19 June 2023 EFFICIENT PRIVATE CLIENTS: THE MARKET AND THE SOUTH AFRICAN RAND - By efpc
As human beings, we always want to be in control of our circumstances. It is, therefore, normal to feel powerless when things outside of our control direct our circumstances. More recently, for some of us who wish to externalise funds, that driving force has been the weakening rand.
Over the past year, the rand has lost more than 20% of its value against the United States (US) dollar. Much of the relative weakness throughout 2022 was driven by the dollar’s strength as a result of higher interest rates and increased volatility. Investors view the dollar as a safe-haven asset alongside gold. In 2023, however, it much rather became a rand story, as the rand lost ground against the greenback and the rest of its emerging market peers. The main culprits causing this are ongoing load shedding, South Africa’s (SA’s) ties with Russia, and foreign investors selling South African assets.
With the rand depreciating against the dollar, clients ask us what they should do with their rands if they want to take it offshore. Several clients have also had their cash in money markets for quite some time now. It is worth mentioning that those clients have done extremely well by waiting, as per our advice. They have earned very healthy interest on those funds while equity and bond markets have lost value. To answer the question, however, we must start with a holistic discussion. If you already have enough local exposure through your South African income, pension fund, property, and other assets, the recommendation is still to wait for a more attractive rand/dollar exchange rate before externalising any funds. Equities still remain the best-performing asset class over long periods of time. We, therefore, urge our clients to use their money markets as a channel rather than as an investment vehicle, so that when the rand strengthens, the funds are liquid and can be moved quickly. Given the volatile nature of our currency, this can happen very quickly and investors need to be prepared.
The expectation is still for the rand to strengthen to below R17.50. If the rand merely adjusted for differences in South African and US inflation since 2000, the dollar would now cost less than R13.00. We think, however, that this level is a bit stretched and the chances are slim for the rand to strengthen that much. To further emphasise the oversold conditions, in a relative sense, the ratio of the market to the purchasing power parity was only wider in 2002, when the rand was nearly 80% undervalued. Today, the rand is 50% undervalued. Furthermore, the amount of short positions on the rand is close to record highs. Any positive news around our local electricity situation, inflation and growth in developed markets, or even SA’s stance on Russia, will result in investors buying South African assets and closing out some of those short positions.
For clients who already have enough offshore exposure, our recommendation will be to consider either the Efficient Private Clients Best View Portfolio, or our 100% Local Equity Portfolio. We are constructive on SA and on emerging markets over a three to five year horizon. With South African equities trading at a multi-decade low and the recent re-opening of the Chinese economy, there are excellent local opportunities. It is also important to remember that the South African economy is not the market. South African companies generate more than 70% of their revenue outside of SA.
Amid market volatility, Efficient Private Clients will continue to manage your scarce resources with care and providence. We will also continue to actively manage these resources through skilled analysis and timely adjustments. We thank you for affording us the opportunity to do just that!
Kind regards
The Efficient Private Clients Investment Team