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By Renee Eagar, CFP®* 

The local currency’s strong come-back towards the end of 2020 took many by surprise in view of the continued and more severe impact of the global Covid-19 pandemic and worsening local economy.

The rand was under massive pressure and traded at R19.26 in the first week of April 2020, shortly after SA went into hard lockdown and Moody’s downgraded the country to junk; voicing concern that the SA government’s debt is ballooning. The agency also said it has little to no confidence that the state would succeed in cutting spending, especially the large civil servant wage bill.

Yet, the rand started rallying, largely due to external factors.

Source: Exhangerates.org
  • Dollar weakness.

Markets believe that new US President Joe Biden will be less unwilling than the Republicans to pump billions in stimulus. This means more US government debt, which is negative for the dollar in the long run.

Biden is also expected to stop the American trade war with China and others, which will impact imports to the US that could weigh on the dollar. US importers will have to sell dollars to pay for goods in another currency.

  • High interest rates in South Africa

Traders are attracted to currencies which earn higher interest rates, and even though rates have been cut to their lowest levels in half a century in SA, 3.5% is still far better than what is offered from most major currencies. Many countries – Switzerland, Spain, Japan, Denmark, and others – now have negative interest rates.

Interest rates in SA are not expected to go lower anytime soon as consumer inflation numbers hit seven month highs.

  • Bigger appetite for emerging market currencies

The Covid-19 pandemic and its impact on the world economy has provoked investors to invest in themes such as gold, US bonds and the dollar. But now that there is a vaccine in place it has boosted confidence that the worst of the virus could be over. This increased investors’ risk appetite which put emerging markets back on the menu, so to speak.

  • South Africa’s current account is looking better in 2020 than it has in years

To explain this simply – if more money flows out of a country than into a country, it is bad for its currency. The flows out of a country are measured by the current account. Because SA imports most of its oil and pays huge amounts in interest and dividends to foreigners outside the country, the country has maintained a large deficit, as much as 6% of GDP, for many years.

This deficit for the past year is now closer to 0%, the oil price tanked during the pandemic, foreign investment in SA has dwindled in recent years, reducing  interest rate and dividends going overseas.

Renee Eagar

SA has also seen record harvest and agricultural exports have been strong, and because of the depressed local economy imports of machinery and other expensive goods have been weak. SA typically imports more than the country exports, which changed significantly last year.

These factors contributed to the strengthening of the rand but are largely  external factors. e.g., the dollar weakening that is making the SA currency look strong.

Several analysts and large global asset managers have indicated in their outlook reports for 2021 that they expect an increased appetite for emerging market exposure and expect China/Asia to lead the global recovery. This too will have a positive effect on the rand.

However, South Africa’s many challenges remain. Actions needed include:

  • A reduction of the state’s wage bill
  • Prosecutions for corruption
  • Stable provision of electricity
  • Strategies to address the impact of lockdowns on many industries
  • Workable strategies to grow the economy

Currency fluctuations have an impact on offshore investing but considering the state of the local economy and the very lacklustre returns achieved through investing locally, investors need to focus on offshore investment options.

When comparing a high growth offshore investment portfolio to that of the local JSE, double digit annualised returns have been achieved over the past 5 years even when you strip out the currency fluctuations. The JSE, which is skewed to approximately 60% offshore earnings and has an inbuilt hedge to the rand, has come nowhere near that.

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The key is the vast choice of sectors that are not easily accessed locally.

Some perceive the rand’s fair value to be around R12.97/$. However, this fair value is never achieved and the bands it trades in are too wide, which results in extreme volatility and because of the liquidity in the SA market, it seldomly follows this line.

Source: Ninety One

The rand is likely to continue to weaken over time, for the next five to ten years and more.

However, investors need to concentrate less on the rand and its short term fluctuations and more on offshore growth opportunities.

Concerns over the dollar are also topical but the key is to have a globalised portfolio combining different currencies and exposure to worldwide earnings, perhaps now a bigger exposure to emerging markets is warranted.

There are many factors to consider to successfully invest offshore, the value of the local currency is but one. Read more about offshore investing.