The South African rand (ZAR) has been increasingly sensitive to domestic politics over the past decade. It fell to its weakest point in December 2015, to 16 to the USD, when President Zuma reshuffled finance ministers.
It jumped sharply late last year when businessman Cyril Ramaphosa was voted head of the ANC, putting him in pole position to succeed Zuma as president. Since then there has been speculation that Zuma may step down early, and Ramaphosa has presented an optimistic vision of South Africa for investors at Davos. Both of which have further boosted the currency, which rose to below 12 to the USD.
While a stronger rand may reflect an improved political outlook for the country, it is not, perhaps ironically, what is best for the economy. Given South Africa’s reliance on exports for economic growth, a stronger rand may deter sales and lead to weaker output growth. Consensus forecasts for GDP growth last year are for a modest 0.8% increase over the previous year.
The weakness of the U.S dollar in recent weeks has also been an important contributing factor. The impact for S.A investors depends very much on what their base currency is. i.e. which currency do they use to account their wealth? For many it will be the rand, in which case any American real estate, or in U.S Treasuries, or relatively exotic dollar-denominated emerging market sovereign debt, will be worthless in rand.
A rand-based investor may wish to hedge against further rand appreciation through taking out derivative positions, or from buying ‘hedged into rand’ share classes available from mutual fund providers. This assumes a further strengthening for the rand. But given the uncertainties of South African politics, and the many structural problems facing its economy, betting on further long-term appreciation of the rand may prove frustrating.
The alternative is for investors to not hedge against further rand appreciation, but instead to ensure that any overseas currency exposure is widely diversified amongst a number of hard currencies which might include sterling, the euro as well as the dollar. This will offer some protection against dollar weakness.
But many South African investors will have developed a global lifestyle with a global spread of assets, and perhaps account for their household wealth in dollars. From this perspective, the weak dollar/ strong rand theme is good news that flatters the returns made on South African assets when expressed in dollars. For example, the MSCI South Africa index is up 8.5% in USD since the start of January, but 3.7% in rand terms. Again, global diversification will help ensure that if/when the rand falters, the investment portfolio is not overly hurt.
Tom Elliot, deVere Group International Investment Strategist