The rand has seen a revival of its fortunes over the past year. Currently trading at about R12.50 to the US dollar, the currency has increased in value by over 30 percent in dollar terms since its record low of R16.89 to the dollar on January 20 last year.
This means that, if you have investments in rand-hedge assets, such as offshore funds or funds that are heavily exposed to local rand-hedge shares, you will probably have seen a drop in the rand value of your investment over the past year, even if the assets have performed relatively well in dollar terms.
Local rand-hedge shares are shares in South African companies that do a large portion of their business offshore or that are heavily invested in offshore operations – such as Naspers, Steinhoff, Richemont and British American Tobacco.
Since 2000, the rand has seen three major dips in value (see graph, below). Despite its rallies against these dips (peaks in the graph), over the long term the rand has steadily weakened against the dollar and other developed-world currencies. So although R12.50 is relatively strong when compared with its record low, it is a far cry from the R6 to the dollar that South Africans were used to at the beginning of the millennium.
Most investment experts would agree that, rather than being strong, the rand is currently trading at “fair value”.
Ashburton Investments’ fund manager Wayne McCurrie, in recently outlining Ashburton’s major investment themes, said the rand was a structurally weak currency for many long-entrenched reasons. “Unfortunately, the rand does not weaken consistently. Normally it collapses for a few years, stabilises for a while and then the weakness starts over again.
“At the start of 2016, we had a number of negative events occurring at the same time, which resulted in a steep fall in the rand’s value, namely: a collapse in the commodity price cycle, the drought reaching its apogee, political turmoil at its worst levels in more than 20 years, and rising inflation and interest rates.
“Depending on what valuation criteria you used, the rand was between 30 and 40-percent undervalued at the start of 2016. Therefore, from this level you were bound to get some sort of recovery, which is what we are seeing now. The rand has recovered from this oversold level and is now approximately at fair value. While we could see some continued strength, the majority of the recovery has already happened,” McCurrie says.
Pieter Koekemoer, the head of personal investments at Coronation Fund Managers, says the fairly strong recovery after the extreme weakness at the beginning of last year “is a combination of relatively benign global market conditions – a general belief that the global economy is doing reasonably well – and South African fundamentals, where, even though our economy continues to stutter along significantly below the growth level required for South Africans to do better, the outcome exceeded the expectations held by most people after ‘Nenegate’ in December 2015.”
Koekemoer says one of the strongest characteristics of financial assets is a tendency for values to revert to a long-term average – what is known as “mean reversion”.
“What tends to happen is, if you have had an unusually and relatively large move in a certain direction, it becomes more likely that the next move will be in the opposite direction,” he says.
This is basically what has happened with the rand.
“A consensus view of the markets would be that the rand is broadly trading around fair value at the moment – you can argue what that is and how you would calculate that – but you would find very few valuation-orientated fund managers at the moment who would hold a view that the rand is either too weak or too strong,” Koekemoer says.
WHAT DO I DO AS AN INVESTOR?
If you are worried about the effects of the rand’s current strength on your long-term retirement savings and you have a well-constructed, diversified portfolio, you should not stress.
Pieter Koekemoer, the head of personal investments at Coronation Fund Managers, says it is not easy for a newcomer to the financial markets, who has only recent experience to go on, to heed this advice. Experienced investors who have been through different market cycles are likely to be more sanguine.
Koekemoer says that the regulation 28 ceiling of 25-percent offshore exposure for retirement funds has proved to be a fairly reliable strategic allocation for the long-term retirement saver who is aiming for a real (after-inflation) return of five percent and wants to draw a pension in rands. In fact, over the last 10 years, multi-asset funds with a 20 to 25 percent offshore allocation have performed similarly to local general equity funds – about 10 or 11 percent a year – but at lower risk.
Looking forwards, he says the longer your investment horizon, the more likely it is that the rand will weaken against developed-world currencies. The reason is simply the inflation differential between the South African economy and the developed market economies. Inflation in South Africa is anchored at about six percent a year, and in the developed world it is anchored at about two percent a year, giving you a four-percent-a-year difference.
Natasja Hart, a wealth manager at GCI Wealth in Johannesburg and an accredited certified financial planner, says the rand is notoriously volatile.
It’s interesting to note, she says, that the rand is roughly the world’s 20th most traded currency and makes up around one percent of the world’s daily currency trade, according to a survey by the Bank of International Settlements.
The current robust rand is not only denting offshore investments, but also rand hedge shares. Hart says many investors are feeling the negative effects of rand strength through exposure to these shares. People are more likely to be living off the proceeds of local portfolios than offshore portfolios, Hart says, and therefore the effect on rand-hedge stocks may be severe.
Hart’s advice is to stick to the fundamentals and not to let short-term volatility detract from your long-term strategy, which must be based on a holistic investment plan.
She says your offshore allocation should be drawn from excess capital above the amount required to service your primary liabilities. “Your retirement income requirement is a liability, so you must have sufficient capital invested in the currency of the country in which you are living to service this liability. You can’t base your retirement plan on the probability of the rand weakening to make up the differential.”
Hart says if you want to take advantage of the stronger rand to invest funds offshore, the investment must be appropriate for your portfolio. She says a number of her clients with surplus assets are using the opportunity to boost their global portfolios, not least because of political uncertainty locally.
Koekemoer cites political uncertainty as an ongoing risk.
“You can paint a domestic political scenario that is benign and positive, which could translate into fairly significant further rand strength towards the end of this year, but you could also paint a scenario that is quite dark, where you are back to the Nenegate-type ‘fear’ decline in the value of the rand.
“That plays out against elevated global political uncertainty, because you don’t know what the potential cause for the next global crisis could be – a Euro break-up, trouble in China, or irresponsible behaviour from an unprecedented president in the United States.”
Your portfolio should be diversified and robust enough to cope with uncertainty, Koekemoer says.