THE DEPRECIATION OF THE RAND - pwminvest.co.za · [[greece-1.41% 3.73 india -0.13 % other sa...

[[GREECE

-1.41%

INDIA

-0.13%

OTHER SA SECTORS

BONDS 0.18%

CASH 0.37%

PROPERTY 3.28%

USA

3.73%

BRAZIL

0.79%

CHINA

-3.13%

LONDON

1.41%

S.A

1.20%

It has been a volatile ride for the Rand the past year - and a difficult one for exporters and importers alike.

depreciated beyond the R 9/$ exchange rate level towards the end of January 2013,

examines the reasons surrounding the Rand’s recent depreciation, as well as

RUSSIA

-2.24%

GERMANY

0.69%

SSTTOOCCKK MMAARRKKEETT RREETTUURRNNSS:: MMAARR 22001133

TT

REASONS : CURRENT ACCOUNT DEFICITS

When total imports outweigh

exports & a country isborrowed means (other

are financing the economy)

SA’s Current Account

worsened from 2011deficit was 6.3% of GDP

(compared to 3.4%contributing to the

7.1% against the dollar

Source: South African Reserve Bank

SA (JSE)

INDIA (BSE)

CHINA (H. Seng)

RUSSIA

BRAZIL (FTSE)

INDONESIA

USA (Dow Jones)

GERMANY (DAX)

LONDON (FTSE)

GREECE (MSCI)

MMaarrkkeettss::

CHINA

%

Quite clearly, the

default and improving US economy

to developed market equities

the BRICS) have all decline

2013. With bond yields all over th

interest rates expected to be lower for longer

equities appear to offer the investor

beating returns over the m

is another financial bubble

overstretched, and not in equities. As far

been seen as a “defensive

relatively less risky

deficits (tax budget and current account balance of trade deficit

% of GDP), which is as high as

perception has been the catalyst for

MMAARRKKEETTSS: YEAR TO 31/03/2013

and a difficult one for exporters and importers alike. The question on everyone’s mind

exchange rate level towards the end of January 2013, breaching R 9.2442/$ in mid-March - the lowest since April 2009

, as well as and the impact on our markets, the inflation rate, and our investment portfolios.

-1.58%

-1.78%

-3.04%

-3.09%

11.25%

2.48%

14.46%

2.40%

10.32%

17.07%

INDONESIA

3.03%

TTHHEE DDEEPPRREECCIIAATTIIOONN OOFF TTHHEE RRAANNDD

CURRENT ACCOUNT DEFICITS

outweigh total

is running on(other countries

economy).

Account balance

to 2012. TheGDP in 2012

% in 2011),rand sliding

dollar this year.

FOREIGN DIRECT INVESTMENT

When a company invests in

another country (by buying acompany, or expanding operations

of a company in that country).

Foreign Direct Investment (which

funds the Current Account Deficit)declined by 16% from 2011 to

2012, showing poor funding.

RATINGS DOWNGRADE

SA’s credit rating was

second-lowest investment(BBB) by Fitch Ratings,

downgrades from S&P

Another way to fund

Account deficit isCountries may be willing

credit to SA basedrating (which was recently

downgraded - makingmore difficult to receive

APRIL 2013

Quite clearly, the effect of quantitative easing, reduced risks of

improving US economy has led the flight of capital back

to developed market equities. Global emerging market (especially

have all declined (in US$ terms) for the first quarter of

With bond yields all over the world at historic lows, and

expected to be lower for longer, by default only

equities appear to offer the investor the prospect of inflation

over the medium term. The consensus is that if there

is another financial bubble, it is in bonds where valuations are

and not in equities. As far as SA goes, it has always

“defensive” emerging market, being regarded as

risky – but this perception is changing. SA has now twin

budget and current account balance of trade deficit as a

which is as high as Turkey, India and Greece. The change in

been the catalyst for Rand depreciation.

on everyone’s mind – What does 2013 hold in store for us? The rand

lowest since April 2009. Based on our updated analysis, this edition

, and our investment portfolios.

