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