Our Rand continues to surprise

Just when you think the rand is heading in a particular direction it turns the corner and surprises.

A while ago just after Minister of Finance Nene was fired the rand easily weaken to nearly R17 to the US$. We all then assumed it would continue with some predictions of R20 to US$. Panic struck and many South Africans took money out of the country in the fear that the rans would devalue dismally.

But then the opposite happened the rand took a turn and started to strengthen over a short period of time to levels in the range of R13 to R12.

When President Zuma reshuffled his cabinet recently firing our Minister of Finance, Pravin Gordhan we saw the rand weaken again but this time it settled in the R14 range and never got anywhere near the previous weakness.

Now we have been downgraded with a key political event taking place in December and see that the rand has now strengthened to mid-R13 levels.

Can we make sense of the direction that the rand chooses? Back to fundamentals. The rand should depreciate at a rate of the difference in inflation of our trading partners. We do the most trade with Europe so technically we should weaken by around 4% per annum against the Euro. The same applies to the US and other countries.

Pundits have calculated that the rand is probably 30% undervalued. So there is a lot more potential for it to strengthen than weaken if technical analysis is still valid.

A weak rand has some positive effect on our exports but at the same time hurts more on our imports and where we see it directly is in the petrol price which is heading to over R14 a litre next Wednesday. This in turn fuels inflation which makes everything that much more expensive.

So…what should you do? Essentially you should spread your exposure between local and offshore investments.
The offshore exposure can be made indirectly through a range of hedge stocks such as Billiton and Anglo America. Even Resource ETFs would provide some hedge against the rand.
Otherwise, there is a huge universe of options to invest in directly. This requires more homework so need more understanding and detail.

The rand will continue to surprise and to work with it you need to invest in it and away from it.

S&P Global Ratings downgraded South African local currency debt to “junk” territory on Friday, citing a further deterioration in the country’s economic outlook and public finances, sending the rand tumbling.

Essentially the downgrade points to the risk investors face when lending money to South Africa. Our economic weakness questions our ability to repay the loans we make.

Not much the man in the street can do about it. We rely on our finance authorities to navigate a way back to being upgraded. In my opinion, we should have been more focused on improving things to avoid the downgrade instead of now having to dig our way out of it.

So how would stand up to a review?
In a very similar way, banks and money lenders assess our ability to pay back debt. Income, (which is our personal GDP), is measured against our exposure to debt (credit cards, cars, personal loans, mortgages etc…). The higher the cost of debt the more risk you present to the institution.

Avoid your own personal downgrade.
Take action by assessing what your own credit rating is. There are many credit bureaus which offer a free assessment for you. Once you know where you stand you can make a plan to improve your situation.
Step one
Stop going further into debt.
It is a great opportunity in the current weak economic environment to pay off debt as the high cost of interest offers higher returns than other asset classes. Where can you, for example, get a solid return of 24% which is being charged to your credit card?
Step two
Rank your various debts by the interest rate you are paying. Target the higher one first and then use the savings to pay off the next highest.
Step three
Look for opportunities to be less dependent on debt. This will be found in working realistically on your spending habits. If the cost of your debt is above 30% of your income then you are living above your means. (SA’s debt is currently 60% of GDP). It’s better to earn interest than to pay it. So after your debt has been settled invest the money you so readily paid the bank and save it for yourself.

Easier said than done. South Africa has a long hard road ahead to work its way towards an upgrade. Getting yourself back to a healthy status will be just as hard. It is a problem that doesn’t get better until you take charge and turn it around.