We often get asked the question – is it now too late to take money offshore following the rapid depreciation of the rand over the last year? Whilst this question is natural and pertinent, it’s important to take in to context a number of factors and statistics when evaluating a response to this question.
- We are not currency, or any other asset class for that matter, timers. The tightrope of trying to time entry points into an investment, be it currencies or equities, is a speculative and highly risky one, which is not an investment philosophy we adhere to. We are long term investors and take views in excess of five years, whereby marginal differences in entry points render themselves inconsequential.
- The rand has depreciated over 25% over the past year, which is extraordinary for any asset movement. This has been due to a number of reasons:
- The obsession in the markets over Janet Yellen and her mighty sword of a potential 0.25% interest rate increase in the US. Just as we had with Ben Bernanke and his murmurs about the end of quantitative easing last year, the extreme amount of volatility exhibited in the market place over a somewhat menial change in US monetary policy seems to be an exponential factor of sentiment, rather than calmly calculated fundamentals. Whilst we do appreciate that we are undoubtedly a link the chain of global monetary policy games, and this initial move will be all but a precursor to future rate hikes, the global economy is not in a state whereby we expect to see wholesale changes to interest rates in the near future.
- The rand, as one of the most liquid and commodity linked emerging market currencies, has been the bearer of brunt for a number of macro themes which have emerged over the past year. These include the slowdown of the Chinese economy, which continues to affect commodity prices, and a flight to safety (i.e. US $) each time any positive data comes out of the US. We saw this with the recent nonfarm payroll numbers which beat estimates and led to a spike in the December rate hike probability (as exhibited by interest rate futures) from 56% up to 70%, off a base of 30% a month previously and 45% a month before that. What this should be telling you is that markets are incredibly volatile and investors in aggregate, flush with excess liquidity, are struggling to find a place to plant their pennies.
- That being said, gauging the fundamentals is where investors should focus their attention outside of the sandstorm of sentiment. The facts are as follows:
- South Africa remains on a path whereby both the budget and trade deficits continue to widen; wasteful government expenditure reinvigorates anger in the supposed beneficiaries of fiscal spending across the economy from student protests to labour unrest; wide scale unemployment appears no closer to being addressed and economic growth continues to slow at a pace in excess than that of our continental partners. All of this serves to exacerbate the continual decline in the attractiveness of South Africa as an investment destination for emerging market exposure.
- Then there is the potential of a credit downgrade looming on the horizon. This at a stage whereby capital raising remains a high priority in order to service the ballooning public servant wage bill; fund the zero percent tertiary education fee increase, as well as continue to bailout perpetually maladministered parastatals. Accompany this with sluggish growth, and thus a resultant fall in tax revenues, again leads to a situation whereby our sovereign debt becomes less and less attractive for foreign investors.
- If you look at the largest ASISA category of unit trust funds, that of Multi Asset High Equity, or balanced funds, the majority of these houses have allocated up to the maximum limit of 25% in global assets, thus hedging out against further ZAR deprecation. Furthermore, the local exposures in the listed property and equity space are skewed towards companies who generate the lion’s share of their income outside of South African borders, again acting as a hedge against the declining rand.
- Currency forward markets, although primarily a function of interest rate differentials (IRD) between countries, often include a premium/discount based on the markets’ view of the future of the relationship. Looking at the forward market for the rand against the major global currencies we notice that the market is pricing in additional depreciation outside of the IRD. This would be a function of the aforementioned concerns over South Africa’s ability to remain competitive in global trade markets and attract the foreign direct investment needed to revive the burgeoning economy.
Without packing your bags and heading for the closest refugee boat into open German arms, all is not doom and gloom. We have seen improvements across some departmental appointments, which should clean up some of the entrenched inefficiencies in state institutions; we have a number of fantastic companies with world class leadership teams which continue to do their part in the economy; we have the top ranked securities exchange in the world in the JSE and we have an incredibly vibrant and vocal youth aiming to change the status quo and ensure better opportunities for all. These are just a small example of the positives aspects of our young nation we can be proud of.
With all this in mind, and in conclusion, our advice for clients who are concerned about investing offshore due to the recent collapse in the rand, is as follows –
- It is always prudent to diversify your portfolio in global markets in order to protect the real (in currency terms) value of your investment portfolio.
- Global markets continue to exhibit more value than what we are seeing in South Africa, which would lend towards our view of a higher allocation to global assets.
- The rand is an inherently weak currency, and waiting for a retreat before entering may or may not pay off in the long term, we are not in the business of calling short term currency movements. What we are in the business of is ensuring that our clients have the most appropriately positioned and efficient portfolio which adheres to their personal requirements and risk appetite.
At the end of the day, what you need to consider is whether your offshore investment forms part of your strategic or tactical asset allocation. Your strategic allocation is long term and fixed in nature, and in that case the recommendation would be correctly align your portfolio for your long term goals and views on the currency. Creating a protection mechanism and hedging yourself against South African specific issues should form part of most prudent investors’ investment portfolios. If you are however tactical, your view may be more towards a short term shift in allocation and thus a speculative play of the currency markets which is, in effect, is a zero sum game.