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Wednesday, January 24, 2024
Pair-Trade Holding Cost Strategy Switzerland-20 and South Africa-40
تم إعداد هذا المنشور من قبل سنشري للاستشارات
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*Trading in financial market carries risk and can result in loss of capital.
*This performance is only observed with historical backtests and not traded by the company.
The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.
Trading pairs is not a risk-free strategy. The jeopardy comes when prices of the two instruments move contrary to the positions taken resulting in losses. Thus, adhering to strict risk management rules is important when dealing with such adverse situations.
Calculations of estimated or past profits and losses do not include applicable holding costs and transaction charges.
Risks & Assumptions
This strategy involves an experienced investor going short on the South Africa 40 Index while simultaneously going long on the Switzerland 20 Index (SMI). By doing so, the investor is likely to incur a holding cost of 5.35% p.a., currently applicable to the South Africa 40 index. On the other hand, the investor will have to pay a holding cost of 4.18% p.a., presently applicable to the Switzerland 20 Index. On a net basis, investors could receive holding costs of around 1.17% p.a. (with 2x leverage).
The figures in the table have been derived by taking long positions in the Switzerland 20 while simultaneously shorting the South Africa 40 index with equal exposure on both sides. Over the past 10 years, employing two times leverage, thisstrategy would have yielded a total profit on investment of almost 32% (averaging 3% annually) with a hit ratio of 60%.
Despite South Africa outperforming Switzerland on a total return basis 7 out of 10 times in the past, the holding cost strategy has minimized losses and has infact returned gains 6 out of the 10 times with 2x leverage. The loss has only exceeded 2% only once in the last 10 years in 2022 with 2x leverage.
Total Returns and Past Performance in the last 10 years
| Year | Swiss Yearly Total Return | South Africa Yearly Total Return | Long: Swiss Short: SA Net Return on Investment | Net Holding Cost Received on Investment | Total Return on Investment (Including Holding Cost) | Profits Each Year on Investment |
| Investment | $100,000 | $100,000 | $100,000 | $100,000 | ||
| Leverage | 2x lev | 2x lev | 2x lev | 2x lev | ||
| Exposure | $200,000 | $200,000 | $200,000 | $200,000 | ||
| 2014 | 12.93% | 9.23% | 3.70% | 5.53% | 9.23% | $9,232 |
| 2015 | 1.14% | 7.62% | -6.48% | 6.29% | -0.19% | ($188) |
| 2016 | -3.39% | -1.53% | -1.86% | 7.12% | 5.25% | $5,253 |
| 2017 | 17.88% | 23.20% | -5.32% | 7.05% | 1.73% | $1,734 |
| 2018 | -7.05% | -8.18% | 1.13% | 6.82% | 7.94% | $7,945 |
| 2019 | 30.16% | 12.50% | 17.65% | 6.85% | 24.51% | $24,508 |
| 2020 | 4.30% | 10.03% | -5.74% | 4.93% | -0.80% | ($805) |
| 2021 | 23.73% | 28.50% | -4.77% | 4.40% | -0.37% | ($369) |
| 2022 | -14.29% | 4.67% | -18.96% | 2.09% | -16.87% | ($16,871) |
| 2023 | 7.06% | 9.09% | -2.03% | 3.18% | 1.15% | $1,154 |
| Total | 72% | 95% | -23% | 54% | 32% | |
| Average Return | 7% | 10% | -2% | 5% | 3% |
*The calculation assumes an investment of $100,000. With 2x leverage, the client will have a total exposure of
$200,000 with $100,000 on each side of the pair.
Source: Bloomberg
18th January 2024
Scenarios when spread increases/decreases in the past 10 years
| Currency | Position | *Last Price (Local Currency) | Exposure | Potential Price when the ratio increases | Potential Profit/Loss when the ratio increases | Potential Price when the ratio decreases | Potential Profit/Loss when the ratio decreases | |
| SMI Index | CHF | Long | 11,153.11 | $100,000 | 11,878.06 | $6,500.00 | 10,595.45 | $-5,000.00 |
| TOP40 Index | ZAR | Short | 66,090.11 | $100,000 | 62,785.60 | $5,000.00 | 67,808.45 | $-2,600.00 |
| Ratio (in USD terms) | 3.70 | 4.15 | 3.43 | |||||
| Dividend ($) | $101.48 | $101.48 | ||||||
| Holding Cost | 1.17% | $1,166.00 | $1,166.00 | |||||
| Total Return ($) | 1.17% | $12,767.48 | $-6,332.52 | |||||
| Total Return on Exposure (%) | 6.38% | -3.17% | ||||||
| Leverage | 2x | 2x | ||||||
| Total Return on Investment (%) | 12.77% | -6.33% |
*Last Price as of 18th January, 2024
**The calculation does not incorporate the movement in currency
SMI-SA Ratio
Source: Bloomberg | 18th January 2024
There has been a recent breakout in the ratio after testing the resistance multiple times in the last few months, with the potential to reach the range of 4.10-4.15.
