The Rand’s Perfect Storm
It is not perchance that we have maintained a significant overweight exposure to offshore assets during the first half of 2023. As much as it pains us to admit, there are moments in time when one concurs with Magnus’s views and this has been one of those periods. From around R17,00 to the dollar at the beginning of this year, the Rand’s recent decline has been rather spectacular, more recently resembling a date that most of our readers would have been born on.
The reasons have included a perfect trifecta of risk factors which have come to fruition, ranging from the US’s flirtation with default resulting from mindless politicians initially not being able to agree on the terms for raising their own debt ceiling, a lower local rate increase of 50bp (where many expected 75bp) by the SARB, to the wonderful range of political missteps and faux pas which local politicians have engaged in alongside being called out by the American ambassador to South Africa for our (really not so secret) supply of arms to the Russians during the dead of Simons Town night, compliments of Lady R.
There are actually two other scenarios which we also suspected might pose a risk to the currency which have not yet played out, namely an increase in military activity in the Ukraine (as the aggressive counter-offensive is matched by Russian threats of localized nukes) and SA’s flirtation with a recession – and subsequent potential downgrade by ratings agencies – which for now at least seems to have been narrowly avoided. This does not however mean that international announcements of larger developed market countries which may still go into recession this year will not trigger a further risk-off event which sees emerging market currencies, for which the Rand is a popular liquid trading proxy, weaken further.
The answers in our view to this are threefold. Firstly, without throwing the baby out with the bathwater, maintaining our very healthy exposure to offshore assets (not just USD), which we have been doing for some time. Secondly, it is worthwhile reminding investors that over and above a healthy overweight to offshore assets, almost 50% of JSE listed companies (by market cap weight) have hard currency earnings. Even with one’s more limited local exposure, a large portion has already been hedged by companies who do not receive their earnings from local sources or in Rands. Last but not least, although it is easy to fall into a rut of perpetual pessimism when it comes to local politics, economics and the Rand, one must not completely relegate the Rand to the category of African currencies indefinitely, as snap-backs in our nimble Springbok currency are also not completely unheard of, particularly when our local real bond yields are as attractive as they have recently become or when global investors become more sanguine regarding the global outlook (a rising tide which lifts all boats – even our unseaworthy South African one).
Whereas the Rand will invariably continue to weaken gradually against other major currencies (even potentially against a much anticipated weakening dollar) over the very long term, in the near term at least we believe the largest currency moves might now have played out, unless of course South Africa goes and does something really clever like host an international war criminal in Durban later this year which could result in the potential suspension of beneficial international trade deals. Oh wait…