Deal­ing with cur­rency dis­tress BY LEON KOK

Finweek English Edition - - FUND FOCUS -

Per­haps the most dom­i­nant theme in our re­cent se­ries of in­ter­views with as­set man­agers was the rand, and the gen­eral threat of cur­rency wars. Gen­eral re­sponses re­gard­ing record rand lows were neg­a­tive, with some des­per­ate to hedge port­fo­lios against a sink­ing rand. On the other hand, another an­a­lyst was less con­cerned, ar­gu­ing that the US dol­lar is on steroids and should be seen in iso­la­tion.

How­ever, con­sen­sus was that rand weak­ness will con­tinue, at least for the medium term. Fig­ures bandied about in­di­cate a worst case of R14.50/$ in a year’s time and R16/$ in two years’ time.

Much of this, it was agreed, will be a func­tion of po­lit­i­cal mis­man­age­ment and slow eco­nomic growth in SA; China’s latest game changer on cur­rency; and dis­turb­ing trends in emerg­ing mar­kets gen­er­ally. Tur­key and Brazil, for in­stance, have been cited as worse off than SA.

Old Mu­tual s enior economist, Jo­han Els, was more con­ser­va­tive than most, tel l i ng us t hat Old Mu­tual’s MacroSo­lu­tions di­vi­sion’s gues­ti­mate for the rand/dol­lar ex­change rate at year-end is R12/$ for both this year and next.

De­spite the ghastly hand the Re­serve Bank and Trea­sury have been dealt, the Investec In­come Team was highly praise­wor­thy of both. How­ever, it con­ceded that the Re­serve Bank sees its role as com­bat­ing in­fla­tion, not de­fend­ing the cur­rency. Els was most con­cerned about the latest Chi­nese de­val­u­a­tions’ po­ten­tial of ex­port­ing de­fla­tion into the global econ­omy, and, as a con­se­quence, driv­ing com­mod­ity prices down, di­rectly af­fect­ing SA’s eco­nomic per­for­mance.

On the other hand, Els sug­gested that the sit­u­a­tion could also be sta­bilised by a strong Chi­nese stim­u­lus. “Per­haps China has al­ready had its ‘ hard land­ing’, with growth hav­ing de­clined from an av­er­age 10% pre­vi­ously to around 7% now. It still has con­sid­er­able ca­pac­ity to stim­u­late its econ­omy via a fis­cal pack­age,” said Els.

My for­mer col­leagues at Fleet Street Publi­ca­tions (FSB) in Lon­don are more wary of that view. They in­sist that China’s econ­omy is in se­ri­ous trou­ble and that the de­val­u­a­tions are a means of ‘steal­ing’ qual­ity growth from else­where; and in ad­di­tion as a sop to be in­cluded in the IMF’s spe­cial draw­ing right. The IMF, in fact, has given China a B+ for its ef­forts.

US Demo­cratic Sen­a­tor, Chuck Schumer, has ar­gued that “al­low­ing the yuan to be de­clared a re­serve cur­rency is akin to putting the fox in charge of the hen house”.

The ques­tion arises nev­er­the­less: how do you and I hedge against a col­laps­ing rand?

Look­ing back three years – and a credit to the fund in­dus­try – you ought to have done rea­son­ably well if you’d in­vested in the bet­ter funds.

Among the best would have been the Or­bis SIVAC Ja­pan Eq­uity Fund that gen­er­ated an an­nu­alised 45.71% over three years. On its heels were the Investec Global Strate­gic Eq­uity 34.41%, Or­bis Global Eq­uity 33.91%, Coro­na­tion Global Eq­ui­ties 32.11%, Stan­dard Bank Strate­gist M-M Global 31.18%, and Stan­lib Global Eq­uity 30.25%.

Among more mod­er­ate global as­set al­lo­ca­tion funds, the Coro­na­tion Global Man­aged Fund would have given you 27.33%, fol­lowed by – among oth­ers – Investec Global Strate­gic Man­aged 26.16%, Stan­lib Global Ag­gres­sive 26.3%, and Or­bis Op­ti­mal 18.67%.

Global fixed in­ter­est would have given you be­tween 11% and 15%, while you would have earned a re­spectable av­er­age 24% from lead­ing global real es­tate funds.

For those who are ex­tremely bear­ish about the cur­rency, sev­eral im­por­tant lessons come from Latin Amer­ica. I trav­elled ex­ten­sively there dur­ing the ex­tremely volatile 1990s and most prom­i­nent hedg­ing av­enues were the hoard­ing of hard cur­ren­cies, in­vest­ing in good prop­erty, and cap­i­tal­is­ing on gem­stones and col­lectibles.

It’s no co­in­ci­dence, for in­stance, that San Telmo in down­town Buenos Aires is one of the f in­est an­tique mar­kets in the world.

SA, of course, is still very dif­fer­ent f r om Latin Amer­ica, but we a r e be­com­ing more l ike it. Some of the strate­gies and tac­tics peo­ple use there will be­come in­creas­ingly valid for us in the fu­ture.

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