How to protect your wealth when the rand is falling through the floor11th January 2016
Since 1987 all sudden movements in the Rand versus global currencies have occurred as a consequence of global events. Zuma’s supposed unilateral move to fire Nene has triggered an idiosyncratic sell off in the Rand and quite simply a loss of confidence domestically and abroad in our markets, businesses and leaders. The 32% year to date decline in the Rand against the Dollar and the recent 6% decline in December following the announcement of the changes in the finance minister has further highlighted the impact that currency changes can have on investor’s wealth.
Chart 1 shows that the South African equity market has delivered a total Rand return of 52% over the last five years.
Whilst this may appear respectable, Chart 2 shows that the South African equity market has delivered a negative total Dollar return of 35% over the same period. More importantly global equity markets have delivered a total Dollar return of 21% over the last five years whilst the U.S equity market, as measured by the S&P 500, has delivered a total Dollar return of 63%.
In real global terms an investment in the South African equity market has destroyed a substantial amount of wealth over the last five years. The reason for this is that since 2011 the Rand has depreciated against the Dollar at a compounded annual rate of approximately 19% as shown in Chart 3.
South African investors have two key decisions to make:
1. The percentage of their assets to be invested outside of South Africa
2. The timing of the movement of assets out of South Africa.
In our view, South African investors should have a substantial portion of their assets invested outside of South Africa. This is not only from a portfolio diversification point of view, but also for risk mitigation. The next question is at what point should investors move their assets from South African denominated to international denominated assets. This requires both a longer term strategic decision, and a shorter term tactical decision. From a strategic perspective, nothing has changed from the recent “Nene Firing” the economic fundamentals of south Africa are such that we believe the exchange rate will continue to weaken against other major global currencies over the longer term. The reasons for this are:
- A bulging public sector wage bill and spending that has no end. This needs to be funded and continued borrowing will contribute towards the fiscal deficit we find spiralling out of control.
- A dysfunctional education system preventing productivity growth and therefore negatively impacting competitiveness leading to a continued current account deficit.
- Increasing levels of corruption, and mismanagement of government finances which has been highlighted by Nene’s firing for supposedly trying to curb the above;
The effects of these are:
- unsustainable trade and fiscal deficits;
- high and increasing unemployment;
- increasing government debt;
- lack of investment; and
- structurally low growth.
Whilst we are quite comfortable in believing that the Rand will be trading at substantially weaker levels against major global currencies 5-10 years out, we do not know what the Rand may do in the short term. Quite conceivably the Rand could bounce back to below 14 to the Dollar. We believe that investors should make a strategic decision to allocate a substantial portion of their wealth offshore whilst avoiding any temptation to time currency movements. The best way to achieve this is to develop a targeted offshore exposure and then move assets on a consistent and regular basis irrespective of movements in the exchange rate. This is hard with all the volatility we are experiencing but remaining disciplined will result in an averaging of exchange rates at different points in the cycle. We do believe that when things are bad they are never as bad as they seem and when they are good they are not as good as they appear. To this end keeping cool and not panicking should lead to preserving your hard earned wealth and transferring it into hard currency.
Stonewood Investment Management provides investors with the opportunity to gain off-shore exposure and wealth protection through various strategies and investment vehicles. These include Public Equity Funds, Hedge Funds, Private Equity and Property. Please feel free to contact us, should you wish to discuss any of the above information in more detail.