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IN THE global currency war, South Africa has an arsenal of two plastic cricket bats and a popgun compared to what others are rolling out.
China is sitting on reserves of $2.5 trillion with which it is manipulating the market to keep its yuan low, while Brazil is blasting foreign investors with taxes and some in the US want to go "nuclear": ban all Chinese imports until that country's currency is allowed to appreciate.
SA, which offers the second-highest real interest rates in the world, has seen the rand jump to a 33-month high as global investors flood the local bond market.
The SA central bank has started selling small amounts of rands in an effort to curb the currency, but this intervention is small change compared to what other countries like Japan, South Korea and Switzerland are already spending to weaken their currencies.
The cost of full-scale intervention - which may involve printing more rands to buy dollars, issuing bonds to take the rands out of circulation and ending up with a huge interest bill - would be prohibitive and the effectiveness questionable, considering the volumes that trade in the rand every day on forex markets, says Geoff Blount, CEO of Cannon Asset Managers.
SA has about $40bn in foreign reserves – the equivalent to four days' worth of trading in the rand.
Attempts to defuse the global currency war at a meeting of the International Monetary Fund at the weekend failed and fighting looks set to intensify as growth falters and large nations try to export their way out of an economic mess.
China has also started buying emerging market currencies, further boosting rand demand.
For the time being at least, it looks like SA might as well raise a white flag and go cut some oranges for half-time as others fight it out.
Tough choices for investors
But the strong rand is causing major stress for government, industry and unions alike, who fret about what it will do to SA's competitiveness by hiking the prices of export products in overseas markets and chasing potential tourists away.
While this is the consensus view, some, like Blount, think the strong rand may actually boost SA Inc. He points to the period between 2002 and 2007, when the local currency doubled in value against the dollar.
During that time, the economy also went through a massive spurt, growing at times by 6%.
Contrary to conventional wisdom, Blount says a long-term analysis indicates a slightly positive correlation between the strong rand and manufacturing output.
A potential explanation for this is that input costs – like imported machinery and goods used in production, as well as fuel (oil is SA's biggest import) are lower, thereby reducing the cost of manufacturing.
"Weakening the currency may mean that our labour costs are temporarily cheaper, but as our inflation is closely linked to the currency, these gains are short-term as wages soon start rising due to the rise in inflation as the rand weakens."
A strong rand also boosts consumer spending by keeping inflation and interest rates in check.
But while there is disagreement about the impact of the strong rand, and also whether the current strength will last, there's no disputing about what it means for local investors: trouble.
There aren't that many investment options that allow you to capitalise on rand strength.
Local shares
Investments in the JSE overwhelmingly favour a weakening rand. Between 60% and 70% of the local market's capitalisation is geared towards foreign currencies - either through mines (which sell their commodities in dollars) or through large companies like Richemont [JSE:CFR] and British American Tobacco [JSE:BTI], which earn their income overseas.
Local retailers, which can now import goods more cheaply and fatten their profit margins, are the most obvious beneficiaries of a strong rand.
Blount is also upbeat about the effect lower inflation (thanks to the rand) plus above-inflation wage adjustments will have on consumer spending.
There's only one problem. Retail shares are already painfully expensive, sitting on price to earnings ratios of above 20 times.
A select few industrials - including his favourite, Hudaco Industries [JSE:HDC] - still offer some value, Blount reckons.
Global shares
Rand strength now gives you the chance investments in other markets for much cheaper.
However, many locals are still nursing third-degree burns after investing overseas in recent years, and may be hesitant to dip in again.
Offshore investing has been disappointing for a decade, says Simon Pearse, Marriott Asset Management CEO.
"This is a result of so many international mega-cap companies having been overvalued for many years from the late 1990s. Dividend yields in 1999 were in the order of 1%.
"Today those same companies are offering dividend yields of between 4% (and) 6%. This implies that an investor today is paying a quarter of the price for the same income stream, clearly a very different opportunity."
