There goes the Rand again

One of my daughters has one year of school left, while the other has two years left, and as you would expect, most conversations these days are focused around career choices and what each of them would like to become someday. It always takes me back to my younger days when the exact same conversations took place between me and my friends. One wanted to become a doctor, while another wanted to become a pilot. Although I’m not at liberty to make these kinds of decisions on my daughters’ behalves, I know that there is one job that no one in South Africa would like to have right now, and that is the position of minister of finance.

With the Nenegate saga of December 2015 still fresh in our minds, the most recent “Gordhangate” saga that dominated headlines couldn’t have come at a worse time. The rand barely found its feet when the rug was pulled out from under it, yet again.

But how much have these August movements cost us so far? When we take a look at the FTSE/ JSE All Share Index exclusively, the losses have clearly been massive. The FTSE/JSE All Share Index dropped by 5.89% in August, while the FTSE All World Index remained relatively unchanged (+0.09%). That means that by looking at the FTSE/JSE All Share Index’s total value of R783bn, we have lost close to R46bn in value, according to my calculations.

Yes, some may argue that this is an unfair statement because SA is an emerging country, but looking at it from that perspective then, emerging countries have actually had a good run over the same period (FTSE Emerging Index strengthened by 1.65% in dollar terms this August), which means that we have lost a whopping R59bn on paper, for no good reason at all.

We’re almost done with the first third of September and the rand has already made a good comeback (in US$ terms) from R14.69 (end of August) to its current R14/$ level. I couldn’t help but smile when I saw the newspaper headlines on lamp posts with threatening messages stating that the rand may be on its way to R25 per dollar. So is this the calm before the storm? Unfortunately, no one knows, and anyone that tells you that they know exactly what is going to happen next, is only guessing.

I feel that even at current levels (R14/$), the rand is still too cheap and I stand by my valuations (finweek of 22 April) that indicate that the rand will be more fairly priced at around R11.50/$. I have no doubt that we haven’t seen the end of local political unrest and that it may very well have a further negative effect on the rand, but at the end of the day the rand has an underlying fair value and it should return to this value, in my opinion.

Graph 1: Rand/US$ vs. Fair Value (source: PSG Old Oak & I-net)
Graph 1: Rand/US$ vs. Fair Value (source: PSG Old Oak & I-net)

I’m not selling myself as a technical analyst, but by looking at the rand’s graph below, there are a few important indicators that support my fair value statement. With the 50 day moving average that broke the 200 day moving average in March (see below), the rand’s overall tendency still seems to lean towards stronger levels.

Graph 2: ZAR/US$ with 200 & 50 day Moving Average (source: I-net)
Graph 2: ZAR/US$ with 200 & 50 day Moving Average (source: I-net)

By looking at our local stock market, and with specific focus on.companies that generate most of their earnings in rands, companies such as Capitec, PSG Group and Tiger Brands may be considered. If, however, you feel that this is the calm before the storm and that the rand has reached its strongest levels for the time being, companies such as BHP Billiton, Intu Properties and Richemont may be considered, seeing that they generate most of their earnings in other currencies, as opposed to rands only.

The opinions expressed in this blog are the opinions of the writer and not necessarily the opinions of PSG. These opinions do not constitute advice. Although the utmost care has been taken in the preparation of this blog, no responsibility can be taken for actions taken on the information contained in this blog. 

Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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