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An offshore investing update, amid political and market volatility

Warren Ingram assures that ‘this too shall pass’.

This article is a follow up to the one I wrote in February this year about offshore investing. It seems that we are once again faced with market turmoil caused by South African politicians. The rather violent swings in the direction of the rand caused by the aforementioned politicians and associated civil servants targeting finance minister Pravin Gordhan are worrying.

These events cannot be portrayed in a positive light and should be a huge cause for concern. The possible outcomes from here are either very positive or very negative – quite similar to what happened with Nenegate. The rand will either strengthen significantly, driven by global events, or weaken substantially. Unfortunately it is not possible to predict the outcome unless you are in the political inner circle.

I believe the odds of a speedy resolution to our completely needless political problems are probably 50:50 at best.

In situations like this, where the outcome of economically-significant events are so unclear, you need to exercise caution in making big financial decisions. Maintain a focus on the long term, so that you avoid material investment mistakes driven by short-term thinking or panic.

This too shall pass

The graph below from Credo Wealth illustrates the cyclicality of the rand very well. The black line shows the rand/dollar exchange rate since 1995, while the blue line shows the approximate ‘value’ of the rand as measured by purchasing power parity (PPP).

Ingram

The simplest example of PPP is the Big Mac Index, which shows the price of a Big Mac burger in every country where McDonald’s operates. When a Big Mac (or Starbucks coffee) is much cheaper in SA than in the US, we know that the rand is cheap. The PPP calculation in the graph below aims to provide a more comprehensive comparison of a currency’s value. The PPP (blue line) shows that the rand is still very cheap and so there is still scope for it to strengthen more, possibly below R11.00 to the US$.

When making an investment decision, considering the relative value of the rand can be a useful anchor in your decision-making process. It is certainly not a perfect solution but many people sent money out in late December 2015 and early 2016, which was not a good time for the rand. It would have been better to send money out in batches so that they could have averaged the weak exchange rate against a stronger rate a few months later. The current situation with Gordhan might cause sustained weakness but it would not be wise to predict a sustained one-way collapse of the rand. Political events can turn positive as quickly as they have turned negative.

Invest offshore for the right reasons

It is an ideal time to determine the correct offshore allocation for your portfolio. If you decide to invest overseas, it should be for the right reasons. You should be trying to diversify your asset base as a way of reducing your investment risk. It is not certain that you will achieve much better growth by investing overseas in the next few years.

International markets are not cheap and many developed economies are in deep distress. More importantly they have poor demographics with ageing populations and negative interest rates. This does not mean you should avoid international markets, just be prepared for a low-growth environment. You need to be patient and realistic with your growth expectations. If you are structurally under-invested overseas then continue investing offshore but send your money out in batches over a period of time to minimise the impact of volatility in the exchange rate.

There is a very good chance that the domestic stock market could have a good run relative to international markets.

All it will take is for our politicians to stop messing up for a while.

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Some you win – some you loose. For those who have made investments in global currencies one must remember there is a time to take profit as well. Rand weakness due to events are always the opportunities we are provided.
Rather sell too soon than sorry for not using the free lunch provided my the market. Using the simplest indicator like a moving average will get one doing the right investment at the right time.

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