Real Estate Investor Magazine South Africa Real Estate Investor Magazine - June 2017 | Page 59

becomes a riskier investment destination. Expect to see inflation increase, this, together with our endemic problems of low productivity and high relative cost of labour, means that the Rand will need to devalue to keep South Africa competitive in export markets. On the other hand, as an emerging market currency, we also get lumped with the likes of Turkey and Brazil, and recently the international community has looked favourably on emerging markets as risk appetite has become stronger. This has helped the Rand, however, as the recent political crisis in Brazil has demonstrated, investors are very willing to drop an emerging market currency if they smell a rat. The Brazilian currency shed 10% in one day when their president was implicated in a bribery scandal. Stories like these are not uncommon and can serve as a warning to putting too much stock into general emerging market rallies. When it comes to emerging market currencies, no discussion of fundamentals is complete without delving into commodities. Recently, there has been a muted recovery in the price of most commodities, so South Africa stands to benefit from this in the medium- to long-term. In addition to this, the recent drought (apart from in the Western Cape) has broken and the agricultural-sector, a large exporter, will see some growth in the year ahead whilst we rely less on imported food - this is also good news for the Rand. Local consumers are cash-strapped and buying less, which translates into lower imports, again a positive for Rand strength. So in a way many medium-term fundamentals appear to be pointing in the right www.reimag.co.za direction with just a few dark (sometimes very dark) clouds on the horizon. Be wary of speculation The Rand is one of the most speculated/traded currencies, relative to its market share of global currency trade. This, over and above what I’ve already pointed out, makes the volatility factor in the sentiment-driven swings even more terrifying. Until recently, the Rand was the most volatile EM currency, however recently we have slipped back into second place to the Turkish Lire… Nothing to be that proud of! Truly, the next two years will be perhaps the greatest test of our young democracy. South Africa offers some of the highest money market interest rates in the world, so why wouldn’t fund managers dump short-term cash into our markets as they aggressively seek yield, which in today’s world is so hard to come by? Just remember that this is flighty cash, and whilst it trickles in slowly, when the risk trend and perception reverses and the Rand starts falling, this money flies out of the system at an alarming rate, contributing to a speedier devaluation. RESOURCES Sable International JUNE 2017 SA Real Estate Investor 57