Is it a good time to exchange dollars to rand to pay off a bond considering the lower rand at present – or is it better to invest the dollars offshore longer term?
Trevor Lee - Rosebank Wealth Group (Pty) Ltd
This is the ‘Million Dollar’ question!
The Covid-19 crisis has seen emerging market currencies in general fall against the US dollar. On top of this, South Africa also suffered a recent downgrade and our interest rates have been substantially reduced. So the South African rand is currently undervalued and all things remaining equal, should strengthen when things get back to normal.
Remember, however, that being able to know what will happen to our currency is unpredictable. Some professionals have developed structures/processes/thinking skills that have stood them in good stead in the past, but these tools are fallible, and not reliable under every scenario. After the Covid-19 crisis has abated, it is likely that we will continue to have underlying obstacles with respect to growth in South Africa and we will need to increase our borrowing substantially to get our economy back on its feet. This could keep our currency undervalued for longer than expected.
Back to the question. In general, it is always a good idea to be debt-free and now would be a great time to be bringing money back into the country. Exchange rates are clearly favourable. Paying off a bond tends to free up capital which could be used for investment purposes.
On the other hand, with our interest rates being lowered your bond repayments will also have fallen and the question remains as to whether you can get a better return with your investment capital than the cost of your bond. You have also touched on whether it is better to invest your capital offshore rather than in South Africa which is an important consideration.
To answer this question you should take into account the interest rate that you are currently paying for your bond as well as possible/likely returns (measured after fees and administration expenses) that might accrue from any investment you may make.
There are a few considerations that need to be identified before any firm decisions can be made.
You need to take into account things like:
- Emotion (being debt-free as opposed to owing the bank money);
- How you would allocate the additional monthly capital you would have if you paid off your bond;
- Your attitude to risk;
- Your time horizon (it appears to be long term, which is extremely important); and
- The percentage of your overall portfolio that you have in South Africa as opposed to offshore.
We would suggest that you have a discussion with a financial advisor in order to assist you to rank and weigh these priorities before you make the best decision for your circumstances. Both courses of action have pros and cons. We believe clients should have investments wherever they live as well as offshore.