‘It is not just about the rand’

Things to consider when moving money offshore.

JOHANNESBURG – What is going to happen to the rand? Should I move money offshore?

This is one of the most common questions investors and financial advisors pose to him, Pieter Hugo, managing director of Prudential Unit Trusts, says.

However, in answering this question, it is prudent to consider the broader market context. The currency is only one part of the equation, he argues.

The effective offshore exposure

The average local Balanced Fund currently has an offshore exposure of 26.6%. Regulation 28 of the Pension Funds Act caps the offshore allowance at 25%, but due to the significant depreciation of the currency, the current exposure is slightly higher. This is the typical offshore exposure a local investor’s retirement money would have, Hugo says.

An investor might consider the current challenges facing South Africa and argue that offshore exposure of 25% is not nearly enough. However, this percentage is not really reflective of the investor’s true global exposure, he says.

An analysis of the net asset value of the FTSE/JSE SA Listed Property Index (Sapy) suggests that about 30% of the Net Asset Value of the underlying properties are offshore, which could be used as a rough approximation of the revenue that these companies generate offshore. A similar examination of the FTSE/JSE All Share Index (Alsi) suggests that 56% of the revenue of all the listed companies included in the index is generated outside the country.

This means that the effective offshore exposure of the average Balanced Fund investor is almost 50%, he says.

Hugo says whether offshore exposure of around 50% is ideal, will depend on the investor’s personal circumstances.

Where should the rand be trading?

The graph below depicts the movement of the rand against the dollar over time (in red). Since South Africa has a much higher inflation rate than the US (the inflation differential), the rand should theoretically depreciate at a rate equal to the inflation differential. If investors take their money offshore they will receive roughly 2% interest in a US bank account (as opposed to the 7% they would have received in South Africa), but because the rand depreciates, investors are not “losing” money.

Screen Shot 2016-06-01 at 10.19.52 PM

Sources: I-Net, Prudential Investment Managers

The rand peaked at R13.72 to the dollar late in 2001. Hugo says if the rand depreciated according to the inflation differential from that point onwards, it would have traded just below R23 to the dollar by the end of April this year. While it is quite a long way off from this, the current picture, is “still not fantastic”.

The pain South Africans are currently feeling is the currency’s movement from very expensive (in mid 2011) to very cheap in a short period of time.

While the rand should theoretically depreciate in line with the inflation differential over time, practically, it fluctuates around this path.

‘It’s not only about the rand’

Hugo says when investors ponder investing offshore the exchange rate is often their only consideration. But if you are moving money offshore, you are firstly selling a local asset, exchanging currency and then buying an offshore asset.

The graph below shows the real effective exchange rate when compared to a basket of currencies of South Africa’s trading partners (the black line). Above a level of 100, the currency is considered expensive. Below 100 it is cheap. The beige line depicts the price-to-book value of the MSCI ACWI Index, while the red line represents local equities.

Screen Shot 2016-06-01 at 10.20.07 PM

Source: Bloomberg, Prudential Investment Managers

Hugo says if an investor had to sell South African equities and exchange rands for world currency to buy world equities, the investment returns on a three-year basis would not only be determined by exchange rate movements.

While the rand is currently very cheap compared to its own history, it is not the first time this has happened. It was also undervalued at the end of November 1985 and December 2001. In 1985, an investor would have sold South African equities at around fair value, would have sold rands very cheaply, but would also have bought offshore equities quite cheaply.

On balance, the investor made money on the trade. On a three-year basis, there was a 15% return when investing offshore at that time.

Fast forward to the end of 2001 and the same investor was selling South African equities fairly cheaply, selling rands cheaply and was buying very expensive offshore equities.

“You lost 120% [on a three-year basis] if you went offshore,” Hugo says.

At the moment, both local and offshore equities are marginally expensive, and investors should also keep this in mind when they decide to invest in stocks offshore.

“I’m not saying the rand can’t go either way. Just understand, it is not just about the rand.”



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so in three words – the rand is heading for 23 – have been saying that for ages. chris hart is suggesting 60 to us$1 before the IMF arrive in the nick of time to save your fancy suburbs, cars and overseas holidays – aint going to happen – the IMF arriving in the nick of time that is

Could someone please block this guy from Moneyweb?

I agree
This guy is probably a disillusioned SA’n living somewhere in SA with very little to invest and missed the boat (if indeed he had an opportunity) to move overseas.
His comments are just plain negative and insulting.
Even if he is living abroad he should by now have enough vindication for his decision to move on with his new life.
Reminds me of a divorcee who is ‘happily’ married to next wife but still involves himself in the affairs of the ex-wife. Psychiatrists will have a good term for this condition.
I agree – – MWeb should block him in future

Hi robertinsydney

Do you mind putting a time-frame onto that prediction? It is inevitable that the ZAR will be trading at 23 to the USD eventually. So you having been saying that for ages is a pretty useless prediction…

no in aus we are called ACA – altho’ I am an FCA. the fact is that the lower exchange rate has NOT led to increased exports for reasons your economists will tell you about (prices not competitive mainly).

