CurrencyInvestment NewsIs this the real Rand, or is this just fantasy?

May 31, 20210
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It’s not often that we can get excited about our local currency, but a USD/ZAR rate below 13,80 is worth of a Freddie Mercury reference.

Speaking of that band, the Queen’s currency (GBP) is faring far better against us than the USD, as is the Euro, because the USD rate has very little to do with the Rand and a great deal to do with what has happened in America.

The world’s reserve currency is having a tough time this year. To be fair, it was the go-to asset when the world was badly broken in 2020 and everyone was forced to stay indoors. The extraordinary levels of stimulus (i.e. money printing) drove a debasement of the USD, pushing people into assets like cryptocurrencies.

Although the pandemic certainly isn’t over (as Tsogo Sun’s latest results clearly demonstrate with a spectacular earnings collapse), investors who have no interest in cryptocurrencies have been moving beyond the USD and seeking yield in emerging markets.

This is great news for South Africa, which remains an important emerging market. Economically, it’s a classic case of in the land of the blind, the one-eyed man is king. We have loads of problems domestically, yet we are still more attractive than many other emerging markets.

Will it last?

Some are calling for further Rand outperformance this year. In other words, there is a belief that the currency can improve even more. Whilst this may be true, it feels as though further significant improvement is unlikely. It might improve slightly or even go sideways for a while before South Africa’s economic realities catch up.

Right now, the local economy is being propped up by agriculture and commodities. Despite our government rather than because of it, we are somehow surviving. If vaccinations speed up and our tourism industry starts to operate again, that will be another strong driver of GDP.

So, there are clearly tailwinds for the ZAR. There are headwinds too, like Eskom’s ongoing calamities and the possible impact of NHI, which could well be the nail in the coffin.

We can’t be sure what the future of South Africa will hold, but we can safely point out a fascinating anomaly in the market right now: US stocks have been sold-off and the Rand has strengthened at the same time.

Why does this matter?

The usual situation is the other way around. A risk-off trade typically causes stocks to drop and leads to a flight to safety, where capital flows out of emerging markets like South Africa. This causes a sell-off of the Rand and causes the currency to weaken.

In other words, at exactly the moment one might want to top up on US exposure, the Rand weakens and our buying power decreases.

This time, the exact opposite is true. US tech stocks have come off the boil and the Rand is strong, which means that they are significantly cheaper in ZAR than they have been for months. In fact, there are numerous exciting stocks and funds that are trading at ZAR-equivalent prices not seen since the middle of last year!

Remember, these are businesses that have proven themselves during the pandemic and are growing in many cases at over 30% a year. The impact of the Rand is that we’ve stepped into an investment time travel machine, with the ability to enter positions at last year’s prices.

Over the next ten years, you have to ask yourself a few questions…

  • Will the South African economy outperform the developed world?
  • Is the Rand more likely to strengthen or weaken from R13,80 to the USD?
  • Will tech companies continue to grow quickly?
  • Is wealth creation best achieved in South African or US stocks with global impact?

We don’t have a crystal ball and neither do you. However, on a balance of probabilities, it feels reasonable that carefully selected US stocks can do well over the next ten years.

The strong Rand is an exceptional buying opportunity into the Unicorn Fund for example, with a strong basket of growth stocks that have been great performers in recent years. You may choose to live in South Africa and take your chances with Eskom, but your money can be given a passport.

This is the approach we take with our clients, focusing on growth in their portfolio with the ultimate goal of wealth creation and a truly comfortable retirement.

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