Will the rand continue to depreciate, and should I move my money abroad as soon as possible?
The volatility and recent depreciation of the rand are causing concern for many investors. This is exacerbated by increasing signs of political instability and warnings of a shrinking economy.
Emotion gets the upper hand
It is easy to yield to one’s emotions and “decide to move all available funds abroad” when faced with protesters disrupting the N3 or setting fire to towns like Delareyville and Hermanus. The decision to move money offshore than comes as a kneejerk reaction, instead of taking thoughtful action based on a sound strategy.
Rand weakens again
The rand is a volatile currency that tends to overreact to both positive and negative news. A period of excessive escalation usually follows after each major currency contraction. For investors who acted on impulse, this then leads to regret as they realise again how unpredictable the currency is.
The rand has been particularly volatile over the past three years. In 2015 the currency weakened to almost R17.00 against the dollar during “Nenegate”. It recovered to R11.50 with the election of President Cyril Ramaphosa in February this year. The currency has since weakened to below R14.00. Without Ramaphosa, forex specialists say the rand would have been back at R17.00 today.
Investment houses have, however, observed that many investors have increased their offshore exposure because of other risk factors in South Africa, irrespective of the rand’s performance.
This raises the question: has the level of political and economic tolerance now been exceeded?
One of the straws breaking the camel’s back was certainly weak local returns over the past three years, coupled with South Africa’s economic growth shrinking to 2.2% in the first quarter of this year. In May, trading activity, according to the BankservAfrica’s index, also decreased by 2% – the sharpest fall since 2013.
Emerging countries vulnerable
The dollar’s strength and rising interest rates in the US mean that investors are exiting emerging market currencies, because these countries will face increasing pressure to settle their dollar-based debt.
International investors are further wary of emerging markets because of the looming trade war between America and the rest of the world, which will have a significant impact on the developing world.
In addition, emerging countries are especially exposed to the effects of US tariffs against China (the rand weakened to almost R14/$ with the tariffs announcement) because it will affect Chinese economic growth, which means exports from emerging nations to China will decline.
Global funds are performing well
There are certain international investment funds, such as global equity funds, which have produced excellent returns over the past five years.
According to Morningstar, the top three global equity funds in South Africa have delivered between 13% and 14% per year over the past five years. The FTSE/JSE General Index showed a return of 9.16% per year over the same period.
Many investors choose to be exposed to specific sectors such as technology, which leaves Naspers as the only JSE-listed option. Global equity funds offer investors opportunities to invest in a broader range of quality international technology shares, such as Facebook, Apple, Microsoft and Amazon.
Global funds provide exposure to high-growth countries such as China and India, and the opportunity to invest in more stable economic and specialist sectors such as biotechnology.
Developing countries, like South Africa, are often heavily exposed to commodities and resources. Global funds give investors exposure to developed markets and countries, which respond differently to world events, and diversify portfolios.
Switching out of rand-based investments is not the only way to hedge your money against the volatility of the South African economy. Many investors already have indirect exposure to foreign currency hedged shares like Richemont, MTN, SABMiller and Ecsponent Limited. The latter has 30% of its assets denominated in US dollars and Euros. Many companies are listed locally but earn the lion’s share of their income from abroad.
Move for the right reasons
The uncertain political climate is not the most compelling reason to consider foreign investments. The main motivation for moving funds should be diversification, and alignment to the investor’s needs and appetite for risk.
Foreign investments are an important part of a cleverly compiled and well diversified investment portfolio. However, it is not a magical asset class that will automatically secure wealth. Many investors end up highly disappointed with their foreign returns – especially if the exchange rate turns against them!