Conventional market timing is the process of switching asset classes to meet expectations about economic or sector related forecasts. This paper extends existing research by examining the risk and return outcomes of a market timing approach in which portfolios of ‘Rand-play’ and ‘Rand-hedge’ shares are switched according to fluctuations in the exchange rate. Three sets of exchange-rate sensitive portfolios are identified on the JSE. A market timing strategy of switching between these portfolios on a monthly basis is then examined for the 10 year period 1998 – 2008.
The results show that exceptional returns, in excess of 35% per annum above the benchmark can be obtained, dependant upon forecasting ability. To be certain of out-performing the benchmark, a forecasting accuracy of around 70% is required, but even with considerably lower ability it is possible to out-perform. These findings indicate that whilst similar levels of forecasting
accuracy are required, bigger potential returns are possible for market timing strategies relating to currency fluctuations when compared to conventional asset switching strategies.