RATINGS DOWNGRADE

was cut to the

investment gradeRatings, following

S&P last year.

fund a Current

with credit.willing to grant

on its creditrecently further

making it evenreceive funding).

LABOUR UNREST

The rand reached a 4-year low,

as labour disputes spurred fear ofa repeat of violence that curbed

production last year.

Foreigners reduced holdings of SA

assets, citing concern that laborunrest and mining output cuts will

weigh on the nation’s current-account deficit. Consequently,

investors dumped SA bonds & theRand - perpetuating its decline.

IMPACT :

FINANCIAL REPRESSION

• A form of debt reduction, in

which governments keep Interest

Rates artificially low, allowing

inflation to erode the value of debt

• While the rand is depreciating (&

inflation is increasing), the low

interest rates associated with

Financial Repression results in

negative real rates (making it

difficult for investors to earn a real

return on investments)

• Whereas the usual reaction to a

depreciating Rand is to increase

Interest rates, the SARB will now

opt to keep Interest Rates low.

PETROL PRICE INCREASE & INFLATION

• South Africans could have seen

drop in the petrol price due

lower global oil prices. However,

as a result of the Rand weakening,

this was not the case.

• The weaker rand meant

currency accounted for a greater

portion of the fuel price hikes.

• If the Rand weakens further

international crude oil prices

up further, it means there will

further fuel price hikes going

forward.

RAND VOLATILITY :

PETROL PRICE INCREASE & INFLATION

seen a

due to

However,

weakening,

meant the

greater

.

further &

goes

will be

going

PORTFOLIO INVESTMENT

• Given that SA is currently

experiencing negative real rates,

money left in Money Market

Accounts (or the Bank) will be

eroded by the effect of inflation.

• To prevent this, funds should be

invested in the market.

• The top 60 SA companies derive

about 50% of their revenue from

overseas. This provides a natural

hedge to currency weakness (as is

evident by the graph on the right).

Despite the Rand depreciating

consistently outperformed the S&P

JSE (US$) vs. S&P 500 (US$)

The graph illustrates how Rand fluctuations

economic forces but rather by mass spe

When global investors are at ease

SA. As global markets become volatile

withdraw their funds from emerging markets and

ORANGE Index shows periods of high

Rand weakness and periods of low volatility coincid

VERDICT

The change in global perception of

safe Emerging Market is unlikely to change in the near future.

Currently, the rand weakness

capital back to Developed Markets and the US Dollar.

retracement to R 8.75 – R 9.00.

Despite the Rand depreciating steadily over the past decade, the fact that the JSE

consistently outperformed the S&P 500, indicates that it is an effective Rand Hedge.

JSE (US$) vs. S&P 500 (US$)

Rand fluctuations are not influenced by rational

but rather by mass speculative activity and foreign sentiment.

When global investors are at ease, they invest in more speculative markets like

s global markets become volatile (2001 & 2008) these investors panic and

withdraw their funds from emerging markets and the Rand suffers. In turn, the

eriods of high US stock market volatility coinciding with

periods of low volatility coinciding with Rand strength.

ange in global perception of South Africa no longer being a comparatively

is unlikely to change in the near future.

rand weakness has been overdone due to the sudden flight of

Developed Markets and the US Dollar. So, we do expect some

R 9.00.

VV iirr ee nn BB .. GG aa rraa cc hh

However, the economic reality is that over the next 5 years, we expect the Rand to depreciate

inflation and risks associated with South Africa.

To combat capital erosion due to negative real interest rates and the depreciating rand ,

years) should be invested in the JSE or similar overseas markets.

Whilst it may seems safe, a low interest earning investment in an environment of high inflation and weakening

fledged investment in the stock market.

However, the economic reality is that over the next 5 years, we expect the Rand to depreciate further by approximately 6% per year as a result of

gative real interest rates and the depreciating rand , any funds that are not immediately required in the short term (i.e. 5

Whilst it may seems safe, a low interest earning investment in an environment of high inflation and weakening Rand, is actually more dangerous than a fully

APRIL 2013

by approximately 6% per year as a result of increased

funds that are not immediately required in the short term (i.e. 5

is actually more dangerous than a fully