The pair is looking at a long ABSA Group position versus a short Nedbank position. The net result of these combined trades provides a profit margin of 12.6%. A stop loss is considered equally proportional to the expected profit.
A successful pair trade can be realized in 1 of 3 ways:
1. The long position rises while the short position falls
2. The long position rises faster than the short position rises
3. The short position falls faster than the long position.
The blue line on the graph represents the ABSA / Nedbank ratio, which recently traded more than 2 standard deviations below the mean (middle line). In turn, a successful trade would require the ratio (blue line) to return to the mean in order to achieve the targeted profit target of 12.6%.
- Standard Bank, ABSA and Nedbank have an average broker rating of Buy
- Capitec and Firstrand have an average broker rating of Hold
- ABSA and Standard Bank trade at the widest discount to a consensus on long-term broker price targets
- The JSE Banking Index is still in a longer-term upward trend, which has correlated with the ZAR strength over the last year
- A weakening of the margin would pose a risk to the sector
- ABSA Group vs Nedbank offers a pair trade consideration