Watching and forecasting the movements of our currency is almost a national sport for South Africans. The Rand is an interesting currency because it is volatile - reflecting the underlying health of the South African economy and its political prospects, while at the same time being used by international traders as a proxy for other commodity based developing economies. For these reasons, the Rand is one of the 10 most actively traded global currencies. Transferring your savings overseas because the Rand has suddenly weakened is a poor investment strategy In the 1971 Nixon Shock, the United States suspended the gold based currency system which had been the cornerstone of international currency valuation for hundreds of years. One US Dollar was then worth 71 South African cents. Since then the Rand has steadily lost value so that at the time of writing one Dollar will buy you 13.40 Rands, which is an average decline 6.7% per year. Thus over the long-term and through good and bad times, the Rand has lost buying power to the Dollar. There are many factors which contribute to this trend, with the SA Inflation Rate (9.5%) vs. the US inflation rate (4%) over this period being probably the most significant driver. There is also a close correlation between the fortunes of the Rand and the global commodity cycle. As a large resource exporter, the South African economy tends to perform much better in periods when the prices of raw materials are higher. However forecasting where the Rand will be next month or next year is extraordinarily hard to do. There are broad indicators which are commonly used to gauge whether a currency is over- or under-valued at any point in time. One of these is the Purchasing Power Parity (PPP) which attempts to show the real or fair value of the currency within its own country. The chart below shows this relationship between the Rand and US$ over the last 30 years. The red line is the PPP or fair value of the Rand. It can be seen that even though there are times when the Rand can be significantly over-valued or more often under-valued, over the long term the trend is towards PPP. The Rand should currently be trading at nearly R12.00 to the US$ based on this measure.
Source: SIM Awareness of the long-term decline of the Rand is hard wired into the South African financial markets, to the extent that over 70% of the market capitalisation of the JSE All Share Index is composed of companies with predominantly US$ earnings. Companies such as Richemont, BAT, Naspers and Steinhoff have an international focus and earn the bulk of their revenue in international markets. These are often referred to as Rand hedge shares. In recent years the South African Reserve Bank has relaxed certain Exchange Controls which now allow local Balanced and Equity Funds to have an allocation to international assets up to a maximum of 25% of their total assets. So for the average investor, the best way to protect long-term savings against the declining Rand, is to invest in funds with both a Rand hedge and an offshore exposure. Ensuring that your investments perform better than inflation by selecting the appropriate risk profiled funds is essential. Protect your long term savings against the declining Rand by investing in funds with both a Rand hedge and an offshore exposure. Short term volatility may be driven by reaction to political factors such as the 1985 Rubicon speech by PW Botha and the December 2015 sacking of Finance Minister Nene. However, over time, these factors have proven to be less important in determining the value of the Rand than South Africa’s underlying economic fundamentals. Protecting your savings and investments against the declining value of the Rand is both sensible and easy to do, provided that you take a long-term approach and do not make panicked and emotional decisions when there is market turmoil.
Submitted April 26, 2017 at 04:58AM by Rutherford_Capital http://ift.tt/2q4gHg2
