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[[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