Allocating capital is crucial for a trader. But you do want to know, where should you invest that capital. Is it better to opt for the South African stocks or the US stocks? With that in mind, every trader needs to focus on various criteria, along with their own trading history. In doing so, results will vary. But here we will focus on narrowing down whether you may want to go on US or South African stocks, depending on general criteria.
Market size and liquidity
Naturally, the SA market is smaller when compared to the United States. Liquidity on the JSE, which is the largest exchange in Africa is concentrated in small numbers of large cap names. Outside of the top 40, things thing out quite a bit. That means it widens the bid-ask spreads and it’s harder or exit position without moving the price.
On the US market, you have deep liquidity over thousands of listed companies. There’s great variety in here as well, and if you are a trader that relies on tight spreads and the ability to scale in and out of positions, then the liquidity gap is exceptional and it can make a major difference when it comes to trading.
Currency risk and the Rand factor
Currency exposure is an underappreciated difference between these two stocks. The ZAR is volatile and it’s sensitive to the commodity prices, global risk sentiment, and the USD strength. If you are based outside of South Africa and buy the JSE listed stocks will take on rand exposure aside from the equity risk. It can work for you, but also against you, so it’s rather problematic.
With that in mind in the US you remove the currency risk. Granted, you still have all the other trading risks, so it’s extremely important to think about that to the best of your capabilities. There are some traders that view the rand volatility as a feature. However, others are focused more on stripping the currency risk out by sticking with the dollar-denominated instruments.
Sector composition
The US and South African markets differ quite a bit when it comes to the sector weightings. That shapes what type of exposure you get as a trader. For example, the JSE is known for being more resource-heavy, and it comes with a focus on materials companies, precious metals and mining. On the US side, you have way more focus on the growth sectors and technology. Traders that want exposure to all kinds of innovative companies will find the US stocks to be more compelling most of the time. However, if you’re more into precious metal and materials trading, the JSE might very well be the right option to consider.
Trading hours
Trading hours are crucial to consider for any serious trader. And that’s the thing, you do want to ensure that you can trade within the allocated timelines. South African stocks usually go from 9 AM to 5 PM South African time. The US markets run from 9.30 AM to 4 PM eastern time. So yes, based on where you live right now, there might be quite the difference to consider.
Due to the timeline, there is an overlapping window where the South African market is close to closing, and the US market begins working. But yes, in general you want to see when you can trade and which market is better for you timeline-wise.
Regulatory environment
The regulations will vary, although both markets are known to be very well regulated. In South Africa, you have more focus on the FSCA which regulates these local markets and the US markets fall under the SEC, where the broker-dealers have oversight from FINRA. There’s a lot of transparency required on both markets to ensure that everything is suitable and safe for trading. With that being said, the US side has more publicly available research, historical data and analyst coverage. But rest assured that there’s enough information and content available for both sides, which does matter immensely here.
Access and costs
That’s the thing, if you are from South Africa and want to trade in the US, you can use local brokers that offer international share trading. But those can introduce certain fund transfer and tax reporting concerns. Additionally, you have other costs you need to factor in. For example, you have the currency conversion fees, brokerage commissions, withholding tax, platform and account fees, and anything of that nature. It’s similar if you want to trade South African markets as well, because there are fees to think of and other challenges, too.
Volatility
In general, the emerging markets like South Africa tend to have a higher volatility when compared to the developed markets like the US. There are issues like commodity price sensitivity, currency swings, lower liquidity and political risks as well.
Even if the US markets are more complex a lot of the time, they are still volatile. Individual stocks will move fast, but the broader market has a more stable baseline volatility. If you are focused on trading, a good idea is to size positions and set the risk parameters according to the volatility profile of the market and instrument, instead of applying a uniform across both of them.
What should drive your decision?
The reality is that as a trader, you are the one to decide where and how to trade. But there should always be considerations when it comes to the market you choose, assets and other factors. Here are some of the main ideas for you to take into consideration.
- Think of the base currency and reporting needs. Traders who have expenses and obligations in rand will have ongoing risks if they have a dollar-based portfolio. So yes, if you want to stick with a specific market, then the currency you use might need to be changed, which is something to consider.
- The strategy type plays a role as well. Some traders rely on tight spreads, rapid position turnover and deep liquidity, and they will find the US markets more accommodating. But if you want a less-covered opportunity and you are ok with wider spreads and a lower liquidity, then the South African markets might be better.
- Diversification goals are crucial as well. Because these markets have a different sector composition, you can’t hold exposure to both. That reduces the portfolio risk when compared to just focusing on a single market.
- Think of the practical access and the cost structure. These should not be an afterthought, as you need to think of fees, tax treatment and currency conversion. All of these things will usually bring their own fees and issues. And when you factor those in as well, it’s not as good as you might expect.
Closing thoughts
According to a survey, around 1 on 6 South Africans are saving to enter the stock market. And then you have lots of different markets and options to consider. All of them are great, but it’s always up to you to ensure that you choose the right solution. In the long run, the best thing is to understand how the markets work, what risks you are dealing with, and then slowly adjust. Both the South African and the US markets are viable, but it does depend on your preferences, what you want to trade, risk tolerance and other factors. That’s why you want to perform some due diligence and see which market fits your trading style.
