In­vest­ing off­shore: Why less is more at cur­rent rand lev­els


Ial­ways en­joy the story of how the Spring­boks played a test match against Scot­land at Mur­ray­field Sta­dium in Ed­in­burgh in 1951 and how they beat them with a record score of 44-0. The Scot­tish com­men­ta­tor, Bill McLaren, fa­mously told his lis­ten­ers that the Scots were lucky to have scored zero points.

We heard the same words from many in­vestors 50 years later af­ter they were pulled down along with a rand that lost more than 50% of its value against the US dol­lar in a three-year pe­riod up to the end of 2001 (R6/$ down to R12/$). De­ci­sions were made in fear of fur­ther de­val­u­a­tion and a large num­ber of for­eign in­vest­ment op­por­tu­ni­ties were taken up, only for in­vestors to dis­cover that, un­til re­cently, they should have been ‘happy’ with 0% growth on their cap­i­tal in rand terms.

Back to t he present. For nearly a decade, no one cared for for­eign i nvest ments, but I ’m be­com­ing in­creas­ingly wor­ried about the num­ber of read­ers and clients who re­cently ap­proached me for the first time since 2001/02 ask­ing about the best pos­si­ble for­eign in­vest­ment op­por­tu­ni­ties. Why?

Let’s look at the value of the rand. The eas­i­est way to de­ter­mine its value is first and fore­most to es­tab­lish why it weak­ens and strength­ens. Our gen­eral bench­mark is the US dol­lar. The rand should weaken with the dif­fer­ence in South African and Amer­i­can in­fla­tion rates.

In De­cem­ber 1981 the rand was R1/$. If the rand weak­ened yearly with the dif­fer­ence in inf la­tion be­tween South Africa and the USA since 1981, we will note that it is not cur­rently trad­ing at its in­di­cated pur­chas­ing power par­ity (PPP) of R7.55/$, but rather at R12.50/$.

The rand, there­fore, is trad­ing at a pre­mium of nearly 66% com­pared to its PPP value. We will also note that the rand only traded at such high premi­ums on three prior oc­ca­sions since 1981: in 1985 (Ru­bi­con speech), 2001 (rand ma­nip­u­la­tion) and 2008 (global fi­nan­cial cri­sis).

Fur­ther­more, we will see that the rand traded at an av­er­age pre­mium of 36% over the past 22 years (since the build-up to the first demo­cratic elec­tion). Un­for­tu­nately, our cur­rency has be­come a global spec­u­la­tive ‘toy’, and I urge read­ers and in­vestors to act with ex­treme cau­tion when it comes to new off­shore in­vest­ments right now.

Although his­tor­i­cal fig­ures bear no prom­ise for fu­ture per­for­mance, it is still un­likely that I would get rid of my own rands, re­gard­less of all the bad news about SA that is cur­rently fill­ing up the world­wide press. My rea­son is sim­ply be­cause I won’t be told that as soon as the ‘dust set­tles again’, the rand won’t be able to strengthen to lev­els of be­tween R9-R10/$ (closer to the 36% pre­mium com­pared to its fair value).

Short term, I would rec­om­mend to keep in mind the golden rule of ap­ply­ing make-up – ‘ less is more’ – when ap­proach­ing any new off­shore in­vest­ment trans­ac­tion. Rather fo­cus on per­sonal debt lev­els, be­cause if the rand does weaken fur­ther, in­ter­est rates will be in dan­ger of ris­ing.

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