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Good grief, look what the rand is doing…

The diversification argument is now stronger than ever.

You know you’ve achieved a certain level of fame/notoriety — take your pick — when your church-going secretary sidles up to you first thing on a Monday morning and in a conspiratorial whisper tells you “they were talking about you at church yesterday”.

Trying to keep a straight face I quickly scanned my recent history for something that could have led to this.

My mind raced  for a brief second to try and establish what could have been the cause. Adultery? No. Drunkeness in public? No. Blasphemy? No.

I know I haven’t been to church perhaps as much as I should have in recent years, but this is not so uncommon anymore.

Perhaps in another life, many years ago, my personal behaviour could have caused some flutter of discontent among the congregation, but I have been a good boy for many years now….

“Was it the dominee? I asked.

“No,” she replied, “it was a group of elders that was discussing you during tea after church.”

“Why on earth would they be discussing me?” I asked perplexed. After a slight hesitation she said: “They say you were wrong about the rand.”

She said this with such a stern face as if being wrong about the currency could have had me crucified and burnt at the stake.

I almost burst out laughing.

“Shouldn’t they be more worried about things like sin, forgiveness and eternal life than discussing more trivial issues such as the short-term movements of the rand?” I blurted out.

So there you have it, dear readers, being wrong about your currency is now deemed to be breaking the 11th commandment.

Seems that even the more religious among us also have an interest in the movement in the local currency. I thought it was only central bankers, fund managers, advisors and investors who watched the movement of currencies like a hawk. Not so it seems.

So, was I wrong about the rand?

Offshore investing not only about rand weakness

First, some context.

I have been recommending offshore investments since about 2010. It was my view — publicly stated on many platforms including several columns on Moneyweb — that the rand was overvalued relative to the US dollar and that following a decline in the commodity cycle (always key in such a forecast) plus the rising balance of payments-deficits and several downgrades the rand weakened from R6.80 in 2011 to above R17 just after the Nenegate fiasco in December 2015.

The blowout of the rand in the days during these tumultuous days of political drama would have been a runway for further weakness of the local currency to R20 and perhaps beyond. But that was not to be as this period of Zupta-induced political turbulence coincided almost 100% with a very gentle but noticeable upturn in the global commodity cycle, which has continued to this day.

Although substantially less in intensity than the previous upturn in commodity prices (2001-2008) it was nevertheless enough to offer some kind of support for all commodity producing countries, especially the rand.

The year 2017 also added additional support for the local currency as a major swing towards emerging market currencies ensued which, aided and abetted by a collapse in the US dollar in the last two months of 2017, coincided with the surprising win of Cyril Ramaphosa as the new leader of the ANC and soon to be president of the country.

This came as an injection of adrenalin for the rand, which powered its way against the US dollar from R14.50 early in November to below R12 at the end of the year, becoming the best-performing emerging market currency against the USD.

And did I add that the balance of payments was quietly getting bigger and in December last year was the largest in surplus in 27 years?

It couldn’t get better and to some members of the popular press in SA, Cyril Ramaphosa was about to start walking on water, such was the euphoria and hoopla about his triumphant march to, first Luthuli House, and then soon to the Union Buildings.

But investment returns over the long term are not only determined by currency weakness/strengths. And also is the choice for SA investors not only a binary one: in other words either local or offshore, depending on the currency.

Despite the surge in the rand over the last 12 months, was the JSE not the best-performing country as far as investment returns are concerned? Most Asian countries, including China and Japan and several sectoral funds (technology, biotechnology, pharmaceuticals etc.) still outperformed the local stock market. See chart below.

SA versus the world over 5 years

Rushing out, not in

Are investors rushing to repatriate their money back to SA? It would seem as if there was, instead, a rush of money out of the country to buy dollars below R12 or so. Both Allan Gray and Foord have announced the closure of the offshore window for now as they both have reached their limits in terms of Regulation 28, which determines how much money they can take offshore.

It seems as if the forward-looking investors have used the current bout of rand strength to top up their offshore investments.

The diversification argument is now stronger than ever. If you haven’t built up some foreign investments into funds and sectors not available to you in SA then now is a great opportunity. Can the rand get stronger? Is it going to weaken again?

I don’t have that kind of divine insight in the short term.

I also know that there are many investors who should never invest their money offshore or into offshore assets. These are the investors who cannot handle volatility or short-term declines in their investment portfolios. These are also the investors who keep on tracking their investment returns in rand and not in global currencies.

Short-term movements in the rand tend to be very unpredictable and very sudden. We could easily be back at R14 or more if interest rates in the US start rising again. Or then again, maybe not.

But to have all your assets in one country whose economy is not showing much signs of life at the moment simply is not a great investment strategy to follow if you want to truly build global wealth.

Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached for ideas and suggestions at magnus@brenthurstswealth.co.za.