Fundamental Analysis
Long: Switzerland 20 Index
The Switzerland 20 Index, or SMI, stands as the premier stock index in Switzerland, comprising the top 20 stocks from the Swiss Performance Index (SPI). The SMI, Switzerland's main stock market index, is heavily weighted towards the healthcare and consumer staples sectors, with a significant presence in financials, industrials, and information technology
Switzerland's economy, renowned for stability, showcases resilience with a strong financial sector, diversified industries, and a high-quality workforce. Outperforming its neighbors, the GDP expanded by 0.3% in Q3, with the OECD projecting a 0.8% growth for the year. Notably, Q3 GDP rose from -0.1%, fueled by an unexpectedly robust services sector and contributions from manufacturing. The Swiss economy also experienced a year-on-year growth of about 0.9%, surpassing the 0.5% expected by market forecasts.
The consumer price index (CPI) in December was at 1.7%. Despite global economic challenges, Switzerland's inflation remains within the central bank's target range of 0 to 2%. While November's consumer price rise of 1.4% marked a two-year low, attributed to reduced costs for hotels, package holidays, fuel, and produce. Due to the more restrictive monetary policy pursued by the Swiss National Bank (SNB), inflation is expected to continue to fall next year or at least stay within the SNB’s targeted range. This resilience contrasts with inflation trends in other advanced economies, underscoring the protective influence of Switzerland's robust currency.
Swiss tourism reflects this vitality, defying economic gloom and global conflicts. The summer of 2023 witnessed a surge in the hotel industry, and Swiss tourism was back in full swing in 2023, with overnight stays expected to top the 40 million mark for the first time. American tourists played a pivotal role, surpassing pre-pandemic numbers by 20%. Anticipated increases in guests from European countries (2.2%) and distant markets (5.4%) highlight the sector's optimistic trajectory.
After undergoing a year of restructuring, significant acquisitions, and leadership adjustments, Swiss pharmaceutical companies aim to generate positive attention and reassure investors about their growth prospects in 2024. These companies are increasing their sales projections for innovative therapies, specifically on-patent treatments with the greatest profit potential.
In conclusion, Switzerland's SMI, rooted in a diverse economic landscape, mirrors the nation's resilience. Robust GDP growth, controlled inflation, and a thriving tourism sector positions Switzerland favorably.
Short: South Africa TOP40 Index
The FTSE/JSE Top 40 Index, representing the 40 largest companies on the Johannesburg Stock Exchange (JSE), is a key indicator of South Africa's economic health. It spans diverse sectors, including mining, banking, retail, telecoms, and industrials, serving as a widely-utilized gauge for market sentiment. The South African economy faces challenges, marked by record load-shedding, aggressive monetary tightening, low confidence levels, and a weak job market hindering growth.
In 2024, South Africa faces economic challenges with discouraging indicators, including a -0.2% GDP growth in 3Q 2023 and heightened Eskom blackouts impacting the economy in the following quarter. Despite some industries showing resilience, overall economic momentum remains slow. Annual inflation reached 5.5% in November 2023, close to the upper limit of the South African Reserve Bank's target range. The 9.0% year-on-year food price inflation suggests a prolonged period of elevated interest rates due to weakened finances and cautious lending practices.
The economic downturn is evident in household finances, retail sales, and new-vehicle sales. There's a potential downward revision of the consensus GDP growth forecast for 2023 to around 0.6%, raising concerns about household stress. Private fixed investment's stagnant performance signals a warning for future growth and employment. Household credit data highlights vulnerability amid weakened finances, higher interest rates, and prudent lending practices, pointing towards an extended period of heightened interest rates.
The mining crisis in South Africa reflects broader economic challenges, contributing to increased unemployment and economic slowdown. The sector's decline mirrors the nation's overall economic well-being, raising concerns about diminished investor confidence and heightened capital outflows. The rand depreciated by around 7.5% against the US dollar in 2023, showcasing the impact of severe power cuts, logistical constraints at South African ports, strained government finances, and global risk aversion. This positions it as one of the worst-performing emerging market currencies.
In summary, the SA40 index faces various challenges, including economic slowdown, political uncertainty, and adverse external factors, dampening investor sentiment and fostering a bearish outlook for the index in 2024.
Technical Analysis
Switzerland – SMI Index Chart
18th January, 2024
Source: Tradingview
A significant trend has been identified on the monthly chart price chart of the index over the past decade. The current market price has recently touched the lower boundary of a well-established channel, suggesting a potential support level. Moreover, the prices are presently trading above the 100-day moving average, indicating an ongoing upward trend. These technical indicators collectively point towards a favorable market scenario, providing a good opportunity to enter the trade.
