Rand honeymoon fading
Investors tend to have short memories and inevitably anchor themselves to the flavour of the day (excuse the mixed metaphor). In the past few months, the mining and resources industry has dominated headlines, with shipping getting its fair share of the spotlight as well.
Not enough people realise that cyclical businesses can make or break an investment portfolio. The rewards are great but so is the risk, with cyclicals offering one of the greatest challenges in investing.
The danger for investors is highest when these companies are dominating the headlines and exuberance fills the air, which has been the case in the past few months as the commodity cycle has swung favourably in 2021.
But can the commodity upswing be sustained, at least to an attractive extent? There’s a sensible argument to be made that a period of higher inflation and infrastructure investment globally could support commodities, though the impact on individual commodities can vary wildly.
Uranium is now getting all the attention, with the spot price up around 65% this year. But platinum group metals (PGMs), critical for SA’s economy, haven’t been doing so well as automakers have struggled with chip shortages.
Since the end of July, the rhodium price has tanked by a third and palladium is down by around 25%. Platinum is down more than 10%. Naturally, the shares of platinum miners have suffered accordingly, while international uranium players have shot up and rewarded those who played that cycle correctly.
Grindrod Shipping is up around
360% this year, which is incredible. But one must remember that the shipping industry suffered years of pain before the 2021 supply chain squeeze caused by the pandemic.
The lesson is that a long-term strategy of buying and holding these companies isn’t, typically, optimal. First prize is to get in just before a major upswing, so you benefit from the huge gains in price without suffering years of going sideways.
Being too early doesn’t help either, with time value of money eroding the benefit of the eventual gains.
Other than the obvious impact on the share prices of mining companies, there’s another lens that I don’t believe is getting enough attention: the impact on the rand.
A charmed life
Our currency has been living a charmed life that seems completely at odds with the current unemployment rate and the situation on the ground.
This is because the trade surplus has been keeping the fiscal lights on. For the seven months to July 2021, the cumulative trade surplus was R290bn, against R95bn for the comparable period last year. In July, mineral products and precious stones collectively contributed nearly 60% of SA’s exports.
However, the trade surplus in July came in below R37bn, way down from June’s revised number of R55bn.
Exports dropped 11.2% month-onmonth, with the riots playing havoc with the supply chain for key products like iron ore. The Durban and Richards Bay ports were significantly affected.
As usual, we do ourselves no favours as a country.
It’s clear minerals and precious metals have played a major role in protect
Our currency looks like a sitting duck and there’s no tourism industry to pick up the slack, partly because SA remains on the UK’s red list
ing the rand. Within that basket, PGMs contributed more than 35% of mineral sales in July while iron ore and coal each contributed about 18%, based on Stats SA data. One must remember that much of the coal is consumed locally by Eskom, rather than exported.
As already noted, PGMs have dropped sharply. Iron ore is even worse, down more than 45% since the end of July. Thermal coal ex-Richards Bay increased more than 12% in August but that doesn’t come close to mitigating the slump in PGMs and iron ore.
Our currency looks like a sitting duck and there’s no tourism industry to pick up the slack. To great disappointment, we have remained on the UK red list, which will have a severe impact on our tourism industry again this year.
To give an idea of the damage to that sector, Growthpoint’s results to June 2021 showed that distributable income from the V&A Waterfront fell nearly 40%, to R365m, from R607m in the previous year. Just last week, the rand weakened by about 4% against the dollar. The market is starting to price in the rapidly diminishing trade surplus.
As that surplus honeymoon fades, investors would do well to consider their currency exposures in their portfolios, which can be direct or indirect via rand hedges on the JSE (companies with extensive global operations).
I’ve moved the cash in my portfolio from rands to dollars. The US equity market continues to test a potential selloff, which would drive a risk-off trade that I think would hurt the rand at the same time. By decoupling the currency and asset allocation decisions, I’m able to take a view on rand weakness without having to rush into US equities.
We really need those tourists.