Wow, the rand is something to behold. As South African investors we are fascinated by and intimately linked to the volatility of our currency. Just look at the graph below, borrowed from a recent Anchor Capital newsletter:
Just to put this graph into perspective: the rand has lost something like 7,5% per year of its value against the dollar over the last twenty years and year to date it has devalued by 23%. At one stage in 2020 the rand was down 35% against the dollar. But that is nothing compared to some other countries. If you look at Zimbabwe, you can say their currency has lost all of its value since 1980. Even if you look at the post-WW2 powerhouse Argentina, their currency has devalued by 1634% against the dollar over the last ten years, and by 178% over the last two years.
The question you have to ask yourself is: why? The easiest way to explain it is to simply compare it to any company, with the rand representing your share in South Africa Incorporated. If a company is very profitable, with loads of cash and a product everybody wants, like Apple, your share price will be strong. If, however, your company sells something nobody wants any more; or if you have managed to spend more than you have earned; or if management stole the funds, like Steinhoff; your share price will go to zero very fast. So looking at the rand we can see two facts very clearly:
1. Because our economy is so small and fragile, any time something goes wrong in the world, people holding rands will sell them as quickly as possible to rather invest in something safer, like US bonds; and
2. South Africa has been rather controversial in the way the governments have managed the economy, with a fabulously bad patch during the Zuma years.
Now we have to remember that the value of any currency relative to another should devalue at the same rate as the difference in the inflation rate between the two countries to compensate for the loss of purchasing power. To illustrate, if country A pays $1 for an orange from country B, who grew that orange at a cost of R1 in 2019, but due to unproductive labour the same orange costs country B now R1,10 to grow in 2020, country A will still only be willing to pay country B the $1 for the same orange in 2020. So where the currencies were $1 for R1 in 2019, they are now $1 for R1,10 in 2020.
But in real life currencies do not follow the rules and especially one that is as tradeable as the rand, so vastly over- and under-valuations occur. We have seen one of these spectacular over-reactions in the rand during 2020 when we were downgraded to junk by Moody’s and Covid-19 scared everybody away from emerging markets like SA. Now, as a South African investor with money in dollars, this devaluation in the rand provided a fantastic hedge against the collapsing stock markets worldwide as we have discussed before. But what we have seen over the last week or so was a rapid recovery in the rand from over R19 to around R17,40 to the US$. One of the reasons for that is the positive sentiment generated by countries downscaling their lockdowns, so people are willing to invest in higher-risk investments like emerging markets again; and another one is the very attractive interest rates international investors can get in our government bonds. In the USA you get a 0,68% return if you buy their 10-year bond, in SA you get 9%. So even with our higher inflation rate you still get a handsome return to compensate you for the risk you take when investing in South Africa, where anything can happen.
So to sum up, if international investors are fearful, they will sell risky assets like the rand, but as long as they can get their money out quickly and the return we offer them on our bonds or in our shares or on our properties are higher than what they can get in other countries with similar inherent political and fiscal risks, the more willing they will be to buy our rands to invest in our assets. The one thing we have to remember is that most of the money that underpins our rand can be gone in a heartbeat, and then your rands will not be able to buy anything. You have to diversify away from currency, country, regional and specific company risk at all times