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COMMENTS   31

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I enjoy reading the doom and gloom articles of Magnus Haywire, too much positivity is depressing.

Magnus Heystek are you hedging!

Article should read, good grief I was wrong again! Just the same story over and over again under different headings – MH is no economist and no fund manager – MH maybe you should write about all the useless fund managers that invested in Steinhoff? Fund managers and advisers add zero value – Invest in a low cost index tracking fund (directly offshore) for example Vanguard Total World (0,11% total cost.

A few lessons from from observation and experience:

1. When there are tv and radio ads from the wealth managers telling you to go offshore, that is probably the cyclical low point of the rand for the decade.

2. Invest in assets not currencies. Was the pound a bad bet or was Glencore IPO a bad bet? Can go through long lists including that buying and reinvesting dividends in SABMiller or Rembrandt/BAT for the last 30 years would likely have been a better bet than any currency move and only worse than some very very specific share moves.

3. Everybody should be diversified, our pension funds should be 75% offshore 25% local equities at minimum.

Strange that, a currency being volatile with a general long term weakness due to interest rate differentials….

can you update article with 12 month performance as opposed to 5 years graphs? you do after all discuss how other emerging markets have outperformed SA over 12 months, however only display the 5 year return.

Wouldn’t be to hasty about criticizing Magnus for his Doom and gloom outlook….I bet he has never owned one Steinhoff share and probably no Capitec shares either. He would reluctantly own Naspers and be celebrating Kumba which he probably bought at R67 not too long ago! Caution is not a bad thing in this game…. and it can only come from a balanced perspective where negativity has a 50% role to play!

I agree. “Negatively” must not bee seen in a bad light…as it helps one to avoid problems.

(During the rise of the Nazi-party in Germany in the late 1930’s, many of the negatively-minded Jews started to migrate/flee to the USA, and neighboring countries….while all the positive-minded Jews, thinking it “could never happen” to them, all ended up in Auschwitz!) So the negative-minded Jews, had a good/positive story to tell 😉

You can’t move every time an alarm goes off. There are any more false alarms than actual positive alarms. People are also predicting the fall of America, the fall of Europe and indeed the fall of the whole planet.

@MoneyChief. Accepted, one cannot simply relocate at every instant.(..but the surviving Auschwitz family members will not agree)

The word “negativity” is part is how people make investment decisions. Would you walk alone in the KNP , knowing there’s possibility of lion hidden in long grass? The positive-minded person will say “I don’t need a rifle” as I stay positive nothing will happen to me. The “negative” minded person will carry a rifle, just in case 😉

Agree, with you on a different article’s post re the disadvantages/inflexibility of property investment vs owning shares. Plus CGT tax will hit the property owner much harder, by selling an asset after holding it for a longer term. With shares, you can take profit annually, and utilise your R40K CGT exemption every year.

@MichaelfromKlerksdorp, Trust me I know what you are saying, I lived overseas for 10 years. Most of my capital is invested overseas (MSCI World Index) and I have UK citizenship just for in case.

However, first world countries are overrated, especially if you have skills. First world countries treat their poor people better, that is the main difference.

@MoneyChief. Certainly, what you say about skilled people in the western world…the competition among the skilled is so great, that one almost lives an ‘average/moderate’ life, while here in skilled-scarce SA….if you have proper skills / have a well-run business, you can live like a king (compared to outside).

Now that you mention you have a UK passport for the “just in case”….hmm…do it sense some “negativity” there *lol* by leaving the back-door open? 😉

I’m pretty much ‘stuck’ in SA *lol* , so that makes me a more positive person to remain where I am? Maybe not… 😉

Nevertheless, I enjoy most of your (sensible) comment on MW 🙂 You certainly has value to add to the reader. Welcome to PM me at ‘michaelstorm@telkomsa.net’ Take care 🙂

Hi Magnus

As your friend I value your opinion on offshore investments.

“I know I haven’t been to church perhaps as much as I should have in recent years, but this is not so uncommon anymore.”

I dont care if you make fun about the Rand etc, but please dont make fun of your church-going secretary and the

churchgoers.

The fact that you mention your absence from your church, is enough proof that you know you that you are not at the

place where God want you to be. Also that it is not so uncommon anymore will not count as an excuse when you

appear before your God.

You still have time to correct it.

Your friend

Bertus

Nee jislaaik ou Bertus, kry ‘n lewe man ! Genadetjie tog, broeder !

I respect your opinion and in other situations would be quick to share it as well. But I think you are overly sensitive to what the writer wrote. I doubt there was any malicious intent. All the positives of church-going aside (and it is massive indeed!) – remember that being in a garage don’t change you into a car. Good people, church goers, etc don’t go to heaven … believers (i.e. children of Him) do.

“Dear Lord. Thank you for “oom Magnus” financial guidance and input all these years. Not only to me, but also to all our readers…”i.e. loving thy neighbor as thyself”, who may not always agree with you.

