Economy

There goes the rand… Yet Again

As South Africans, we have this amazing ability to come up with catchy terms for big events that take place in our country. But just as the USA is running out of female names for hurricanes, it seems that we will also be running out of terms to label local catastrophic events soon, especially when we consider the magnitude and frequency of these types of events.

In the last four years alone, we had “Nenengate” in December 2015, which saw the rand tumbling down to levels of around R16.75/US$. Slowly things started to stabilise and improve until we saw the rand strengthening to around R12.75/US$ after March 2017. Suddenly we were faced with “Gordhangate”, which very quickly pushed the rand right back down to around R14.50/US$. Then came one of my personal favourites, “Ramaphoria”, which took form at the end of 2017, where we saw the rand strengthening to levels of around R11.50/US$ in February 2018. In light of these events, our local stock market was unfortunately also adversely affected.

Following “Nenengate”, foreigners were net sellers of local shares for 19 months in a row. Now, to put a value on this, it means that between December 2015 and September 2017, foreigners were net sellers of R223 billion in local shares. To put the magnitude of these outflows into perspective, let’s refer to the recent Pepsi Co offer to purchase Pioneer Foods in its entirety as an example. The offer to purchase amounted to about R24 billion, which already caused giant waves in South African investment circles. We need a further nine offshore companies to make similar massive offers, just to make up for the net sales that took place during “Nenengate” and “Gordhangate”.

In the last month, we saw the rand getting up to its old tricks again, and as at the time of writing (12 August 2019), it had already weakened to R15.30/US$. But what was the reason for this decline and why didn’t we see a new catchy term to capture the rand tumbling down? Funny enough, the main reasons for its decline cannot just be attributed to zero economic growth, or Eskom reflecting more bankrupt than my student daughters’ bank accounts three days after receiving pocket money, or the fact that our unemployment figures have reached a new record high of 29%.

Make no mistake, while these factors undoubtedly contribute to the rand’s ongoing decline, they are not the main culprits at this stage. When we take a look at the BRICS currencies’ performance between 31 December 2018 and 12 August 2019, we will see that South Africa’s performance (-19%) against the US$, wasn’t that much poorer than Brazil’s -17%, Russia’s -12%, India’s -11% and China’s -8% over the same period. An appropriate term to label this would probably be “EmergingMarketsgate”.

I believe that the rand at its current level of R15.30/US$ is still priced too cheap. According to my valuations, it will be more fairly priced at around R12.50/US$. I have no doubt that we haven’t seen the end of political unrest and that it may very well see this negatively affecting our already fragile currency even further, but at the end of the day the rand has an underlying fair value, and it should return to this value in due course.

Graph 1: Rand/US$ vs. Fair Value (source: PSG Wealth Old Oak & Thomson Reuters).

In December 1982, the Rand traded at R1/US$. If we take the inflation adjustment between the Rand and the US$ into consideration for each year since then, it becomes clear that the Rand is not trading at R9.53/US$ as indicated by its purchase power parity (PPP), but rather at R15.30/US$.

The rand is trading at a premium of nearly 61% against its PPP value, but the average premium the rand traded at since our first democratic election in 1994, was 24%, which means it would be better priced between R12 and R13/US$.  Historical price movements have shown us that our local currency can trade well above, or even below its fair value for long periods. It’s important to know, however, that overemotional decisions have cost investors dearly in the past, so beware of making rash decisions.

Always remember that your best defence against a specific weakening asset class, currency or share is diversification. It doesn’t always have to be all or nothing.


The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

 

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.

Leave a Reply