Abstract:
Methods to derive cumulative annual returns (CAR), from stock markets, in-excess of passive buy and hold strategies are popularised in modern culture. Market timing is a proven and systematic method applied by investors to achieve significant CAR. This study investigated the performance of market timing strategies on the JSE by quantitatively assessing the performance of headline differences in sector valuations, as an initiator to switch between a risky and risk-free asset classes. Performance was assessed by calculating each portfolioÕs CAR. Switching triggers were generated using historic daily closing share price data and dual data analysis was completed to determine each portfolioÕs CAR.
Nine JSE industry indices were investigated for use as equity asset classes (risky asset). Daily closing share price data was collected for seven JSE industry indices (J510, J520, J530, J540, J550, J560 and J590) from 1995-2017, J580 from 1960-2017 and from 2002-2015 for the J500. This study calculated maximum CAR possible for each of the nine indices and were found to be within the range 36.7% to 62.4% with a 100% forecasting accuracy. This was out of reach for normal investors. However, the forecasting accuracy required to outperform the associated buy and hold strategy ranged from 80.5% to 87.45%. The key finding being the sizeable CAR possible with associated forecasting accuracies.
To further expand the applicability of this research to investors, two market timing strategies were investigated using a simple ten-month moving average approach. Two riskless assets were examined, being bond (ALBI) and a conservative money market fixed deposit. After including transaction costs (2% per asset switch), four out of nine equity/bond market timing strategy outperformed the associated buy and hold strategy. An equity/bond market timing strategy for the J590 (24% CAR) portfolio beat the associated buy and hold strategy by 13% CAR. Further sensitivity analysis calculated the detrimental effect of high transaction costs and the enhanced CAR of the equity/money market timing strategy with higher fixed deposit rates.
This study further provides evidence of market predictability specifically, short term predictability using the ten-month moving average approach. It is recommended for an investor to adopt an equity/bond market timing strategy using the J590, which achieved the highest CAR over the investigated period. Limitations of this study include inherent look ahead bias and ignoring of taxation.
