The world is changing fast and to keep up you need local knowledge with global context.
*This content is brought to you by Corion Capital
By Simon Du Plooy*
It is January 1986. It is four months after PW Botha’s Rubicon speech and South Africa is under a State of Emergency. A South African investor decides to take cash out of the country. The investor transfers his rand-based deposits into a US dollar bank account. Would this have proved to be a wise decision?
Isn’t it obvious? The exchange rate for $1 was R2 in 1986, yesterday it was around R15.50. A significant devaluation! Furthermore, there were several times during this period in which the rand experienced a blowout (a meaningful weakening over a short period of time). These periods include:
- 1998 – the Russian debt default
- 2001 – the 9/11 attacks
- 2008 – the great financial crisis (GFC)
- 2015 – Nenegate
- 2020 – the Covid crash
Investors might be surprised to learn that they would have been better off leaving their cash in rand rather than converting it to US dollars.
But how is this possible given what we highlighted above? The answer lies in the so-called “interest differential”, that is, the difference between the Rand interest rate and the US dollar interest rate.
South African interest rates were on balance significantly higher than US interest rates over this period. More accurately, the interest rate difference more than compensated investors for the currency depreciation. Too few of us factor in the much higher interest rates in South Africa, when considering whether to have cash deposits in rand or in hard currencies such as the US dollar.
However, it goes without saying that investors were not always better off leaving their cash in South Africa. For example, the rand was particularly strong during the commodity boom of the mid 2000’s and again after the GFC. Investors that took advantage of these periods of rand strength and converted rands into US dollars were handsomely rewarded.
Going forward, what are South African investors to do? Should they listen to the doomsday practitioners and rather have dollar exposure, or should they keep their rands?
At Corion, we believe that the answer to that question is not an exact science and applying the following sound investment principles is the appropriate starting point:
- Ensure a diversified portfolio that is not overly exposed to a single risk factor. Having a portfolio that is fully exposure to a single currency, even the mighty US dollar is not prudent.
- Understand the volatility that offshore currency can have on your investments over the short term. If one cannot tolerate sharp fluctuations in the value of deposit-based investments due to the need for liability matching, it is arguably better to have a greater amount in the same currency as your liabilities.
- History gives us guidance. Whenever the rand was extremely strong, investors were better of using the opportunity to take deposits offshore and to be exposed to rand depreciation rather than earning a higher interest rate. However, the timing of this is exceptionally difficult and as they say, it is only hindsight that is a perfect science.
*Simon Du Plooy is head of strategic investment thinking at Corion Capital (an Authorised Financial Services Provider). Corion is driven by a desire to simplify the world of investing and manage a broad range of multi-strategy funds.
- Corion report shows nimble outperformed in March – light on Prosus/Naspers, rand hedges; heavy on financials, small caps.
- Valuations matter, forget the story – Corion Capital’s David Bacher
- Why we are underweight US equities – Corion Capital
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.