Martin Hesse
Martin Hesse

OPINION: Fickle rand means you need to be careful when investing offshore

By Martin Hesse Time of article published Apr 1, 2019

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As our country’s economic woes continue, and in the light of miserable returns from local equities in recent years, more and more South Africans are moving money offshore.

There are many advantages to investing offshore - it offers diversification across different economies and regions, and gives you access to industries that may not be available locally. The argument is often made that the South African stock market represents a tiny fraction of the global market, so why restrict yourself to just that tiny fraction?

Another plus is that, over the long term, the rand has lost value against the world’s major currencies, because of, among other things, the difference in inflation rates between South Africa and developed economies.

Some commentators have recommended that a large portion of your portfolio should be offshore.

But you need to be very careful before either investing offshore directly or into a rand-denominated local fund that invests offshore, and should do so only under the watchful eye of an experienced and well-qualified financial planner.

Why? Because of the volatility and unpredictability of our currency. Although the trend over the long term has been for the rand to decline in value, in the short term it has been both extremely volatile and extremely unpredictable and, to paraphrase John Maynard Keynes, the currency can remain irrational for longer than you can stay solvent.

Not long ago, in the dark days of state capture, when Finance Minister Nhlanhla Nene was abruptly fired, the rand plummeted, reaching about R17 to the dollar in January 2016. If you had invested offshore then (and ignoring the return on your investment), your money in rand terms would have lost about 18% of its value by January this year.

Over the past 12 months, the rand has experienced its typical roller-coaster ride. On March 28, 2018, it stood at a strong R11.65 to the dollar, on the “Ramaphoria” of the moment. It dropped to R15.42 in September, slowly regaining strength to stand at R13.26 on February 1 this year. But it hasn’t remained there. True to its fickle nature it is now (at March 28) hovering around R15 to the dollar.

I have yet to compare volatility measures of the rand/dollar exchange rate and the FTSE/JSE All Share Index, but I would not be surprised if the currency showed higher volatility than the index.

In other words, you have to be highly risk averse and have a long-term investment horizon to be investing offshore, if your intention is ultimately to use your investment here in South Africa. (It’s different if you are investing offshore with the intention of spending that money offshore.) And if you are investing in offshore equities, you face the double whammy of both currency volatility and equity-market volatility.

Be careful out there - that’s all I’m saying.


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