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Why the strong rand isn’t actually best for South Africa

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Rand - [https://www.lamna.co.za/wp-content/uploads/2017/06/Rand-Banknotes-84343934.jpg] Rand - [https://www.lamna.co.za/wp-content/uploads/2017/06/Rand-Banknotes-84343934.jpg]

The South African rand was slightly weaker against the US dollar on Friday morning (2 February), trading around R12 to the dollar following the US Federal Reserve’s decision to keep interest rates on hold.

This follows continued strengthening last week on continued positive sentiment about Cyril Ramaphosa’s election as ANC president.

By 11h25 the rand was trading weaker against the major currencies:

  • R12.01 to the dollar (-1.36%)
  • R17.08 to the pound (-1.66%)
  • R15.01 to the euro (-2.01%)

Speaking on the outlook for South African investors, Tom Elliot, international investment strategist at the deVere Group said that the rand was likely to be beholden to local politics, with speculation of an early leadership change and renewed optimism surrounding Ramaphosa.

“However, while a stronger rand may reflect an improved political outlook for the country, it is not, perhaps ironically, what is best for the economy,” said Elliot.

“Given South Africa’s reliance on exports for economic growth, a stronger rand may deter sales and lead to weaker output growth. Consensus forecasts for GDP growth last year are for a modest 0.8% increase over the previous year.”

He said that the the weakness of the US dollar in recent weeks has also been an important contributing factor. “The impact for S.A investors depends very much on what their base currency is – i.e. which currency do they use to account their wealth?”

“For many it will be the rand, in which case any American real estate, or in U.S Treasuries, or relatively exotic dollar-denominated emerging market sovereign debt, will be worthless in rand,” he said.

Investments

Elliot said that a rand-based investor may wish to hedge against further rand appreciation through taking out derivative positions, or from buying ‘hedged into rand’ share classes available from mutual fund providers.

“This assumes a further strengthening for the rand. But given the uncertainties of South African politics, and the many structural problems facing its economy, betting on further long-term appreciation of the rand may prove frustrating,” he said.

“The alternative is for investors to not hedge against further rand appreciation, but instead to ensure that any overseas currency exposure is widely diversified amongst a number of hard currencies which might include sterling, the euro as well as the dollar.

“This will offer some protection against dollar weakness.”

However Elliot once again noted that  many South African investors will have developed a global lifestyle with a global spread of assets, and perhaps account for their household wealth in dollars.

“From this perspective, the weak dollar/ strong rand theme is good news that flatters the returns made on South African assets when expressed in dollars,” he said.

“For example, the MSCI South Africa index is up 8.5% in USD since the start of January, but 3.7% in rand terms. Again, global diversification will help ensure that if/when the rand falters, the investment portfolio is not overly hurt.”

 


 

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