The JSE Top 40 Could Benefit From Improved Sea Trade While the Suez Canal Is Unsafe
Months after Houthi pirates began attacking cargo ships moving through the Suez Canal and the Red Sea, traffic in the area has plummeted. Traders prefer to take the safer but longer shipping lane around Africa to reach Europe, which is presenting South Africa with a unique opportunity. A country whose wealth already comes from exporting minerals and metals can capitalize on the increased traffic. Can they become a global trading hub and how would they do it?
The South African Stock Market
South Africa's equity market is by no means the largest one in the world, but it's just large enough that it can be broken down into several indexes that track the industries within it. For the most part though, the one that matters the most is the JSE Top 40, or in other words, the forty largest companies listed on the Johannesburg Stock Exchange.
Compared to industrial giants like Germany or the USA, South Africa doesn't fare well when it comes to technological companies, automobile manufacturing or pharmaceuticals. Instead, its strength lies in the raw materials sector, which is its breadwinner. The country is one of the world's leading exporters of gold, diamonds, and other metals and ores.
For reference, twenty-five percent of the JSE Top 40 index comprises commodity exploration, extraction and processing companies. At the same time, roughly 43% of the country's exports are made up of the aforementioned minerals and metals. That's a big chunk of the country's success on the global stage riding on this one industry. If the country's exporting some of the most valuable resources on the planet, why isn't it a global superpower by now? Partly it's got something to do with geography.
The Suez Canal Bottleneck
South Africa has long been at the center of the world in a sense. Since ancient times, traders from Asia have had to traverse tens of thousands of kilometers by sea to reach Europe. The only way they could do that was going around the southern tip of Africa. That long and expensive journey became history when the Suez Canal was opened in 1869.
It redirected most of the maritime traffic through it because it cut the distance between the two continents almost in half. That, in turn, was beneficial for trade because it meant goods could be transported faster and cheaper than before. And while it's a net positive for the world, the guaranteed traffic South Africa got severely reduced.
Fast forward 155 years to today when the most recent middle eastern conflict began between Israel and Hamas. While the conflict was contained within the Levant, other countries intervened in aid of the Palestinian territories. One of them was Yemen, which occupies a key location for the Suez trade route.
The radical paramilitary group there known as the Houthi movement began raiding cargo ships passing through the Red Sea on their way to the Suez canal. This prompted much of the merchant traffic to be redirected through the longer but safer lane around the southern tip of Africa known as the Cape of Good Hope route.
Coincidentally or not, the Top 40 index rebounded almost immediately after the events in the Red Sea following what was essentially a downtrend. Ultimately, it gained more than 12% of value in the following ten months. South African exports also rose by $15 billion in November, which could be partly attributed to increased traffic through the Cape.
South Africa's Golden Opportunity
As of now, it doesn't seem likely that the war in the middle east will subside anytime soon. If anything, the military conflict in the region is heating up with more neighboring countries swept up in it. This danger zone will continue affecting trade going through it – either directly through the threat of pirate attacks or indirectly through the higher cost for ship protection and insurance.
There are a few ways South Africa can play this newly arisen situation to its favor to boost its economy and importance in global trade. The first one is improving the infrastructure on the ports that get the most traffic like the Cape of Good Hope and Durban. This can make inbound and outbound shipping through there more efficient through loading goods, refueling and repairs.
While the country has no control over foreign direct investment, it can at least signal its dedication to developing its ports and their offerings. Knowing that, companies would be more inclined to invest in them, especially if there's already increased traffic in the area. This kind of capital injection could create more jobs and start a positive feedback loop.
Moreover, any kind of infrastructure betterment could lead to more South African goods exported due to economies of scale, decreased costs, increased efficiencies and speedier logistics. When selling metals and gems is your livelihood, selling more of them or selling them more effectively could really make the difference in your economy's bottom line.
Freighters passing through the Cape of Good Hope nowadays are usually headed to South America or to South Africa itself. If the country becomes an attractive alternative to the quicker Asia – Europe route through the Suez, it could very well bring more business that wouldn't have otherwise gone there.
This could solidify the country's already existing position as an exporter in both directions – to Europe and to Asia, particularly in a time when the world is in need of hard commodities. China is already a main export partner of South Africa, and both are key members of the BRICS economic union.
As it is becoming a key economic conglomerate, what it sells, how it sells it, and whom it sells it to become fundamental questions. Brazil is in South America while Russia, China, and India are all in Asia. South Africa is the one country from the group located in a central point between the East and the West, where trading traditionally passed through.
Some of the largest economies in the world can have their exports pass through it thanks to attractive trade agreements. If China, India and Russia export through South Africa, that would undoubtedly bring more money into the economy. With an improved port infrastructure, it could export more to both its BRICS allies and to the rest of the world.
If the union relies on South Africa for its strategic location and if its exports are now necessary more than ever, can its commodity-based economy flourish? Especially now when tensions in the middle east are at their highest point and traders are avoiding passing through the Red Sea, South Africa can cement itself as a crucial player in world trade.
With a quarter of the JSE Top 40 companies in commodities, an exporting boom could significantly lift the index up. Growing support from BRICS, combined with high demand for resources and increased traffic in the region are all prerequisites for incredible upward potential, that is, if South Africa seizes this golden opportunity.
Technical Analysis of the JSE Top 40 Index
Key Levels:
- R69,760 (Monthly Key Level): A 2022 resistance turned support in 2024. Since then, the price has been printing above the level.
- R75,318 (Daily Key Level): Last all-time high level of February 2023, retested in July 2024 as a strong resistance. It's a critical resistance that needs to be breached for further upside.
- R72,565 (Daily Key Level): 2023 resistance turned support in August 2024 post the recent all-time high. The price's ability to maintain above this level is crucial for sustaining bullish momentum.
Trend Analysis:
- Upwards Trend Line: The JSE Top 40 Index has been following a robust upward trend line since March 2024. The price has consistently found support along this trend line, indicating a strong bullish sentiment. As long as the price continues to respect this trend line, the overall outlook remains bullish.
Exponential Moving Averages (EMAs):
- The JSE Top 40 found significant support at the 100-day EMA in early June 2024. As of August 6th, 2024, it's finding support there again. A golden cross can be observed in may when the 100-day EMA crossed over the 200-day one, which is shortly before the price started posting higher highs.
Past 90 Day Movements:
- Higher Highs and Higher Lows: Over the last 90 days, the JSE Top 40 has recorded four higher highs and higher lows. This pattern confirms that the index is in a strong bullish momentum, pointing to continued positive results in the upcoming months, potentially leading to new highs as we approach the new year.
Conclusion:
- The JSE Top 40 Index shows strong bullish momentum, supported by key technical levels and indicators. The R69,760 and R72,565 critical support levels highlight the index's resilience. The sustained upward trend line, combined with consistent support at the 100-day EMA, underscores the potential for continued upward movement. With these factors aligning, the index is well-positioned to challenge and overcome past highs.