The benefits that a weaker rand can bring to the JSE were evident in early trading on Tuesday

The benefits that a weaker rand can bring to the JSE were evident in early trading on Tuesday as the local currency lost nearly 1% against the dollar to a twomonth weakest level.

In response, the all share surged 1.07% as miners and rand hedges rebounded in a market that has traded sideways for more than three years.

Banks and retailers traded generally lower.

The rally fizzled out in later trade as the rand recovered to R13.56/$ from R13.63/$, but the general benefit of a weaker currency was clearly felt.

In later trade, the somewhat firmer rand did not receive all the blame for the continued poor performance of local banking and retail stocks.

The problem, said Investec analyst Brian Kantor, was that the relatively firmer rand had not been accompanied by lower interest rates. “What has been a headwind for the rand values of the global players has not yet turned into a tailwind for the South African economy plays: the retailers, banks and especially the mid- and small-cap counters that have trailed the market in general.”

Kantor said that a cyclical recovery of the South African economy could not occur without reductions in shortterm interest rates.

Rand hedges have been the main drivers of the subdued growth in the all share index in 2017. Naspers has gained 28% and British American Tobacco is trading 16% higher.

A weaker currency supports rand hedges and miners as most of these firms have diversified overseas operations. In contrast, a stronger currency would support local banks and retailers.

The rand has gained 1.2% against the dollar in 2017 and added 11.19% in 2016, but the benefits for banks have not been extended to the extent they probably should have in 2017 because of local political issues and the recession.

The banking index is down 8% so far in 2017 and general retailers 11.6%. In contrast, industrials have gained 8.5%, supporting a marginal gain of 3.4% in the all share.

“This means that the exchange rate will play an even greater role in portfolio returns in future,” said Old Mutual MultiManagers analyst Dave Mohr. He said the bond market loved a stronger rand because it put downward pressure on inflation, while the equity market responded better to a weaker rand. “But even with a stronger rand, it is getting complicated for local shares as some traditionally SA Inc companies have expanded abroad in search of greener pastures.”

The property index is a good example. With 46% of the assets of locally listed property groups offshore, the sector has struggled for direction as a sizeable part of its activities is still locally based. The index is flat (up 0.01%) so far in 2017.

THIS MEANS THAT THE EXCHANGE RATE WILL PLAY AN EVEN GREATER ROLE IN PORTFOLIO RETURNS IN FUTURE