index, some key scheduled economic data points to consider would be gross domestic product (GDP), consumer price inflation (CPI), trade balance, interest rate announcements and unemployment data. Traders can access this data from a number of places including IG’s economic calendar or plot some of these events on their IG charts as below if you sign up an IG trading account.

SA 40 graph

SA 40 graph

Major international economic data (US in particular) should also be of consideration. While traders might not necessarily have intricate knowledge on the news releases, a general assumption is that data which is better than expected is considered to be positive for the index, while data that misses estimates would be considered to be negative for the index.

As discussed earlier, companies such as Naspers, Richemont, BHP and Anglo American have large weightings in the index and are consequently a large influencers of movements therein. Keeping aware of news items such as (relevant) company results releases will help timing trades on the South Africa 40 index and is a worthwhile strategy to employ.

Using Technical Analysis when trading the JSE Top 40 Index

Technical analysis forms an integral part of a strategy for many traders on the index. While the subject of technical analysis is broad, keeping an eye on key levels of support and resistance is paramount.

Whether trading using fundamental, technical or news driven information, all traders will have an eye on the price to identify levels of perceived value, or levels at which the trading price may be deemed as expensive.

SA 40 graph (support and resistance)

SA 40 graph (support and resistance)

Key levels (support and resistance) also find relevance among options traders who will have strike levels on the index, which when reached can trigger significant buying or selling on the market.

Support levels are drawing at key turning points below the current trading price, while resistance levels are drawn at key turning points above the price. Both support and resistance levels are often used by traders as targets, stop loss levels as well as buy levels in trading. There are more trading strategies you can learn from IG analyst.

A summary of key strategy ideas when trading the South Africa 40 Index

  • The largest 10 shares have a combined weighting of more than 60% on the JSE Top 40 Index and can be monitored to help identify a trend bias on the day
  • International indices (US in particular) as well as companies listed on other exchanges (Naspers through Tencent and the BHP in Australia) can help give an indication to early morning direction on the South Africa 40 Index
  • A weakening rand can often be positive for the index, as a large weighting of stocks on the JSE derive earnings outside of South Africa
  • A strengthening rand can sometimes be negative for the index as it can weigh on rand hedge counters earnings in the domestic currency
  • Using economic calendars and keeping abreast of when key data points are released can help identify when high impact catalysts may be occurring to help with timing trades on the index
  • Technical analysis is a popular tool for trading the South Africa 40 Index
  • Support and resistance levels identify key areas on the index providing targets, stop loss levels as well as possible buy levels in trading

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