Your help and guidance must’ve made a difference in South Africans’ lives, irrespective how small.

The difference you made is felt in a greater degree, compared to my pastor/dominee collecting each Sunday’s tithes and where I don’t easily see the difference it makes.

‘Oom’ Magnus, may you be truly blessed & am sure God has already FORGIVEN your sins!
Amen”

It is a little funny. People going to a special building on a special day of the week to talk to an invisible man in the sky.

It is a little sad. People who have no idea what they are talking about acting as if they are experts on what other people believe in.

@BD, You just made a straw man argument.

Magnus
Sure, the strong(er) ZAR can not be the reason to repatriate your overseas investments.
But it can get worse very easily – or it can get better over a period.
Of course, I hope it gets better – but that requires a lot of things happening in SA that have not been happening for a long long time.
So, its the usual conundrum – it can go up or come down – what to do?.
My view – and I am really no expert – is that being cautiously optimistic about ZAR and SA can not do too much harm in the medium term.

Very lekker read. Thank you. And good insight. Jip, stick to a good strategy and don’t keep all your eggs in the same basket (ie country).

The moment Magnus brags about his latest investment success has so far proven to be a superb contrarian indicator.

I agree, take advantage of the stronger Rand to diversify more – keep the portfolio nice and balanced. If Reg.28 ever got changed that would be welcome so I don’t need to keep compensating with discretionary investments for these archaic rules.

I also find that tracking the networth in multiple currencies helps to give a better picture of how things are going, the USD is becoming quite volatile too, so I’m switching to the IMFs special drawing rights model where you use a basket-equivalent as a proxy to see how the portfolio is doing relatively speaking. Then at least I get a real feel for whether we’re richer or poorer.

You get your normal tides where the sea rises and pulls back, but when the water pulls back much further than usual, you have the only certain indicator that a tsunami is imminent.

The only socialist countries that have strong currencies are those where all citizens are highly skilled and are paying taxes. No socialist country with a 40% unemployment rate, bankrupt SOE’s, bankrupt municipalities, failing sewerage and water infrastructure and a criminal political elite who still debate appropriation without compensation has got a strong currency. In fact, if it was not for our world class financial system, we would have been far down the road of hyper-inflation already.

The rand may appreciate over the longer term if we privatize all SOE’s, all government services and all municipalities under ANC control and scrap BEE and the mining charter. This won’t happen under ANC rule. Only the IFP and the VF+ has a free-market manifesto. What this tells us is that the rand may become a strong currency when a coalition between the VF+ and IFP forms the government. That won’t be soon…..

Agree! Yes, and I doubt the public realise the fin trouble Eskom is really in…being 40X the size of SAA. Even if Govt try to bails it out…no money for that…even robbing all SA taxpayers…there may still be a shortfall. Elec tariff may have to go up 50%(?) to pay for efficiency & employing almost all their voters.

The Rand is too strong. Fantastic opportunity this year to further rand-hedge. (The current euphoria is a temp upward spike in long-term downward trend of the ZAR).

Magnus your commentary is appreciated for its good amount of wit and frankness BUT you do occasionally overdo criticism of others to contrast your own apparently sage advice… and then you must expect some push back. A good example of this was over the last 2 years or so when you repeatedly implied that swathes of fund managers and advisors in SA were for some nefarious but unexplained reasons pushing clients not to invest overseas. Utter rubbish – just about every established fund manager has had their offshore allocations at maximum levels within Reg 28 funds for years now and many well into 30 or 40% in assets swaps in unconstrained mandates.
I also know of very few decent advisors who have not been assiduously taking client money offshore over the last decade.
Just my 2 cents…above all else just keep writing Magnus and stay original, it is appreciated.

What a wonderful opportunity to diversify with such a strong Rand! But wait this is SA we don’t send money offshore when the Rand has strength we wait for a collapse – then we panic – then we send!

Yup, I’ve seen that happen for most of times. People go offshore on emotional reasons, instead approaching it as a long-term diversification strategy / to hedge against sovereignty risk.

People are pretty gullible, especially when you speak negatively about SA. Magnus, can you explain your graph please.

I’ve plotted the same graphs you did and based it in ZAR for exactly the same period and the JSE All Share index beast the MSCI World Index and nearly equals the S&P 500.

What is the current realised/unrealised losses of your client? Those who came in and went offshore in the last 2 years would be down around 20% on the FX fluctuations alone.

But I would like you to explain how you got that graph first because my Reuters trading system is giving a very different result

I’ll bet anyone that Cyril will scrap the mining charter Sensai….he just has to get into the chair! Maybe next week – hold thumbs !

Golden opportunity to invest in USD. Since 1998 the USD had three major depreciation at 52%, 43% and lately at 32% against the rand. This is not uncommon and will again happen in the future. However USD appreciations are much larger at 164%, 112% and 168%.

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