WHAT DO I DO AS AN INVESTOR?

If you are worried about the effects of the rand’s strength on your long-term retirement savings and you have a well-constructed, diversified portfolio, you should not stress.

Pieter Koekemoer, the head of personal investments at Coronation Fund Managers, says it is not easy for a newcomer to the financial markets, who has only recent experience to go on, to heed this advice. Experienced investors who have been through different market cycles are likely to be more sanguine.

Koekemoer says that the regulation 28 ceiling of 25-percent offshore exposure for retirement funds has proved to be a fairly reliable strategic allocation for the long-term retirement saver who is aiming for a real (after-inflation) return of five percent and wants to draw a pension in rands. In fact, over the last 10 years, multi-asset funds with a 20 to 25 percent offshore allocation have performed similarly to local general equity funds – about 10 or 11 percent a year – but at lower risk.

Looking forwards, he says the longer your investment horizon, the more likely it is that the rand will weaken against developed-world currencies. The reason is simply the inflation differential between the South African economy and the developed market economies. Inflation in South Africa is anchored at about six percent a year, and in the developed world it is anchored at about two percent a year, giving you a four-percent-a-year difference.

Natasja Hart, a wealth manager at GCI Wealth in Johannesburg and an accredited certified financial planner, says the rand is notoriously volatile.

It’s interesting to note, she says, that the rand is roughly the world’s 20th most traded currency and makes up around one percent of the world’s daily currency trade, according to a survey by the Bank of International Settlements.

The current robust rand is not only denting offshore investments, but also rand hedge shares. Hart says many investors are feeling the negative effects of rand strength through exposure to these shares. People are more likely to be living off the proceeds of local portfolios than offshore portfolios, Hart says, and therefore the effect on rand-hedge stocks can be severe.

Hart’s advice is to stick to the fundamentals and not to let shortterm volatility detract from your longterm strategy, which must be based on a holistic investment plan.

She says your offshore allocation should be drawn from excess capital above the amount required to service your primary liabilities. “Your retirement income requirement is a liability, so you must have sufficient capital invested in the currency of the country in which you are living to service this liability. You can’t base your retirement plan on the probability of the rand weakening to make up the differential.”

Hart says if you want to take advantage of the stronger rand to invest funds offshore, the investment must be appropriate for your portfolio. She says a number of her clients with surplus assets are using the opportunity to boost their global portfolios, not least because of political uncertainty locally.

Koekemoer cites political uncertainty as an ongoing risk.

“You can paint a domestic political scenario that is benign and positive, which could translate into fairly significant further rand strength towards the end of this year, but you could also paint a scenario that is quite dark, where you are back to the Nenegate-type ‘fear’ decline in the value of the rand.

“That plays out against elevated global political uncertainty, because you don’t know what the potential cause for the next global crisis could be – a Euro break-up, trouble in China, or irresponsible behaviour from an unprecedented president in the United States.”

Your portfolio should be diversified and robust enough to cope with uncertainty, Koekemoer says.