Coronation Asset Managers expects global equity investments, which only managed 2.3% over the past decade, to deliver returns of up to 15% over the next 10 years – compared to between 10% and 12% from local equities.
Louis Stassen, senior portfolio manager at Coronation Fund Managers, believes it is a most opportune time, given the strength in the currency, to externalise assets and invest in offshore equities.
"We prefer offshore developed market equities at this stage of the cycle to domestic equities. On top of that, one could benefit from an anticipated weakening of the currency."
Blount thinks chasing expected currency movements is the wrong reason for investing abroad. He says investors are bound to call it wrong.
"The only right reason to invest offshore is for diversification."
Ask yourself what percentage of your portfolio you want to diversify in other markets and allocate your money accordingly, is his advice.
Focus on shares with a specific focus that you won't get in the local market - technology behemoths like Microsoft and Apple, or consumer multinationals like Coca-Cola.
"Many of the large international companies in stable industries are offering unusually good value in the form of high dividend yields, making them attractive for investment," says Pearse.
Gold
There is a tectonic shift taking place in the major currencies, particularly the dollar, argues Blount.
Due to massive amounts of dollars, pounds and yen being printed to bolster economies, these currencies face long-term devaluation.
"The dollar is transforming from a reserve currency into just another currency which is at the mercy of the market."
This has consequences for gold in particular.
Gold, which is priced in dollars, should rise in that currency as it weakens, as it will become more attractively priced in other currencies.
And as the dollar loses its status as reserve currency, there may be renewed interest from central banks in gold.
However, this is far from a done deal, reckons Schalk Louw, executive chairperson of Contego Asset Management.
He sees a major bubble building in the gold market and is particularly concerned that the precious metal price doesn't pull back when the dollar strengthens, but has kept on firming through dips and troughs.
Louw thinks the US is about to enter an era of lower inflation and lower interest rates, which historically has been accompanied by a strong dollar.
"This leaves gold investors very vulnerable."
- Fin24
China is sitting on reserves of $2.5 trillion with which it is manipulating the market to keep its yuan low, while Brazil is blasting foreign investors with taxes and some in the US want to go "nuclear": ban all Chinese imports until that country's currency is allowed to appreciate.
SA, which offers the second-highest real interest rates in the world, has seen the rand jump to a 33-month high as global investors flood the local bond market.
The SA central bank has started selling small amounts of rands in an effort to curb the currency, but this intervention is small change compared to what other countries like Japan, South Korea and Switzerland are already spending to weaken their currencies.
The cost of full-scale intervention - which may involve printing more rands to buy dollars, issuing bonds to take the rands out of circulation and ending up with a huge interest bill - would be prohibitive and the effectiveness questionable, considering the volumes that trade in the rand every day on forex markets, says Geoff Blount, CEO of Cannon Asset Managers.
SA has about $40bn in foreign reserves – the equivalent to four days' worth of trading in the rand.
Attempts to defuse the global currency war at a meeting of the International Monetary Fund at the weekend failed and fighting looks set to intensify as growth falters and large nations try to export their way out of an economic mess.
China has also started buying emerging market currencies, further boosting rand demand.
For the time being at least, it looks like SA might as well raise a white flag and go cut some oranges for half-time as others fight it out.
Tough choices for investors
But the strong rand is causing major stress for government, industry and unions alike, who fret about what it will do to SA's competitiveness by hiking the prices of export products in overseas markets and chasing potential tourists away.
While this is the consensus view, some, like Blount, think the strong rand may actually boost SA Inc. He points to the period between 2002 and 2007, when the local currency doubled in value against the dollar.
During that time, the economy also went through a massive spurt, growing at times by 6%.
Contrary to conventional wisdom, Blount says a long-term analysis indicates a slightly positive correlation between the strong rand and manufacturing output.
