It is interesting how Rand weakness seems to negatively affect our collective psyche and overall sentiment, notwithstanding that most South Africans probably don’t understand the full implications of currency weakness. Maybe it’s our fears of becoming a banana republic like our northern neighbour, which keeps us up at night.
Currency weakness acts like a pressure release valve bringing the economy back into balance. As the rand weakens our exports become cheaper stimulating demand whilst dampening the appeal of foreign goods, which then become more expensive. This shrinks the current account deficit and should ultimately help with the budget deficit as local economic growth picks-up benefiting from the currency weakness.
Of course, as consumers we feel it at the fuel pumps and elsewhere; currency weakness drives up the fuel price, which then feeds through to the rest of the economy pushing up inflation and eroding our disposable income. Not to mention the risk of the Reserve bank increasing interest rates to counter inflationary pressures taking what’s left of our precious disposable income.
For investor’s the currency effect is enormous with more than 60% of JSE earnings derived from offshore. A weaker currency translates into higher SA earnings, but vice versa, rand strength means lower earnings for the JSE overall index. Ironically the biggest threat for investors is rand strength and not rand weakness. Much of the current negative earnings growth for the JSE, which is down -18.8% for the 12month rolling period ending Oct, is a function of the rands strength year to date (y-t-d).
Any direct offshore investment exposure, prudent for a well-diversified portfolio, has seen y-t-d returns in rands reduced by 14.8% for Dollar investments, 13.6% for Euro and a whopping 36.8% for Sterling denominated investments. Multi-asset class funds, which typically have 25% exposure to foreign investments have had to deal with this currency headwind effectively wiping-out any hard currency gains when translated back into rands.
It’s a case of careful what you wish for. The obvious beneficiaries of the y-t-d rand recovery is anyone who is planning an overseas trip, but as far as the economy and investments are concerned a rand below R 14 is not good. The recent rand strength can be ascribed to a recovery in commodity prices and renewed investor interest in emerging markets and of course the political stalemate between Zuma and the rest of SA, which has restored some confidence of late.
Investors must look through the lower returns for the year and stick with tried tested strategies for generating long-term real growth, which is simply, enough in equities and enough offshore.
Mcomm, CFP®, HdipTax
T. 021-851 3746