Traders revert to traditional strategies, shift to rand-sensitive stocks

The negative cloud hanging over South Africa has encouraged a change in investing habits. People make investment decisions against this negative backdrop and this is something that we have seen with increasing regularity among our clients. Concentration seems to be flowing back to traditional strategies, in part to try to cater for exogenous events whilst considering the risks associated with trading and investing in an emerging market.

Local currency devaluation

A common theme being picked up among traders currently is that most are opting to invest in rand-sensitive stocks, such as SABMiller and British American Tobacco. When the rand weakens, as a result of images of striking workers and negative outlooks by ratings agencies, those stocks that have proceeds in currencies other than the rand will see an improvement in earnings purely on the basis of the local currency devaluation.

For example, if a company generates earnings in USD, when the rand weakens against the USD that company will see an automatic increase in its earnings, even if income being generated remains constant.

Traders often look for short-term trading opportunities during periods of increased volatility. Retail investors tend to be far more nimble in their approach to investing and trading than investment houses or individual portfolio managers, who traditionally employ a longer-term horizon.

Having said that, it is important for investors to remain cautious, as such developments have many moving parts - the strike action may cause the rand to weaken momentarily, but any news of settlements can cause our currency to move quickly in the opposite direction.