The rand touched its weakest level ever against the dollar – R14.01 – this week, but by Friday afternoon (September 11, 2015) it had recovered to R13.63.
The currency appears somewhat oversold following the recent bout of weakness, but it is unlikely to strengthen significantly given the poor growth outlook for South Africa and weak growth in China, Graham Tucker, the manager of the Old Mutual Balanced Fund, at Old Mutual Investment Group (Omig) MacroSolutions boutique, says.
It is best to consider the real (after-inflation) exchange rate of the rand against a basket of currencies over, say, 15 years. This puts the recent rand weakness relative to other currencies into perspective and highlights the currency’s volatility and its long-term trend (see graph, left). A good fund manager will take this into account as one of many market factors to consider when building a long-term investment, Tucker says.
As Omig points out in its Long Term Perspectives booklet, published earlier this year, the exchange rate has a profound effect on investors, because many collective investment schemes have up to 25 percent of their assets invested off-shore. A weakening rand enhances the returns from offshore asset classes.
The shares of local companies may be either positively or negatively affected, depending on whether they are exporters or earn revenue from global operations, or importers affected by the increasing cost of imports.
Tucker says that despite the recent market turmoil, Omig believes the world broadly is unchanged from the start of the year and the manager has made no material changes to its long-term expected real returns.
He says the most recent global market volatility was a market correction (a downturn of up to 10 percent a year) rather than the start of a bear market. A bear market typically involves a downturn of 20 percent or more in a number of equity market indices for a sustained period.
Despite the fact that the global economic outlook remains “unexciting” and economic growth in South Africa is consistently being revised downward, Omig believes a portfolio including global equity, local bonds and some selected South African shares will still deliver acceptable absolute returns.
While the global growth outlook is unexciting, it is improving, and for this reason Omig, like many other managers, still prefers global equity. Although returns will be lower, they will still be better than those from other asset classes, they believe.