EXCHANGE RATES
Don ’ t hedge on the
Strengthening Rand
BY ANDREW RISSIK
While it might not always seem so in the short-term , the Rand is devaluing quite steadily in the long-term . Now , more than ever , we have seen the ZAR fall prey to inexplicable policy decisions made by government leaders . This long-term devaluation is exasperated by gloomy economic forecasts and a massive amount of hotmoney flowing into , and out of , South Africa .
In these volatile times , more than ever , you ’ ll need a level head when deciding how best to invest for you future . Petty and seemingly nonsensical decisions by our leaders have the potential to have very real and devastating effects on the value of our currency and economy . Let ’ s first explore why this is so and then take a look at what you can do to protect yourself .
Hot money , flighty capital While September has been a surprisingly good month for the Rand , we need to keep in mind that these gains are largely on the back of highly liquid money market trades . We have the highest money market rate in the world and this can only be sustained while our interest rates remain high . The returns associated with these rates lure money market investors to our shores in spite of the relative political risk associated with South Africa .
A large proportion of the funds invested in South Africa are “ hot money ” and we cannot base the
sustained recovery that our country needs on these types of investments . Should the US Fed decide to raise rates at some point then our attractiveness as an investment destination will be severely impaired .
In addition to this , there are other emerging markets that can easily take our place as a money market destination if our political climate deteriorates significantly . Simply put , we are not the only game in town .
Given that our leaders have a penchant for taking actions that have economically devastating effects , one would be foolhardy to bet that a significant political meltdown , followed by massive capital flight , is impossible .
Keeping your eyes on the long-term prize As far as I ’ m concerned the Rand is heading only one way in the long-term , and that ’ s down . It is easy to get swept up in the euphoria of short- and medium-term strengthening of the currency : We all want to believe that our country is finally on the road to recovery . However , we need to remain vigilant and not make investment decisions with our hearts , but with our heads firmly screwed on .
Short-term , the Rand is doing quite nicely against the USD and particularly the GBP . The Pound is suffering on the back of uncertainty generated by the vote to leave the EU on 24 June . This means it ’ s
54 OCTOBER 2016 SA Real Estate Investor www . reimag . co . za