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.