Rand bounces back to trade at ‘fair value’

The currency is showing strength after the extreme weakness early last year, but most of its recovery has already happened, experts say. reports

THE RAND has seen a revival of its fortunes over the past year. Currently trading at about R12.50 to the US dollar, the currency has increased in value by over 30% in dollar terms since its record low of R16.89 to the dollar on January 20 last year.

This means that, if you have investments in rand- hedge assets, such as offshore funds or funds that are heavily exposed to local rand- hedge shares, you will probably have seen a drop in the rand value of your investment over the past year, even if the assets have performed relatively well in dollar terms.

Local rand-hedge shares are shares in South African companies that do a large portion of their business offshore or are heavily invested in offshore operations – such as Naspers, Steinhoff, Richemont and British American Tobacco.

Since 2000, the rand has seen three major dips in value (see graph). Despite its rallies against these dips (the peaks in the graph), over the long term the rand has steadily weakened against the dollar and other developed-world currencies, as can be seen in the graph. So although R12.50 is relatively strong when compared with its record low, it is a far cry from the R6 to the dollar that South Africans were used to at the beginning of the millennium.

Most investment experts would agree that, rather than being strong, the rand is currently trading at “fair value”.

Ashburton Investments’ fund manager Wayne McCurrie, in recently outlining Ashburton’s major investment themes, said the rand was a structurally weak currency for many long-entrenched reasons. “Unfortunately, the rand does not weaken consistently. Normally it collapses for a few years, stabilises for a while and then the weakness starts over again.

“At the start of 2016, we had a number of negative events occurring at the same time, which resulted in a steep fall in the rand’s value, namely: a collapse in the commodity price cycle, the drought reaching its apogee, political turmoil at its worst levels in more than 20 years, and rising inflation and interest rates.

“Depending on what valuation criteria you used, the rand was between 30 and 40-percent undervalued at the start of 2016. Therefore, from this level you were bound to get some sort of recovery, which is what we are seeing now. The rand has recovered from this oversold level and is now approximately at fair value. While we could see some continued strength, the majority of the recovery has already happened,” McCurrie says.

Pieter Koekemoer, the head of personal investments at Coronation Fund Managers, says the fairly strong recovery after the extreme weakness at the beginning of last year “is a combination of relatively benign global market conditions – a general belief that the global economy is doing reasonably well – and South African fundamentals, where, even though our economy continues to stutter along significantly below the growth level required for South Africans to do better, the outcome exceeded the expectations held by most people after ‘Nenegate’ in December 2015.”

Koekemoer says one of the strongest characteristics of financial assets is a tendency for values to revert to a longterm average – what is known as “mean reversion”.

“What tends to happen is, if you have had an unusually and relatively large move in a certain direction, it becomes more likely that the next move will be in the opposite direction,” he says.

This is what has happened with the rand.

“A consensus view of the markets would be that the rand is broadly trading around fair value – you can argue what that is and how you would calculate that – but you would find very few valuation-orientated fund managers who would hold a view that the rand is either too weak or too strong,” Koekemoer says.

martin.hesse@inl.co.za