I thought you were a CPA Robert? In SA we have higher inflation (7%) than in the US (3%), so of course the Rand needs to “weaken” to keep things in balance. A weak Rand is also good for exports.

Sensible view.
Watch out those who jump on the bandwagon to sell up and invest abroad – the only people who benefit are the Brenthurst’s and other wealth ‘managers’ who spread fear day after day. Losing 120% on a three year basis is not my kind of fun.
Well done Mr Hugo – will give you a call and see what you can do for me – for this is the type of investment advice I expect.

all indications are that the ZAR will strengthen considerably in the next 2/3 years!!!! watch this space!!!

Of course not.

The main issue is that with bbeeeeeeeeee etc the effectiveness of an already appalling guvmint and local business will decline even further. Chuck in the madness of the unions and you have a recipe made in hell.

In short if will become even more difficult than ever to make money in the private sector. This is the predominant reason to invest offshore, particularly if you can get cash offshore.

The average employee in the private sector is simply no match for pre 1990. Nearly every interaction that one has with call centres or guvmint gives one a headache. Only rarely is the exception true.

Pieter my friend, I don’t think it is a simplistic as ”should I move my money offshore” , as the currency remains the most important ”part” of such an investment. Any offshore investment will obviously depend on ” on the investor’s personal circumstances”, especially if the proceeds must be repatriated to South Africa in future where the investors remains in South Africa and will spend this proceeds locally. This type of investment could be the ”retirement money that you alluded to in your article, save to say that these types of investors starts investing in these offshore investments at very different times during their life cycles.
The investments periods could range between one and thirty years etc. I recently went on pension and my retirement investments changed dramatically during the last ten years, as I moved it around. I did have an advantage as I used to be a Corporate FX specialist for more than 40 years and analysed the market trends on an ongoing basis, before I made changes etc.
I have always believed that the Rand is a very volatile emerging market currency that reacts very fast on both good and bad news and that there are only two people that knows where the Rand is heading, but they never agree!.
I have seen a lot of so-called Rand specialists who’s predicting (I was very disappointed and surprised to see Chris Hart calling for USD/ZAR 60.0000 ) all sorts of levels etc on the Rand. I agree that anything can happen to the Rand, and it usually does (both stronger and weaker).
The ZAR weakened since 1985 and traded at USD/ZAR 13.0000 in 02/01/2001, as the ZAR was sold heavily by big local corporates and certain local and offshore banks ( where most of the trading took place). This assault on the rand led to the ”commission of inquiry” that was eventually authorised by Thabo Mbeki, to investigate all the claims.
A book published in 2013 by Barry Sergeant, ”The Assault on the Rand” , gives a very well researched account and description of all the factors involved in the forex market, leading to the massive manipulation of the rand. It became very popular and clear in those days that the equity markets were used to enhance profits via the so-called rand hedge market , as the rand weakened.
Despite everything that was omitted by the commission, South Africa’s dysfunctional elites were exposed. The rand then started strengthening after the South Africa received investor status to a high of USD/ZAR 5.6500 on massive offshore pension fund investments from fund managers in 2004.
Between 2004 and 2009 the rand started weakening, from USD/ZAR 5.6500 to USD/ZAR 11.4750 for various reasons ( Mbeki replaced by Zuma, South Africa’s rising budget-and current account deficits, slow disinvestment by offshore funds etc).
Rand liquidity returned to the market with very large corporate transactions (dual listings, direct investments Barclays, Vodafone, Carry trades etc) and offshore pension funds returning to buy local equities etc.
Thereafter the rand started weakening to USD/ZAR 13.000 in August 2005 on various factors (political, twin deficits growing, slowdown in demand of raw materials in China, trade union action etc).
Any investor that invested in the offshore market between the beginning of 2001 (USD/ZAR 13.0000 ) and August 2015 ( USD/ZAR 13.0000) did not get any gain out of the Dollar/Rand (and all other major exchange rates), as the exchange rate remain the same. I think such investors did much better with the rest of their local investments due to much higher nominal and real interest rates, than any offshore investment (also without any exchange rate risk!)
My view is that South Africa will again become a top destination for all the ”stork money” that is floating around the world from first world to emerging markets, due to the normal cycles etc. The only risk right now is that our sovereign risk will be downgraded. It will then take more than 10 years, under very good management (political and financial) . I don’t think that our sovereign risk will be downgraded to junk at all and that we will maintain our investment grades.
If we don’t get downgraded and the worldwide markets start growing again and demand returns to the Chinese markets again, the rand could easily strengthen 10 cents in the process. We as traders always believed that the rand market, is an order market (that might return again after this shake-out) ….on the rand, you buy the rumour and sell the fact!
Will I sell rand at these levels and invest offshore ? No
Some of my friends own companies (imports and exports) and I often offer advice to them and/or advise them to consult forex Outsourcing companies to help them manage their risk….all of them have now become forex ”experts” and don’t want any assistance as most of them believe that the rand will continue weakening!

very impressive – BUT the reality is somewhat different. the country is sure to be downgraded to junk – probably by the end of the year. I am going to pass on this link – its a merrill lynch “longest pictures”. it runs to 146 pages – but is very readable. deals with future trends – enjoy


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