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 relatively cheap to get stuck into the UK for those who wish to go offshore.
Looking abroad is a good option; I see 7-9% devaluation per annum in the Rand in the long-term. As a South African, you should take advantage of the SARB’s offshore allowances which, in total, allow you to transfer R10 million out of the country per year.
I stress urgency in this regard because, given the ANC’s precarious electoral position, it would not be shocking if the ruling party decided to move policy toward a more business-unfriendly space. Doing so could include bringing back some of the capital and exchange controls that have been slowly (and thankfully) abandoned over the last 15 years.
What if you want to stay invested in South Africa?
If you’re a South African who wants to stay invested in South Africa, you will have to think very carefully about what kinds of asset classes are least at the mercy of Rand declines. Traditionally, property has functioned as a good store of value for local investors and while my advice would be to diversify your assets offshore, if you’re going to invest in South Africa, you could look at property in high-growth urban areas.
Looking at the example of Cape Town, we see a property market that has increased in value at an eye-watering 16.1% between June 2015 and June 2016. This is more than double the current inflation rate over the same period. This rate of growth is the third highest in the world according to international real estate agency Knight Frank.
A decline in the demand for property in the city is unlikely to happen any time soon. National migration remains high as South Africans flock to what is arguably the best run city in the country. While there are the inevitable talks of a property bubble forming, they seem premature if not totally off the mark. Demand for the limited property near the city centre will remain high, or at least stable, for the foreseeable future.
A final word of caution
It’s easy for private investors to get carried away in heady forex markets. Short-term news and short-lived calamities abound in the 24-hour news cycle and many people have lost a lot of money chasing currency fluctuations.
It’s always better to have a long-term plan based on fundamentals than following the advice of news stories and punters. The key to any strategy is diversification, both offshore and locally, of your investments. Without a long-term plan, you are likely to fall victim to the short-term fluctuations that seem so alluring.