MACROSOLUTIONS
THE RAND – IT’S OBVIOUSLY A
ONE-WAY BET, ISN’T IT?
DENZIL BURGER
SENIOR PORTFOLIO MANAGER
JULY 2016
When you have the memory of being able to buy one US dollar with one rand in 1982 or, more recently, with less than R7 just five years ago1, it is
very easy to simply dismiss the South African currency as a basket case that can go only one way – down! The current cost of travelling and buying
goods and services overseas reinforces that perception for many locals.
SO HOW CHEAP IS THE RAND REALLY?
RAND DEVIATION FROM TREND IN PERCENTAGE TERMS
The US dollar is the single most important currency globally, as it
remains the world’s favoured reserve currency and many important
goods and services are referenced in US dollars – for instance, the
oil price. However, to determine the true value of the rand, we need
to consider a number of factors. First, it is imperative to look at the
40%
EXPENSIVE
30%
20%
SA currency against a basket of relevant currencies – ideally our main
10%
trading partners – rather than just against the US dollar. This will tell
0%
us if we’re globally competitive and whether the strength of the US
dollar is distorting our view of the rand.
-10%
-20%
weaken in nominal terms just to maintain purchasing power parity in
2016
2015
2014
2013
2011
2012
2010
2009
2008
2007
2006
2005
2004
2003
2001
2002
2000
1999
most of our trading partners. Thus, you would expect the rand to
CHEAP
-40%
1998
to a rate in the mid-single digits, it still runs higher than the rates of
-30%
1997
real terms. While over recent years South Africa has reined in inflation
1996
The second important point is that you need to look at currencies in
Sources: SARB, MacroSolutions (June 1996 – June 2016)
real terms. Over and above this, there is a good argument for the
rand to have to weaken more in order to remain competitive, given,
Note the extent to which the rand moved to cheap levels in recent
for example, fast rising local production costs like wages, electricity
times, in line with general perceptions. We all know the factors that
tariffs and water charges.
Third, it is critical to look at the currency over the longer term in order
to gain the appropriate perspective. Focusing on recent trends only,
can too easily lead to short-term thinking influenced by sentiment and
have weighed on the currency in this bout of weakness – local political
developments, including the Nenegate Finance Minister replacement
debacle, low commodity prices and weak economic growth, fears
of rating agencies downgrading South Africa, US dollar strength and
momentum.
emerging markets generally being out of favour, etc.
The following graph brings all of these points together as it illustrates
A wall of bad news flow and overall negative perceptions from
how far away the value of the rand is from the longer-term real trend
investors can see a self-reinforcing move to extreme levels or at least
measured against a basket of currencies of our main trading partners.
to a point where the gap between pricing and reality is unsustainably
This provides a good reference for any discussion on the price of the
wide and a reversal becomes inevitable, as per George Soros’ Theory
rand.
of Reflexivity. That certainly proved the case in the bad bout of rand
weakness in 2001, and elements of this are being seen again in this
1
www.resbank.co.za
current episode.
"I contend that financial markets never reflect the underlying reality accurately; they always distort it in some way or another and the distortions find
expression in market prices. Those distortions can, occasionally, find ways to affect the fundamentals that market prices are supposed to reflect."
George Soros
TURNING CURRENCY VOLATILITY TO OUR ADVANTAGE
When pricing moves beyond what our assessment of the themes in
Note the risk reduction with no meaningful return trade-off as up to
play justify, it provides opportunities to trade the currency. These
40% global exposure is added into the portfolio. Changing the mix
would include tactical portfolio management decisions on direct
of assets within the balanced fund, as we would typically do in
currency trades (through currency derivatives or buying/selling foreign
managing an integrated portfolio, can increase the benefit further.
assets) and other positions where the behaviour of the rand has a
significant impact.
Retirement funds in South Africa are allowed up to 25% of the portfolio
However, you should not lose sight of the strategic value of holding
of South Africa. Given that this is fairly modest compared to the
at least a portion of your assets outside of South Africa. Apart from
optimal exposure as illustrated in the graph, standard balanced funds
to be invested globally, with a further 5% in African investments outside
the usual opportunity arguments, such as the small percentage South
Africa makes up of the total global market capitalisation and the
different sectors and companies available globally, the main benefit
would typically regard their strategic exposure to global as being
close to the maximum allowed.
of holding offshore assets is through the reduction of the risk profile
That does not mean to say you should always be at the maximum
of a portfolio.
permitted. As discussed earlier, there are times when it is appropriate
There are many ways to illustrate the risk reduction of including global
assets in a South African portfolio. One of the clearest is simply to
to increase exposure to the rand and this is where the skill of portfolio
management comes into play.
add an increasing amount of a standard global balanced portfolio
Some investors may have significant assets in excess of their basic
to a standard South African balanced portfolio and see how it would
retirement savings requirements and may prefer to hold these in “hard
change the risk and return outcome based on historical data. We
currency assets”; others may have a strongly negative view about
have done this in the following graph.
prospects for South African-based investments and also prefer to hold
RISK PROFILE REDUCES AS GLOBAL ASSET HOLDINGS INCREASE
(AVERAGE RETURNS OVER 20 YEARS)
80% SA : 20% Global
South Africa, 20%-30% global exposure is probably fine. Those
90% SA : 10% Global
70% SA : 30% Global
60% SA : 40% Global
100% SA : 0% Global
50% SA : 50% Global
13.2%
Return
be accepted that there could be a cost in doing so.
For the bulk of South African savers with most of their liabilities in
13.6%
13.4%
more offshore. The point is to highlight in these cases is that it should
looking for a higher offshore weight, but where the exposure is more
actively managed, should consider a worldwide flexible fund such
40% SA : 60% Global
as the Old Mutual Maximum Return Fund of Funds.
30% SA : 70% Global
13.0%
Across the MacroSolutions range of multi-asset class funds, we have
20% SA : 80% Global
12.8%
been active in managing our rand exposure in the recent bout of
10% SA : 90% Global
weakness, especially taking into account the considerable yield
12.6%
0% SA : 100% Global
12.4%
9%
10%
11%
15%
12%
13%
14%
Risk
Source: MacroSolutions (data to end of June 2016)
pick-up available from local assets in a broadly low-yielding global
world. At the same time, we continue to monitor potential headwinds
that may come back into play.
FOR MORE INFORMATION, VISIT:
www.macrosolutions.co.za
Old Mutual Investment Group (Pty) Limited
PO Box 878, Cape Town 8000.
Tel: +27 21 509 5022 Fax: +27 21 509 4663
www.oldmutualinvest.com
Old Mutual Investment Group (Pty) Limited is a licensed financial services provider, FSP 604, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms
of the Financial Advisory and Intermediary Services Act 37 of 2002. Old Mutual Investment Group is a wholly owned subsidiary of Old Mutual Limited. Reg No 1993/003023/07. The investment portfolios are market
linked. Products are either policy based or unitised in collective investment schemes. Investors’ rights and obligations are set out in the relevant contracts. In respect of pooled, life wrapped products, the underlying assets
are owned by Old Mutual Life Assurance Company (South Africa) Limited, who may elect to exercise any votes on these underlying assets independently of Old Mutual Investment Group. In respect of these products, no
fees or charges will be deducted if the policy is terminated within the first 30 days. Returns on these products depend on the performance of the underlying assets. Old Mutual Investment Group has comprehensive crime
and professional indemnity insurance, as part of the Old Mutual Group cover. For more detail, as well as for information on how to contact us and on how to access information, please visit www.oldmutualinvest.com.
July 2016