The Rand Rollercoaster
The Forex Market:
The foreign currency market stands as the single largest financial market on a global scale, boasting a daily trading volume that soars beyond an astonishing 85 trillion South African Rand (ZAR). South Africa’s daily forex trading volume is estimated at around 271 million ZAR. An impressive 80% of the entire global trading activity involving the ZAR unfolds offshore.
The ZAR is a currency renowned for its volatility in the global currency markets. According to data from the International Monetary Fund (IMF), over the past decade, only the Russian Rouble and Argentinian Peso have exhibited more significant levels of volatility.
Remarkably, the South African rand solidifies its status as one of the top 20 most traded currencies globally, showcasing an annual trading volume that eclipses a remarkable 1 trillion ZAR.
Major Factors Driving ZAR Volatility:
State capture’s insidious grip on South Africa’s economic well-being has left a trail of destruction, depleting public funds through corrupt practices and embezzlement. This misappropriation of resources has caused economic stagnation, hindering growth and development. Moreover, state capture’s pervasive corruption and instability have significantly eroded investor confidence. Foreign investment, vital for economic expansion, has been deterred, perpetuating South Africa’s economic woes.
The continuous devaluation reflects the enduring scars left by state capture on South Africa’s economic landscape. For now, South Africa’s main challenge is load-shedding that further destabilizes the South African Rand, making it a less attractive option in the global currency arena.
Importantly, the Rand operates as a free-floating currency, devoid of any peg to a commodity or alternative currency. As a result, the Rand’s value is solely determined by the forces of supply and demand in the foreign exchange markets. This absence of a fixed exchange rate regime exposes the Rand to swift fluctuations driven by various factors, including economic data releases, investor sentiment, and geopolitical events. Additionally, it correlates to what is happening in other emerging markets, practically China and the Chinese Yuan.
In 2023, The IMF identified political instability and policy uncertainty as significant contributors to the Rand’s volatility. Recent events, such as the “Nenegate” crisis, the Phala Phala saga, and debates regarding South Africa’s arms supply to Russia, exemplify the black-swan-like occurrences undermining Rand’s stability. The graph below, published by Ninety One Asset Management, highlights some of these effects:
Currency Depreciation and Inflation:
Since September 11, 2013, the Rand has depreciated against the United States Dollar (USD) at an annualized rate of 6.67%, outpacing South Africa’s average inflation rate of approximately 5.17% over the same period.
Prior to former President Zuma’s appointment in May 2009, the ZAR/USD exchange rate stood at a relatively stable rate of R7.88. However, as state capture unfolded, the Rand’s value plummeted, reaching R11.69 during Zuma’s impeachment in February 2018. This represents a staggering 48.35% depreciation during his tenure. The journey of the South African Rand over the course of nine years mirrors the persistent impacts of state capture.
The effects of state capture continue to linger, exemplified by the ZAR’s current state. As of September 14, 2023, it has weakened considerably, trading at R19.01 against the USD, marking an eye-watering 141% depreciation since Zuma’s appointment a little over 14 years ago.
When considering the performance of the JSE versus the S&P500 and factoring in currency fluctuations, the S&P500 has outperformed the JSE by around 250% (in ZAR) in the past 15 years, as seen in the graph below:
Investment Opportunities Amidst Volatility:
This volatility in the ZAR presents challenges and opportunities for various stakeholders, including businesses, investors, and individuals. South Africa was ranked 3rd globally in non-resident participation in domestic foreign exchange turnover, underscoring the nation’s significance in the international forex arena and market participants who are taking advantage of the volatility.
While ZAR volatility might discourage some investors, it also presents opportunities for those with a long-term investment horizon. South Africa’s diverse and resource-rich economy, growing middle class (albeit slowly), and infrastructure development initiatives offer potential avenues for growth. Sectors such as mining, agriculture, renewable energy, and technology provide exposure to South Africa’s upside while allowing investors to manage the inherent risks associated with ZAR volatility.
In the realm of finance and economics, it’s essential to distinguish between a country’s economy and its stock market. While these two facets are interconnected, they represent distinct aspects of a nation’s financial landscape. In South Africa, this contrast is particularly pronounced, reflecting the multifaceted nature of its financial ecosystem.
A real-world example of this potential is the “BizNews challenge,” starting in November 2021, where renowned investors Piet Viljoen invested R500k in the local market and Magnus Heystek R500k in the offshore markets. By June 2023, the local portfolio had grown to approximately R550k and the offshore portfolio to R450k.
This showcases the growth potential of the South African market when measured in ZAR terms. In fact, when not considering currency fluctuations, the Johannesburg Stock Exchange (JSE) All Share Index has outperformed the S&P500 over a 20-year period.
Furthermore, the South African Government’s 10-year bond is offering a yield of more than 10% at the time of this article, and many fixed-income asset managers are predicting forward yields of close to 12% for the next 12 months. These returns are akin to those typically associated with equities but with fixed-income levels of risk.
Conclusion:
The ZAR volatility is a double-edged sword, offering challenges and opportunities. By staying informed, seeking professional advice, and adapting strategies to changing market conditions, market participants can effectively mitigate risks and capitalize on the potential gains associated with ZAR volatility in this dynamic currency environment.
Diversifying portfolios across different currencies will help mitigate ZAR-specific risks such as holding or investing in first-world reserve hard currencies such as the US dollar, British Pound, and/or Euro.
At Paragon Wealth Managers, we understand that managing ZAR volatility requires comprehensive research, diversification, and professional advice, especially when considering long-term investment opportunities. We diversify our clients’ overall wealth by encompassing local and international assets, which is prudent to mitigate the impact of ZAR volatility on personal wealth. If you are waiting to externalize your funds, consider staggering the process over time (dollar-cost averaging).
Waiting for the rate to come down? I won’t be holding my breath, and while you may squeeze some strength in your forex conversion, you are exposed to the opportunity cost of not being invested. Missing the best trading days in the market can be detrimental to the long-term health of your portfolio.
Paragon Wealth Managers has established a long-term partnership with The FX Desk, a financial institution with a team of experienced traders who can assist investors in executing forex transactions. Our clients who use our Forex service can access preferential exchange rates when engaging in Forex transactions. These rates are typically more favorable than what is offered to the public, helping clients save money on currency exchanges.
