The rand has strength­ened in re­cent weeks, prompt­ing some in­vestors to con­sider mov­ing all their in­vest­ments off­shore. We ex­plain why this is not only pre­ma­ture, but also un­wise.

Finweek English Edition - - FRONT PAGE - By Schalk Louw ed­i­to­rial@fin­week.co.za Schalk Louw is a port­fo­lio man­ager at PSG Wealth.


is a say­ing among in­vestors that the best time to buy is dur­ing times of max­i­mum pes­simism, while the best time to sell is dur­ing times of max­i­mum op­ti­mism. This say­ing is par­tic­u­larly rel­e­vant to the rand’s mas­sive volatil­ity over the past decade. We first saw how the rand dropped from around R6/$ to more than R10/$ dur­ing the great mar­ket cor­rec­tion of 2008, only to rise to lev­els of just be­low R7/$ in 2011. Un­for­tu­nately, it has only been down­hill since, with the rand drop­ping to lev­els of just be­low R17/$ early in 2016.

We have seen the rand gain­ing strength over the past few weeks, how­ever, ris­ing to be­low R14.30/$, and now ev­ery­one wants to know if this is the highly an­tic­i­pated strength­en­ing they have waited for to move all their in­vest­ments off­shore.

In 1987 Sir John Tem­ple­ton shared the fol­low­ing thoughts at an in­vest­ment pre­sen­ta­tion in the Ba­hamas, and I be­lieve that th­ese thoughts can be per­fectly ap­plied to ad­dress the con­cerns of those in­vestors who are strug­gling with their de­ci­sion of whether to move all of their in­vest­ments off­shore: “An in­vestor who has all the an­swers doesn’t even un­der­stand all the ques­tions.” My in­ter­pre­ta­tion of this quote is that no one truly knows what the rand will do. Every­thing, how­ever, has an un­der­ly­ing value. “To avoid hav­ing all your eggs in the wrong bas­ket at the wrong time, ev­ery in­vestor should di­ver­sify.” My in­ter­pre­ta­tion is that although it may seem cheaper to in­vest off­shore now than it did three months ago, it still doesn’t mean that you should move all your in­vest­ments off­shore. “The in­vestor who says, ‘This time is dif­fer­ent,’ has ut­tered among the four costli­est words in the an­nals of in­vest­ing.” My in­ter­pre­ta­tion is that ex­ag­ger­ated move­ments are un­nat­u­ral at least nine out of 10 times, no mat­ter what the ex­perts say may be the cause. When some­thing looks too good to be true, it usu­ally is. I con­sulted three in­di­ca­tors that clearly il­lus­trate that the strength­en­ing of the rand may not yet be over:

1. Rand’s fair value

In De­cem­ber 1981, the rand traded at R1/$. If the rand in­creased by the dif­fer­ence in in­fla­tion ev­ery year since 1981, it be­comes clear that at R14.30/$, we are trad­ing way above its sug­gested pur­chas­ing power par­ity (PPP) of R7.85/$.

The rand is trad­ing at a pre­mium of nearly 88% in re­la­tion to its PPP value. You will see, how­ever, that the av­er­age trad­ing pre­mium of the rand over the past 20 years is 42%, which means that the rand would ac­tu­ally be more rea­son­ably priced at around R11 to R11.50/$.

2. Rand in re­la­tion to world re­sources in­dex

We can clearly see that there is a huge cor­re­la­tion be­tween the rand’s move­ment and the World Re­sources In­dex.

One swal­low def­i­nitely does not make a sum­mer, but it seems as though the ex­tremely neg­a­tive sen­ti­ment sur­round­ing re­sources is on the de­cline, with re­sources re­ceiv­ing a slight boost af­ter Chi­nese data showed that in­fla­tion is grow­ing at a faster-than-ex­pected rate. Since peak­ing in 2010, both the World Re­sources In­dex and the rand (in $) saw a 60% de­cline un­til ear­lier this year. The in­dex, how­ever, is up by 6% since its lows ear­lier this year and fur­ther in­creases may help to strengthen the rand.

3. The rand’s tech­ni­cal points

I’ve al­ways been care­ful not to base any de­ci­sions on tech­ni­cal anal­y­sis alone, but it does re­main a help­ful tool and an ex­cel­lent in­di­ca­tor of when a share or cur­rency is over­bought or over­sold. When we take a look at the 50-day and 200-day mov­ing av­er­age price graph on the right, you will see that the next rand/$ re­sis­tance point is around R14. If it moves through th­ese R14-lev­els, how­ever, it is highly likely that it may move all the way down to­wards lev­els closer to R11, which co­in­cides with the first in­di­ca­tor. I’m not say­ing that all in­vestors should rush to bring back all their off­shore in­vest­ments, but be care­ful not to see this short-term strength­en­ing as the golden op­por­tu­nity to in­vest all of your cap­i­tal off­shore.

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