South African equities set for volatile 2022
- JSE just finished strongest year since 2012
- Volatility continues to be a threat
- Inflation a major factor worldwide
The past 12 months have been very good to the South African FTSE/JSE index and South African equities in general. In fact, it has been the best year since 2012, gaining nearly 20% as traders ran towards risk appetite from around the world. The market has been moving on the “reopening trade”, and a weakening South African Rand.
In fact, the MSCI Emerging Market Index had dropped 7% during that same timeframe, showing just how strong South Africa was. That being said, it must be noted that China is heavily overweighted in the MSCI EM Index.
The South African Reserve Bank has been paying close attention to inflation, which still had been in its target for most of 2021. However, inflation is starting to creep up around the world and this could cause a certain amount of problems for not only South Africa, but Africa in general.
Worldwide inflation and the solution for traders
In an inflationary environment, it is necessary to be able to trade both signs of the markets as rising interest rates tend to work against the value of equities, as simply “clipping coupons” in the bond market suddenly pays a bit more. That being the case, you need to be able to short, or bet against the value of stocks.
One of the easiest ways to do that is to use a Contract for Difference (CFD) broker, such as AvaTrade South Africa (https://www.avatrade.co.za), which allows traders to short not only South African equities, but various markets around the world. As it is a CFD broker, they also allow smaller positions than would be found through a traditional brokerage firm.
Out of Africa’s hands
Unfortunately for Africa, and the rest of the emerging market world as well, inflation is out of their hands. The Federal Reserve in the United States is considered to be the “World’s central bank”, as so many commodities are priced in US dollars. This is especially difficult for economies that are commodity based because it will drive down demand for exports.
Even emerging markets that are not necessarily commodity based also suffer, as buying essentials such as rice, wheat, and other commodities become much more expensive. (Taking more dollars to buy those commodities.)
It is because of this that traders of equities in Johannesburg or anywhere else will have to keep an eye on Jerome Powell and the Federal Reserve. That being said, there is hope in the sense that the inflation seems to be rolling over slightly in the United States, and the Federal Reserve may not be able to hike interest rates as many times as traders had priced in. In that sense, it will be very important to pay attention to major economic indicators in America.
Expect roller coaster ride
More likely than not, the first quarter of 2022 is going to be very difficult. This will more than likely be expressed in volatility across the board. Not only will stock markets see volatile swings, but it is very likely that most markets will. This is another reason to have a trusted CFD brokerage to trade with, it gives you the diversity and the ability to take advantage of the world’s markets from commodities, cryptocurrencies, currencies, and stock markets.
The year should continue to offer plenty of opportunities, but you will need to be nimble. You will need to understand whether the rate of change in the inflationary numbers suggest that we are going to have more inflation, or we are going to have less.
If inflation starts to drop, then it is very likely South African equities will see an explosive recovery. That being said, it does not necessarily suggest that it will be easy, rather there will be a very volatile time where Johannesburg is trying to stabilize a bit, and then an explosive move to the upside will accompany a “panic bid.”
By the time the second half of 2022 comes around, most pundits believe that there will have been stabilization of the markets, and perhaps the Federal Reserve will have to backtrack some of its talk of interest rate hikes.
If that is in fact the case, South Africa will see fresh money flowing into it, right along with many other emerging markets. South Africa will be especially poised to gain as traders will be looking to invest in hard commodities as well.
Employ a risk management strategy
One of the most important things that will keep traders profitable during 2022 is the ability to employ a reasonable risk management strategy. In times of volatility, most professionals will cut down their position size. If you are trading a CFD market, you have the ability to trade a full contract, or a portion of one in most markets.
When the market does in fact start to bottom, it will be a very noisy accumulation phase and therefore there will not be a need to “go all in” right away. By using partial contracts and building up a position as the risk appetite starts to increase, you can keep your trading account intact.
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