The topic on most investor’s lips is the recent steep depreciation of the Rand. On Monday the 27th of May the Rand was trading at R9.61 to the Dollar and by Friday the 31st of May the Rand touched R 10.28. While these levels against the Dollar were not entirely unexpected it was the severity of the drop which caught most off guard.
What caused this drop?
At its core the Rand has been facing fundamental pressures. South Africa is importing more than it is exporting, this is expressed by a deficit on our current account. Usually a current account deficit would cause the Rand to weaken making our products cheaper relative to our trading partners and the current account would find balance.
South Africa has however received significant inflows into its bond and equity markets from foreign investors. These inflows have slowed the weakening of the Rand. These inflows have been placed under pressure due to slower than expected growth in the economy and a deterioration of labour relations in the mining sector in recent months.
Unfortunately the current account deficit has also deteriorated and was followed by further labour unrest in the mining sector. After last year’s Marikana disaster, where 34 striking miners were killed, the international community have been keeping a keen eye on the developments in the local labour market and have been quick to react to negative news.
This close scrutiny did not play into the hands of President Jacob Zuma when he convened a special news conference to allay the fears of investors regarding South Africa’s growth prospects and the mining labour unrest. President Zuma’s speech had a very counterproductive effect due to the absence of a coherent proposal to increase GDP growth or to calm the mining unrest. Two hours after the speech another mine reported a wildcat strike.
What is the next move?
The next move for the Rand is really anyone’s guess. A technical analysis of the currency indicates that the Rand was oversold and is due to regain ground against the Dollar. The currency has however been influenced more by sentiment than by fundamental factors of late. This has meant that any short term prediction is futile.
At present levels the Rand is closer to fair value than it has been for some time. Coronation Fund Managers still estimate the longer term fair of the Rand to be approximately R 9.50 to the Dollar but with the current value of the currency facing headwinds from a widening trade deficit, labour unrest, and slowing GDP growth. If inflows into the South African bond market dry up or even reverse we could also see another blowout in the value of the Rand.
As things stand our clients’ portfolios have benefitted from the Rand weakness and the resulting improvement the Resource sector. The Rand is trading in a range which is reasonably close to its longer term fair value and offshore shares still offer good opportunities in terms of valuation. We invest for the long term and as such do not recommend taking profit or changing asset exposures due to the recent volatility.
