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There goes the rand... yet again

Aug 21 2019 14:46
Schalk Louw

As South Africans, we have this amazing ability to come up with catchy terms for big events that take place in our country. But just as the US is running out of female names for hurricanes, it seems that we will also be running out of terms to label local catastrophic events soon, especially when we consider the magnitude and frequency of these types of events.

In the last four years alone, we had ‘Nenegate’ in December 2015, which saw the rand tumbling down to levels of around R16.75 to the dollar. Slowly things started to stabilise and improve until we saw the rand strengthening to around R12.75/$ after March 2017.

Suddenly we were faced with ‘Gordhangate’, which very quickly pushed the rand right back down to around R14.50/$ to the dollar. Then came one of my personal favourites, ‘Ramaphoria’, which took form at the end of 2017, where we saw the rand strengthening to levels of around R11.50/$ in February 2018. In light of these events, our local stock market was unfortunately also adversely affected. 

Following Nenegate, foreigners were net sellers of local shares for 19 months in a row. Now, to put a value on this, it means that between December 2015 and September 2017, foreigners were net sellers of R223bn in local shares. To put the magnitude of these outflows into perspective, let’s refer to the recent Pepsi Co offer to purchase Pioneer Foods in its entirety as an example.

The offer to purchase amounted to about R24bn, which already caused giant waves in South African investment circles. We need a further nine offshore companies to make similar massive offers, just to make up for the net sales that took place during Nenegate and Gordhangate. 

In the last month, we saw the rand getting up to its old tricks again, and at the time of going to print, it had already weakened to R15.35/$. But what was the reason for this decline and why didn’t we see a new catchy term to capture the rand tumbling down?

Funnily enough, the main reasons for its decline cannot just be attributed to zero economic growth, or Eskom reflecting more bankruptcy than my student daughters’ bank accounts three days after receiving pocket money, or the fact that our unemployment figures have reached a new record high of 29%. 

Make no mistake, while these factors undoubtedly contribute to the rand’s ongoing decline, they are not the main culprits at this stage. When we take a look at the Brics currencies’ performance between 31 December 2018 and 12 August 2019, we will see that South Africa’s performance (-19%) against the dollar wasn’t that much poorer than Brazil’s -17%, Russia’s -12%, India’s -11% and China’s -8% over the same period. An appropriate term to label this would probably be 'EmergingMarketsgate'.

I believe that the rand at its current level of R15.35/$ is still priced too cheap. According to my valuations, it will be more fairly priced at around R12.50/U$. I have no doubt that we haven’t seen the end of political unrest and that this may very well negatively affect our already fragile currency even further, but at the end of the day the rand has an underlying fair value, and it should return to this value in due course. 

Rand/dollar versus fair value


Source: PSG Wealth Old Oak & Thomson Reuters

In December 1982, the rand traded at R1/$. If we take the inflation adjustment between the rand and the dollar into consideration for each year since then, it becomes clear that the rand is not trading at R9.53/$ as indicated by its purchase power parity (PPP), but rather at R15.35/U$. 

The rand is trading at a premium of nearly 61% against its PPP value, but the average premium the rand traded at since our first democratic election in 1994, was 24%, which means it would be better priced between R12 and R13/$. Historical price movements have shown us that our local currency can trade well above, or even below its fair value for long periods. It’s important to know, however, that overemotional decisions have cost investors dearly in the past, so beware of making rash decisions.

Always remember that your best defence against a specific weakening asset class, currency or share is diversification. It doesn’t always have to be all or nothing.

This article originally appeared in the 29 August edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

rand  |  currency  |  south africa

12 December issue
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