By Cornelius Zeeman,
Fairtree Portfolio Manager

In September 2023, we wrote an article titled Timing the Rand When Investing Offshore, where we concluded that despite the rand being undervalued, it is best to stick to your long-term investment plan and strategic asset allocation. Unless we are at extreme levels and catalysts will reverse the fundamentals of South Africa’s economic situation, it is risky to time the exchange rate. 

Reviewing the past.

Graph 1 below shows the rand exchange rate vs global equities. The rand depreciated more than 20% from March 2022 to September 2022. Over the last 18 months, many clients have voiced their concerns about investing offshore while the rand is undervalued, which prompted us to write about the topic seven months ago. Let’s review what has happened over the last 18 months.

Graph 1: Rand exchange rate vs global equities

Source: Fairtree, Bloomberg

Since the article, the rand has remained relatively stable while the MSCI World Index has continued to perform well, delivering a further 16% return. To put it in perspective, the MSCI World Index returned 55% in rands since we crossed the R18 mark against the dollar in September 2022. Notably, the MSCI World Index (in dollars and rand) comfortably outperformed the JSE All Share Index’s total return of 23%, as shown in Table 1 below.

Table 1: USD/ZAR exchange rate and index returns

Source: Fairtree, Bloomberg

The adage, “It’s not about timing the market, but about time in the market” has been proven true over the years. Research shows that those who stay invested over the long run in a well-diversified portfolio will generally do better than those who try to profit from turning points in the market.

Looking forward.

Although there has been some slight improvement in load shedding over the past year, South Africa’s ongoing struggle to ensure an adequate electricity supply remains a significant concern. This challenge undermines corporate confidence in investing in new mines or manufacturing facilities. Electricity costs continue to escalate by double digits, making us less competitive in the global context.

Transnet has seen some management change and there are prospects of public-private partnerships, but service delivery has continued to deteriorate. Without these key network industries, our economy cannot respond to a weaker exchange rate by ramping up production and exports. This was evidenced by the lack of commodity export growth when coal, iron ore and PGM prices were at record levels.

The upcoming election has the potential to influence South Africa’s economic trajectory significantly. Recent polls suggest that the ANC might drop below 45%. This has scared investors because it raises the chances of an ANC-EFF coalition, which will push us towards more socialist policies. If the ANC secures between 45-50% of the vote, it may trigger a temporary relief rally for the rand, albeit with minimal fundamental changes to the economy. If the ANC drops below 45% and decides to go into coalition with members of the MPC, our markets and exchange rate will likely rally for an extended period (similar to “Rampahoria”). Coalition politics are complicated, and time will tell how our democracy and economy will respond. Basing portfolio construction decisions on such forecasts is risky because you must be both correct and different from consensus to make money.

Disclaimer:

Fairtree Asset Management (Pty) Ltd is an authorised financial services provider (FSP 25917). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Performance has been calculated using net NAV to NAV numbers with income reinvested. There is no guarantee in respect of capital or returns in a portfolio. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices, fees, brochures, minimum disclosure documents and application forms, please go to www.fairtree.com