Globetrotting through the JSE

• Global, South Africa
• Emerging markets, JSE, Rand hedge, Risk-off, Risk-on
• April 6, 2020

Most JSE indices (e.g. the “All Share Index”) are market cap weighted. This means that larger companies carry a higher weighting in the index.

Larger companies typically derive their profits from a variety of countries. Examples include Naspers, Richemont, Aspen and British American Tobacco. Their success or failure doesn’t depend on the state of the South African economy.

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These (and many others) are the so-called “Rand hedge” stocks which allow investors to obtain exposure to foreign lands without actually moving their money offshore.

Their share prices will move in relation to global news, not just South African news. In doing so, they will move the index too.

It might sound like a scene from Karate Kid, but it isn’t.

Risk-on trades happen when there is good news globally, e.g. a decline in the COVID-19 death rate in major economies. This benefits all emerging markets because investors are more inclined to invest in risky assets.

In contrast, a risk-off trade happens in the wake of bad news. Jittery investors shift out of risky assets, hurting stocks on the JSE along with the likes of Brazil, India, Turkey etc.

We can now examine how these three things can happen on the same day.

Positive news regarding the COVID-19 death rate in important economies like Italy and France helped drive global markets higher. The JSE was no exception to this.

The SARB told the market that the budget deficit could be in line with levels last seen during the World Wars. That sound horrific (and is), but isn’t anything that institutional investors weren’t expecting. I’ve seen a number of reports estimating a 2020 deficit of between 10% and 15%, so this was probably priced in.

Finally, more Rand pain means the Rand hedge stocks do better. They earn income in global currencies, so South African shareholders benefit from this when the Rand gets worse.

The critical thing to understand is that the JSE indices are impacted by far more than just South African newsflow. This is part of what makes investing so interesting, but also so complicated.