A potential explanation for this is that input costs – like imported machinery and goods used in production, as well as fuel (oil is SA's biggest import) are lower, thereby reducing the cost of manufacturing.
"Weakening the currency may mean that our labour costs are temporarily cheaper, but as our inflation is closely linked to the currency, these gains are short-term as wages soon start rising due to the rise in inflation as the rand weakens."
A strong rand also boosts consumer spending by keeping inflation and interest rates in check.
But while there is disagreement about the impact of the strong rand, and also whether the current strength will last, there's no disputing about what it means for local investors: trouble.
There aren't that many investment options that allow you to capitalise on rand strength.
Local shares
Investments in the JSE overwhelmingly favour a weakening rand. Between 60% and 70% of the local market's capitalisation is geared towards foreign currencies - either through mines (which sell their commodities in dollars) or through large companies like Richemont [JSE:CFR] and British American Tobacco [JSE:BTI], which earn their income overseas.
Local retailers, which can now import goods more cheaply and fatten their profit margins, are the most obvious beneficiaries of a strong rand.
Blount is also upbeat about the effect lower inflation (thanks to the rand) plus above-inflation wage adjustments will have on consumer spending.
There's only one problem. Retail shares are already painfully expensive, sitting on price to earnings ratios of above 20 times.
A select few industrials - including his favourite, Hudaco Industries [JSE:HDC] - still offer some value, Blount reckons.
Global shares
Rand strength now gives you the chance investments in other markets for much cheaper.
However, many locals are still nursing third-degree burns after investing overseas in recent years, and may be hesitant to dip in again.
Offshore investing has been disappointing for a decade, says Simon Pearse, Marriott Asset Management CEO.
"This is a result of so many international mega-cap companies having been overvalued for many years from the late 1990s. Dividend yields in 1999 were in the order of 1%.
"Today those same companies are offering dividend yields of between 4% (and) 6%. This implies that an investor today is paying a quarter of the price for the same income stream, clearly a very different opportunity."
Coronation Asset Managers expects global equity investments, which only managed 2.3% over the past decade, to deliver returns of up to 15% over the next 10 years – compared to between 10% and 12% from local equities.
Louis Stassen, senior portfolio manager at Coronation Fund Managers, believes it is a most opportune time, given the strength in the currency, to externalise assets and invest in offshore equities.
"We prefer offshore developed market equities at this stage of the cycle to domestic equities. On top of that, one could benefit from an anticipated weakening of the currency."
Blount thinks chasing expected currency movements is the wrong reason for investing abroad. He says investors are bound to call it wrong.
"The only right reason to invest offshore is for diversification."
Ask yourself what percentage of your portfolio you want to diversify in other markets and allocate your money accordingly, is his advice.
Focus on shares with a specific focus that you won't get in the local market - technology behemoths like Microsoft and Apple, or consumer multinationals like Coca-Cola.
"Many of the large international companies in stable industries are offering unusually good value in the form of high dividend yields, making them attractive for investment," says Pearse.
Gold
There is a tectonic shift taking place in the major currencies, particularly the dollar, argues Blount.
Due to massive amounts of dollars, pounds and yen being printed to bolster economies, these currencies face long-term devaluation.
"The dollar is transforming from a reserve currency into just another currency which is at the mercy of the market."
This has consequences for gold in particular.
Gold, which is priced in dollars, should rise in that currency as it weakens, as it will become more attractively priced in other currencies.
And as the dollar loses its status as reserve currency, there may be renewed interest from central banks in gold.
However, this is far from a done deal, reckons Schalk Louw, executive chairperson of Contego Asset Management.
He sees a major bubble building in the gold market and is particularly concerned that the precious metal price doesn't pull back when the dollar strengthens, but has kept on firming through dips and troughs.
Louw thinks the US is about to enter an era of lower inflation and lower interest rates, which historically has been accompanied by a strong dollar.
"This leaves gold investors very vulnerable."
- Fin24
