Dealing with currency distress BY LEON KOK
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.