South Africa – Top 40 Index Chart
18th January, 2024
Source: Tradingview
In analyzing the Top40 Index's price chart, it is apparent that the index has descended below the 78.6% Fibonacci retracement level, rebounding from a pronounced premium territory concerning the Fibonacci levels drawn from a swing high of 75,460.83 to a swing low of 33,411.47. Given the prevailing market narrative anticipating a dip, the current price levels present a favorable entry point.
Additionally, a robust bearish order block is identifiable within the 70,494 to 73,830 price range, and it is observed that the index has exhibited a bearish bounce after testing this order block, reinforcing bearish sentiments. Furthermore, despite the presence of a downward-trending channel in the Top40 Index, there is evidence of consolidation within the 66,462.26 to 75,460.83 range. Moreover, a descending channel is discernible in the RSI, supporting the overall bearish outlook.
Strategy Rationale
The fundamental idea behind the strategy is that Switzerland will outperform the South African companies over the long run. The hedged positions will minimize the losses in case of downward trending markets. As witnessed in the scenario table, the naked long positions would have resulted in losses 7 out of 10 times in the past. However, earning holding cost through leveraged positions reduced the impact of losses.
Note:
However, it is essential to note that Pair Trading is not a risk-free strategy. The difficulty comes when prices of the two securities move contrary to the positions taken, resulting in losses. Thus, adhering to strict risk management rules is vital when dealing with adverse situations.
Past performance is not indicative of and does not guarantee future results. Trading in markets may involve loss of capital.
The return calculation includes the holding cost-benefit received on the strategy and this could change in the future, impacting the strategy either positively or negatively. The returns do not consider the currency depreciation of the Rand and the Swiss Franc. Investors will have to hedge the currency exposure separately.
Data Source: Bloomberg
Data & Prices as of 18th January 2024
Arun Leslie John
Chief Market Analyst
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تنظمها هيئة الأوراق المالية والسلع
سنشري للاستشارات المالي ش.ذ.م.م
تصل إلينا:
-
دبي
الطابق رقم 6, مبنى رقم 4, ساحة إعمار دبي
وسط مدينة دبي، ص.ب: 65777،
دبي، الإمارات العربية المتحدة -
أبوظبي
مكتب 3014، الطابق 30
برج طموح، مبنى 12، مارينا سكوير،
جزيرة الريم، أبوظبي - +971 (4) 356 2800
- info@century.ae
Century Financial is the presenting sponsor of
يتضمن التداول في منتجات المشتقات باستخدام الرافعة المالية خارج البورصة، بما في ذلك العقود مقابل الفروقات وعقود الصرف الفوري للعملات الأجنبية، وينطوي على مخاطر خسارة كبيرة قد تفوق الودائع وربما لا يناسب جميع المستثمرين. وتُعد منتجات المشتقات المالية خارج البورصة / العقود مقابل الفروقات هي أدوات مالية معقدة لا تمنح أي مطالبة أو حق إلى الأداة المالية الأساسية. والتعاملات بهذه الأدوات خطرة جداً، ويتعين عليك التداول فقط برأس المال الذي يمكنك تحمّل خسارته. وقبل أن تقرر التداول في هذه المنتجات، يتعين عليك النظر في أهدافك الاستثمارية وتحمّلك للمخاطر ومستوى خبرتك. وتبعاً لذلك، يتعين عليك أن تتأكد من فهمك للمخاطر ذات الصلة وأن تطلب مشورة مستقلة من المتخصصين إن لزم الأمر.
سنشري للاستشارات والتحليل المالي ش.ذ.م.م (سنشري) هي شركة مرخصة حسب الأصول ومنظمة من قِبل هيئة الأوراق المالية والسلع في دولة الإمارات العربية المتحدة (هيئة الأوراق المالية والسلع) بموجب الرخصة رقم 20200000028، 20200000081و301044 لمزاولة أنشطة وسيط التداول في الأسواق العالمية، ووسيط التداول للمشتقات المالية خارج البورصة والعملات في السوق الفورية، وخدمات التعريف والإحالة والاستشارات المالية والتحليل المالي، والترويج. كما أن سنشري هي شركة ذات مسؤولية محدودة تأسست بموجب قوانين دولة الإمارات العربية المتحدة ومسجلة لدى دائرة التنمية الاقتصادية في دبي (رقم تسجيلها 768189) ويقع مكتبها المعتمد في 601، الطابق 6، المبنى 4، إعمار سكوير، داون تاون، دبي، الإمارات العربية المتحدة، ص.ب: 65777.
يتم تقديم أي محتوى متاح على موقعنا الإلكتروني فقط لتوفير المعلومات وتثقيف الزوار. ولا يجوز تحت أي ظرف من الظروف تفسير أيً من هذا المحتوى على أنه عرض أو توصية أو مشورة أو التماس لشراء أو بيع الأوراق المالية أو غيرها من المنتجات المالية.
معلومات هذا الموقع الإلكتروني غير مخصصة للاستخدام من قِبل أي شخص مقيم خارج دولة الإمارات العربية المتحدة أو حيث يخالف هذا الاستخدام القوانين أو اللوائح المحلية.
