If, at the start of 2017, we had been told that Pravin Gordhan would be fired, that both S&P and Fitch would downgrade South Africa’s credit rating and that Brian Molefe would be reinstated as Eskom CEO, what would we have expected of the rand? Given those variables, most people would surely have bet against the local currency.
Yet five months into the year, and with all that having happened, the rand is stronger today than it was when we were lighting our New Year’s fireworks. As Tamryn Lamb, head of Orbis client servicing at Allan Gray, points out, this highlights just how difficult it is to predict the local currency.
“What’s been driving the rand is not what’s been dominating our minds in South Africa every day,” she says. “It’s that global investors have been more comfortable with investing in emerging markets, which include South Africa.”
Lamb argues that there is an important lesson in this.
While local online searches following the cabinet reshuffle in March were dominated by topics such as Malusi Gigaba, downgrades and Zuma must fall, on a global scale these issues were dwarfed by searches for Obamacare. But even that paled in comparison to internet users searching for Kim Kardashian.
“People globally are, relatively speaking, not as interested in what’s happening in South Africa,” says Lamb. “While we are all focusing on these history changing events, global search engine interest is far more concerned about a reality television star.”
This is significant because many local investors allow political news and day-to-day movements in the rand to influence their decisions about whether or not to invest offshore. This leads to attempts to time investments based on the currency, but Lamb argues that this is the wrong approach.
“We think investors should start by deciding how much of their portfolio they should put offshore,” she says. “They should make that a long-term objective, then work towards achieving it over an extended time frame and at a regular pace.”
How much should I invest offshore?
When working out what portion of your wealth should be invested outside of the country, Lamb says there are two things to take into consideration. The first is the need to protect your local purchasing power, and the second is diversification.
Even if you live in South Africa and your spending is entirely in rands, many of the goods and services you buy are really priced in dollars or other currencies. This includes the likes of imported electronics, fuel, vehicles and even clothing.
“When we think about what we all spend on a day-to-day basis, at least a third of what we buy is denominated in currencies other than the rand,” says Lamb. “So you should consider having at least that amount offshore.”
However, for the sake of diversification, you may want to invest even more than that outside of South Africa. This is because there is a far greater opportunity internationally than in the local market.
“The South African stock market represents only 4% or 5% of the global emerging market universe and less than 1% of the world opportunity set,” Lamb explains.
Investing offshore should therefore be part of any long-term plan, she argues. And the best way to approach this is to make regular contributions into funds with an international focus, or which have meaningful international exposure.
“Firstly, this means you will be able to smooth out rand volatility,” she says. “And secondly, if you attempt to time the rand you may be missing out on what’s happening on the other side – which is that you are giving money to a manager trying to create wealth over the long term.”
That creation of wealth is not only dependent on where the rand goes, but on many other factors including the valuations of the underlying assets. And investing purely on currency movements means that you may miss out on those opportunities.
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