Timing the Rand – is it worth the worry?

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Having lived in South Africa for most of my life and having worked in financial services for much of it, I have been part of trying to time taking money out of South Africa when the Rand is strong and bringing it back when the Rand is weak and I have seen the same attempts by investors.

But all of this changed when I realised that unless you are doing this to speculate on the Rand value of your offshore investment, it is a rather pointless exercise. If you are truly externalising the capital for the long term, should you not just avoid taking your Rands out at ridiculously high historical levels, or to not even worry at all. If your intention is to speculate, then good luck, if it is to participate in global markets and diversify the location of your assets outside of South Africa over the long term, then it may not make too much difference. Keep in mind, that South Africa is only 0.5% of global equity markets as represented by the MSCI All Country World Index (ACWI).

Keep in mind also, that moving your money out of SA when the Rand is strong, does not necessarily mean it is a suitable time to enter the markets on the other side, as the valuations may be weak and vice versa. Emerging Market countries (both their equity markets and currencies) tend to perform well when global risk aversion is low and investors are allocating to riskier asset classes like equities or emerging market countries’ bonds and equities.

But do not take my word for it, let us look at what the charts say. Keep in mind, when investing, you should always consider yourself as a global investor. If you landed on earth with an amount in a currency, what currency would you hold and in which markets would you invest? As a SA resident foreign exchange controls are far lighter now than they were 20 years ago so it is quite easy to move money offshore. Recent developments in SA have also allowed investors to take us much as 45% of their retirement funds offshore and Equity Linked Living Annuities allow for 100% offshore.

Chart A below shows the total (incl. divi) returns of the JSE ALSI (USD), the MSCI World (USD) and the Rand/USD.  The return of the markets is on the right of the chart and the value of the Rand/USD is on the left.

Chart A

In the early 2000’s the world experienced a commodities super cycle like no other. The Rand appreciated by some 40% and the JSE led by the JSE Resources 10 shot through the roof (Chart B below). Resources were approximately 20%-25% of the JSE back then becoming as much as 50% at the end of the cycle. Resources were a small part of global markets, so global markets rose far less. Nearing the end of 2007, if you had perfect hindsight, you would have started moving Rands into USD and buying global markets. Over the subsequent 15 years the JSE has tracked sideways, while global markets have climbed steadily. But at this time you were more limited by South African exchange controls.

Chart B

In 2008 the world experienced the global financial crisis and the JSE fell back to pre-commodity super cycle levels and the Rand depreciated once more by some 60%+. Global markets sold off far less because they had less commodities exposure (recall the JSE had around 50% commodity exposure at this time). In crisis, commodities take a huge hit, especially from what would have been very stretched valuations. During this time, not many investors would have wanted to have moved into offshore markets with such a weak Rand and market, but if you had, your USD returns globally, over the next 13+ years, would have been far superior to local (Chart C below).

Chart C

During this period, there was nothing separating local and global valuations (Chart D below) which were both more attractive following the big sell off.

Chart D

2012 to 2016 was a very trying time in South Africa. Emerging markets tracked side-ways, Jacob Zuma had started to shake the tree, Government were scoring a number of political own goals and the Rand continued to weaken on the back of it. During this time the local markets moved in equilibrium with EM, while global markets continued to climb. 2015 culminated with the collapse of the Rand when Nhlanhla Nene was replaced by David Van Rooyen. But do not be fooled that the shenanigans in SA were to blame for the Rand’s fall, 2015 was very much also about the dollar reigning supreme on expectations of an interest rate rises expected from the Federal Reserve, which impacted emerging markets, oil and metals.

If at the time of the Rand’s demise, if you had lost patience and taken your funds offshore and invested in global markets, your result in USD over the subsequent 6+ years would have been far better than keeping it local (Chart E below). If I can also refer you back to the valuations Chart D, which shows that at this time SA equities were slightly more expensive than offshore equities.

Chart E

In 2017 the Rand rallied to 12, much to investors surprise, given the toxic climate in SA at the time. Emerging markets where strong and that is what counted. It weakened thereafter (alongside broad EM) despite Jacob Zuma being replaced by Cyril Ramaphosa as leader of the ANC and government. If at the time of its strength you had swapped Rands for dollars and invested offshore, you would have done better globally (Chart F below).

Chart F

Enter 2020 and the Covid pandemic. When governments panicked, Emerging Markets saw the largest outflows of capital on record and the Rand, along with all other Emerging Markets currencies and markets weakened significantly. Global markets in USD fell less protected by the currency. Once again, who would have been brave enough to sell Rands at this weak point. Chart G below shows, that if you did, your investment result over the last 2 years would have been better in the JSE, albeit over a truly brief time period.

Chart G

In conclusion what we have attempted to show, is that whether the Rand is weak or strong, it is not necessarily a good or a bad time to invest offshore. Other factors such as valuations, global macro considerations and your investment horizon should be taken into account. Investing offshore gives you access to a much bigger market than South Africa, with diversification across currencies, countries and sectors. The JSE is very concentrated (idiosyncratic risk) to a number of larger stocks such as Naspers, BHP Billiton, British American Tobacco and AB InBev. Furthermore, emerging markets are exposed to a great deal of geo-political and macro risk which makes for a bumpy ride for their currencies and markets. The USD does add more stability and certainty to investing globally. At Omba we invest in global markets across countries and sectors, with no home bias, so you are getting a truly diversified global investment solution.

At Omba we invest in global markets across countries and sectors, with no home bias, so you are getting a truly diversified global investment solution. Omba offers a range of fund solutions which allow a South African investor to invest directly offshore. Through a single online application form which will handle the SARB process and create an offshore account at Prescient Dublin https://ombainvestments.com/invest-from-sa.

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