Real Estate Investor Magazine South Africa Real Estate Investor Magazine - August 2017 | Page 54

CURRENCY
The Rand, #JunkStatus
and Market Irrationality
BY JAMES PAYNTER
I
sn’t it amazing, how time and again, when the news
is about the worst it can get, that the Rand pulls a
fast one against everyone’s expectation?
Will anyone forget the last week of March this
year when, after days of rumours, Zuma decided it
was time to throw all caution (and what was left of
the country’s international standing) to the wind, and
pull out his big guns in the now infamous midnight
#CabinetResfuffle?
Rating agencies were not slow in realizing the
implications of this self-serving action, and within the
next few days all three ratings agencies had downgraded
South Africa to Junk Status.
This is what everyone had been fearing since
#Nenegate, and what ex-ex-Finance Minister Pravin
Gordhan and his deputy had been doing their utmost
since that time trying to avoid.
And now it had happened. This was the end - the
Rand was finished! Rational thinking and common
logic dictated it must be. And yet, against all
expectations, look what happened?
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AUGUST 2017 SA Real Estate Investor
The Rand actually peaked 2 days after the last
downgrade, and has not looked back since.
And now, just 2 months later, here it is below 13,
sitting at pre-CabinetReshuffle levels.
Make any logical sense? I don’t think so either.
So, how do we explain this irrational
behaviour?
Well, having been in this game for over 20 years, I have
learnt to expect the unexpected when it comes to the
markets.
So the first thing I did when #JunkStatus hit and
many clients were saying that this must change our
outlook for the Rand, was to look at what effect such
an action has had on other currencies.
And who better than two of SA’s ‘BRICS buddies’ -
Brazil and Russia who had been downgraded in early
2015 and 2016 respectively. To say the least, the results
were interesting.
As can be seen from this chart, the Russian Ruble
weakened significantly in the months leading up to
being downgraded.
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