- Equity momentum and sentiment dictated by Brexit vote
- Bremain would send investors into riskier assets
- Brexit could trigger recession in South Africa
Lights would go out in Johannesburg's financial district should Brexit trigger a recession. Pic: iStock
By Dylan Bester
First, let's take a look at the breadth of the South African equity market, specifically, the Top40 index of leading bluechips. Momentum Up and Down in the chart below shows the previous day's direction and short-term moving averages direction. Advancing and Declining shows the amount of stocks that closed higher or lower the previous day.
Momentum in the index has been driven by risk sentiment from opinion polls ahead of the British EU vote on Thursday. The referendum outcome is of great relevance to South African stocks as it should determine the direction and risk sentiment until we get more direction from the Federal Reserve which itself is focusing on the outcome and contagion risk.
South Africa Top 40 Index, long-term:
Source: Saxo Bank. Create your own charts with SaxoTraderGO click here to learn more
Outcomes and effects
Bremain – On the back of polls showing a possible Bremain vote for Thursday, yesterday's momentum showed advancing stocks up 86%. The likelihood of increased risk exposure if the UK remains in the EU would drive investors into riskier assets and away from safe haven assets. The effect on local listed stocks with UK exposure should recoup their speculated loss in market value. The GBP should also find some renewed strength which would put pressure on any further rand appreciation. Sentiment is very mixed at the moment but the expectation is this Bremain is more likely to occur.
Brexit – If the UK is forced out of the EU by the referendum, locally listed stocks with UK exposure (which have already lost a lot of value and seen a "pricing in" of Brexit) could experience a greater loss of market value. A win for the Brexit side could trigger a domino effect with other European countries requesting the same treatment, which means more danger within the European Union. This would cause momentum on stocks with European exposure to lose market value in the medium term. The economic impact on South Africa, which has Europe as one of its largest trading partners, could be recession in the coming months if more members of the EU request to leave. The upside of Brexit would be a possibility of the rand strengthening over the medium term.
Risk-on environment – Emerging market equities and currencies will be an investment vehicle of choice along with high risk assets.
Risk-off environment - Assets in long-term debt and low yield are investment vehicles of choice as medium-term momentum has no clear direction. Safe haven currencies are CHF, JPY as an alternative to GBP.
Update on recent South African news:
Meanwhile, a technical event has been triggered on Nedbank Group stock.
Nedbank Group (NED:xjse) – Broken channel to the upside
- Momentum: Short-term momentum is pointing upwards and supported by a breakout from a downward sloping channel.
- Risk: Average true risk is around R6 lower from the closing price meaning upside potential is limited below R177.
- Stochastics: Has moved off the oversold region around 20 and is moving towards the upside.
- Volume: Increase in volume on upward days shows support for higher prices.
- Chart: Trading in between a range of R167 and R189, with renewed support above the downward channel. Next resistance test and possible break is R189.
Update onon last week's trades
Discovery Holdings (DSY:xjse) – The risk trigger of R3 has been confirmed before a test of R110, therefore a short position is no longer valid as momentum is moving up.
ZA40.I – Traded to a low of 45,000 which triggered a good short-term momentum trade.
— Edited by Clare MacCarthy