A market timing strategy

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.

Market timing is often defined as the process of shifting the weights in portfolio constituents in accordance with expected market conditions (see Jeffery 1984; Sy 1990; Sharpe 1975). For example, during bull phases of the market, market-timers will increase the weighting of equities versus cash, and vice-versa for bear phases. Many researchers (see De Chassart and Firer, 2004; Levis and Liodakis, 1999; Firer, Ward and Teeuwisse, 1987) have shown that, whilst the potential returns of such a strategy are attractive, the success of the investor is dependent upon forecasting ability. Generally speaking, high levels of prediction are necessary to out-perform a buy-and-hold strategy.

This paper investigates a market timing strategy on the JSE related to exchange rate fluctuations in the Rand. Various researchers (see Barr, Kantor and Holdsworth, 2007; Barr and Kantor, 2005) have identified shares which react positively or negatively to exchange rate fluctuations affecting the Rand. By increasing theweight of so-called ‘Rand-hedge’ shares when the Rand is expected to weaken or increasing the weight of ‘Rand-play’ shares when the currency is expected to strengthen, a market-timer can enhance her returns – subject to the accuracy of her currency predictions.

Using three independent sets of currency sensitive shares, this research examines the risk and return space on the JSE that would have been experienced by market-timers for different levels of predictive accuracy over the period October 1998 – October 2008.