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There is a saying among investors that the best time to buy is during times of maximum pessimism, while the best time to sell is during times of maximum optimism. This saying is particularly relevant to the rand’s massive volatility over the past decade.
We first saw how the rand dropped from around R6/$ to more than R10/$ during the great market correction of 2008, only to rise to levels of just below R7/$ in 2011. Unfortunately, it has only been downhill since, with the rand dropping to levels of just below R17/$ early in 2016.
We have seen the rand gaining strength over the past few weeks, however, rising to below R14.30/$, and now everyone wants to know if this is the highly anticipated strengthening they have waited for to move all their investments offshore.
In 1987 Sir John Templeton shared the following thoughts at an investment presentation in the Bahamas, and I believe that these thoughts can be perfectly applied to address the concerns of those investors who are struggling with their decision of whether to move all of their investments offshore:
- “An investor who has all the answers doesn’t even understand all the questions.” My interpretation of this quote is that no one truly knows what the rand will do. Everything, however, has an underlying value.
- “To avoid having all your eggs in the wrong basket at the wrong time, every investor should diversify.” My interpretation is that although it may seem cheaper to invest offshore now than it did three months ago, it still doesn’t mean that you should move all your investments offshore.
- “The investor who says, ‘This time is different,’ has uttered among the four costliest words in the annals of investing.” My interpretation is that exaggerated movements are unnatural at least nine out of 10 times, no matter what the experts say may be the cause. When something looks too good to be true, it usually is.
I consulted three indicators that clearly illustrate that the strengthening of the rand may not yet be over:
1. Rand’s fair value
In December 1981, the rand traded at R1/$. If the rand increased by the difference in inflation every year since 1981, it becomes clear that at R14.30/$, we are trading way above its suggested purchasing power parity (PPP) of R7.85/$.
The rand is trading at a premium of nearly 88% in relation to its PPP value. You will see, however, that the average trading premium of the rand over the past 20 years is 42%, which means that the rand would actually be more reasonably priced at around R11 to R11.50/$.
2. Rand in relation to world resources index
We can clearly see that there is a huge correlation between the rand’s movement and the World Resources Index.
One swallow definitely does not make a summer, but it seems as though the extremely negative sentiment surrounding resources is on the decline, with resources receiving a slight boost after Chinese data showed that inflation is growing at a faster-than-expected rate. Since peaking in 2010, both the World Resources Index and the rand (in $) saw a 60% decline until earlier this year. The index, however, is up by 6% since its lows earlier this year and further increases may help to strengthen the rand.
3. The rand’s technical points
I’ve always been careful not to base any decisions on technical analysis alone, but it does remain a helpful tool and an excellent indicator of when a share or currency is overbought or oversold. When we take a look at the 50-day and 200-day moving average price graph on the right, you will see that the next rand/$ resistance point is around R14. If it moves through these R14-levels, however, it is highly likely that it may move all the way down towards levels closer to R11, which coincides with the first indicator.
I’m not saying that all investors should rush to bring back all their offshore investments, but be careful not to see this short-term strengthening as the golden opportunity to invest all of your capital offshore.
* Schalk Louw is a portfolio manager at PSG Wealth.
This article originally appeared in the 28 April 2016 edition of finweek. Buy and download the magazine here.
