Not Only About Rand Weakness
By Magnus Heystek, Director and Investment Strategist
IT’S a well-known fact that Brenthurst Wealth has been recommending a strategy of offshore diversification for many years, in particular from about 2011 onwards when the rand was trading below the levels of R7 to the US dollar.
An analysis of economic conditions at the time – based largely on the decline in the global commodity cycle – indicated that the rand was overvalued and that a period of extended weakness was to be expected.
Other economic factors contributing to the weakness of the rand included several downgrades of SA’s credit rating as well the rising deficit on the balance of payments.
Political factors play a much smaller role than the global macro factors but they included the disastrous economic policies followed by the ANC under the presidency of Pres. Jacob Zuma.
For early investors the recommendation to remit money offshore resulted in great, if not fantastic investment. A combination of rand weakness coupled with sound foreign currency returns produced spectacular returns, in some cases producing double and in some cases treble the returns of equivalent investments based and priced in SA rands.
The rand reached a historical low of R17 to the US dollar, ironically a month or so after pres. Zuma fired Nhlanhla Nene as finance minister in December 2015, only to be forced to replace Des van Rooyen four days later with Pravin Gordhan, a former finance minister.
The blow-out of the rand during these tumultuous days of political drama would—one would have thought—been a runway for further weakness of the local currency to R20 and perhaps beyond. But that was not to be as this period of Zupta-induced political turbulence coincided almost 100% with a very gentle but noticeable upturn in the global commodity cycle, which has continued to this day.
Although substantially less in intensity than the previous upturn in commodity prices (2001-2008) it was nevertheless enough to offer some kind of support for the currencies of commodity producing countries, especially the rand.
The year 2017 also added additional support for the local currency as a major swing towards emerging market currencies ensued which, aided and abetted by a collapse in the US dollar in the last two months of last year coincided with the surprising win of Cyril Ramaphosa as the new leader of the ANC and soon to be president of the country.
This came as an injection of adrenalin for the rand which powered its way against the US dollar from R14,50 early in November to below R12 at the end of the year, becoming the best performing emerging market currency against the USD.
And did I add that the balance of payments was quietly getting bigger and in December last year was the largest in surplus in 27 years?
It needs to be pointed out that the US dollar in 2017 has declined by more than 10% against a basket of the world’s largest currencies and in December last year dropped to a 13 year low.
This period of dollar weakness/rand strength coincided almost perfectly with the victory of Cyril Ramaphosa as new president of the African National Congress in December. To many the rand strength was attributed to this changing of the guard within the ruling party.
It couldn’t get better and to some members of the popular press in SA Cyril Ramaphosa was about to start walking on water, such was the euphoria and hoopla about his triumphant march to, first Luthuli House, and then soon to the Union Buildings.
Investment returns over the long term are not only determined by currency weakness/strengths. The choice for SA investors is not always a binary one: in other words either local or offshore, depending on the currency.
Despite the surge in the rand over the past twelve months, the JSE was not the best performing stock exchange as far as investment returns are concerned. The exchanges of most Asian countries, including China and Japan and several sectoral funds (technology, biotechnology, pharmaceuticals etc.) still outperformed the local stock market. See
Rushing Out Not In
Are investors rushing to repatriate their money back to SA? It would seem as if there was, instead, a rush of money out of the country to buy dollars below R12 or so. Both Allan Gray and Foord have announced the closure of the offshore window for now as they both have reached their limits in terms of Regulation 28.
The forward looking investors have used the current bout of rand strength to top up their offshore investments.
The diversification argument is now stronger than ever. If you haven’t built up some foreign investments into funds and sectors not available to you in SA then now is a great opportunity.
Can the rand get stronger? Is it going to weaken again? I don’t have that kind of divine insight in the short term.
There are however some investors who should NEVER invest their money offshore or into offshore assets. These are the investors who cannot handle volatility or short-term declines in their investment portfolios. These are also the investors who keep on tracking their investment returns in rand and not in global currencies.
Short term movements in the rand tend to be very unpredictable and very sudden. We could easily be back at R14 or more if interest rates in the US start rising again. Or then again it might not.
To have all your assets in one country whose economy is not showing much signs of life at the moment simply is not a great investment strategy to follow if you truly want to create global wealth.
INVESTING OFFSHORE IS DETERMINED BY MANY OTHER FACTORS WHICH INCLUDE, BUT ARE NOT
1. The ANC is about to embark on a renewed focus on the expropriation of land (not only
farm land it seems) without financial compensation. How this is going to work without seriously damaging economic confidence is not clear. Reports over the weekend indicated that all kinds of property will be considered for expropriation, similar to the manner that all mineral rights were expropriated by government in 2004, also without financial compensation. This has led to a sharp drop in foreign investment in the mining sector.
2. The SA economy is still in the grips of a serious downturn and the IMF recently downgraded SA’s growth forecasts to 0,7% for this year and 0,8% in 2019.
3. SA’s fiscal situation is rapidly deteriorating and the fiscal “hole” is now estimated to be close to R60bn for the current financial year and almost R200 billion over the next three years. The forthcoming budget will need to find additional revenue from, amongst other sources, higher VAT, a wealth tax and also new taxes on things such as
petrol and sugar.
4. Moody’s has refrained from downgrading SA’s credit rating until after the 2018 budget. Such a downgrade will mean that all three the large credit ratings have SA at “junk” status and that global pension funds will then be forced to withdraw from the local bond market, leading to the withdrawal of about R100 billion rand from our bond market. This is all potentially rand negative.
5. A policy of radical economic transformation, spearheaded by Cyril Ramaphosa, could also include the withdrawal of the current foreign investment allowance of R10m per taxpayer per year. One must never forget that the opportunity to invest offshore is still a regulatory allowance in terms of the country’s foreign exchange control legislation. It can be scrapped or repealed overnight.