SIMON BROWN: I’m chatting to Schalk Louw. He’s a portfolio manager at PSG Old Oak. Schalk, good morning. I appreciate the early morning time. An article you had in Finweek – you tweeted a bit around it in terms of commodity exports and how those drive the rand.
First question: I’m assuming this is Reserve Bank data that you’ve found that shows that commodity exports have gone from a decade average of about R16.5 billion, if my zeros are correct, to almost R25 billion per month.
SCHALK LOUW: Yes, that’s 100% correct – Reserve Bank data. It’s phenomenal. The one thing that we tend to find lately is that big question mark around the rand. Why is the rand strengthening? We’ve had the Covid environment and in that Covid environment, we saw a junk downgrade last year. And there’s all this political uncertainty. Yet we’ve seen the rand on this recent power run, and a lot of people have been asking me: “Why? Is this just pure luck? What’s the story?”
I’ve touched on a few things, among other things the current account deficit. I think the current account deficit is looking very strong. These are the strongest two quarters South Africa has ever seen. When we look at the current account – and we were looking at imports and exports, all things being wonky and Covid-19 – imports have been somewhat of a question mark.
But, as you mentioned, focusing on the exports we’ve been enjoying a wonderful time, specifically with precious metals and stones; as you alluded to now, R16.5 billion average over this past decade. And when you look at it, recently we’re still sitting at R21 billion with the recent rand strength. But over the past six months, the average is close to R26 billion of exports. That is a very, very strong argument for why the rand has been strengthening.
SIMON BROWN: That adds R10 billion a month to our FX market, and it’s R10 billion on the right side. And then of course there’s citrus. There are the other commodities. We saw this from 2001 to 2006. The rand went from R13.60 to R5.75/dollar. Again, the commodity boom was happening there. So I suppose the question is how much stronger can it go. Was that a block you’re not putting your head anywhere near?
SCHALK LOUW: That’s the magical question. How much stronger can it go? If you know the answer to that one, please just give me a WhatsApp or something like that. But Simon, I think you’ve said it 100% correctly. We’ve had this discussion once or twice in a previous conversation, where I get this 2003/2004-ish feeling, and I’m not going to concentrate on that environment yet.
But there’s another thing that happened. Recently we’ve seen the US coming out with a year-on-year inflation rate of 2.62%. A week after that South Africa came out with 3.2%, the difference being 0.58%. This is the narrowest inflation differential between South Africa – or let’s call it the rand – and the US. This is also something that we last saw 15 years ago. This is the narrowest inflation differential between South Africa and the US for 15 years, or since 2006, also very similar to when we had that commodity boom. So again, this commodity boom clearly is yielding traction – not just for other emerging countries, but definitely yielding traction for the South African rand. And we’d be really brave to call a top on the commodities cycle currently.
Back to your original question, could we see further strength? When we look at the rand relative to its purchasing power parity – for the listeners out there it’s just a word again, looking at the inflation differentials to put a valuation on the rand – when you look at the rand relative to its purchasing power parity, we can clearly see it. If we see it prolonged, or a longer commodity boom, we can get much closer to those levels, and then I would say don’t be surprised if we dip below this R14/dollar level very, very soon.
SIMON BROWN: And that 2004/2006 feeling, I hear you on that. In 2006 the Top 40 was up 42%. I’m not saying it is, but it’s getting that feeling there and the rand I think can go a lot stronger if this holds.
Schalk Louw, portfolio manager at PSG Old Oak, I appreciate your early morning.
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