Fasten Your Seatbelts

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As I write: R/$ 13.53 || R/GBP 16.92 || R/EUR 14.50

We are currently experiencing some positive Rand direction and the Rand could even break through the R13.20/$ levels, but we tend to have short memories. On reflection, one would think that Nenegate was the tipping point when all South Africa’s (and the Rand’s) troubles began. But now the Rand is back to where it was before Zuma hired and fired three finance ministers in less than a week back in December 2015. Before that though, the Rand had been under massive pressure – since 2011 when it reached highs against all the major currencies. South Africans have become accustomed to short term shocks when local politics and economic decisions create violent swings both up and down for the value of the Rand.

What is encouraging is that the Turkish Lire has now replaced the Rand as the most volatile emerging market currency. Sadly, though, that is through their misfortune and not because we are doing anything better.

What has been consistent since 2008 is that whilst SA continues to experience political and economic turmoil, the so-called first world is becoming more and more politically divided and economically unstable. Brexit was the first real shock of 2016, followed by the election of Donald Trump! Suddenly all the European Union members, smug in their exclusive club, have realized that Brexit could well be the new normal. Instead of ‘punishing’ Britain to stave of the desire of others to break away, they really need to take note of what made the UK choose to leave and make some constructive structural changes to a very inefficient system.

So, what will 2017 look like in SA against such a back drop? Well not only do we need to factor in our own currency volatility but we need to understand the foreign currency environment that we deal in, so if you are thinking of going offshore for investment, the question is where? Buying an apartment in London, one must try and understand what the Rand will do and what the Pound will do.

As I write, technically, the Rand is still probably a little undervalued; however, bearing in mind the way things work here, risk is definitely priced in. The question is what could weaken it and what could strengthen it? So, here’s what to look out for:

Weakening factors:

  • A potential politically motivated cabinet reshuffle by Zuma
  • Further attacks on treasury
  • Talk of radical economic transformation
  • US interest rate hikes
  • Looming credit rating reviews where next downgrade level is junk status
  • Global emerging market sell offs if China continues to falter
  • Slower economic growth and high unemployment than predicted
  • Dirty power struggle within the ruling party as Mangaung ANC leadership conference looms
  • Increased imports

Strengthening factors:

  • Increased demand in commodities and increase in commodity prices
  • Sustained positive interest rate differential, yield seeking short term investors
  • ECB and / or BoE interest rate cuts
  • Falling oil prices
  • Increased exports
  • Increased risk appetite for emerging market investment

Volatility factors:

  • Rand is highly speculative currency withy currency traders/speculators
  • Increased uncertainty around the future of the EU
  • Trump as the 45th US president who is divisive, anti-establishment and will rock many established agreements
  • Dutch parliamentary elections before June
  • Article 50 Brexit negotiation trigger March 2017
  • France’s looming elections with a move to a populist right-wing revolution?
  • Germany Federal elections late 2017
  • EU/Euro currency and liberal democracy being challenged

Ironically, if SA can keep an even keel this year, we might just see the Rand back into the R12/$ territory but what are the chances? In summary, most of the time South Africa’s currency starts to tick upwards is often because the counter side is doing relatively worse than us and not that we are doing any better in real terms.

Fasten your seatbelts as 2017 will be a very interesting year, remember most of the information one sees on social media and the mainstream media is so hyped, emotional and designed to sell content. Strip aside the noise and look at the fundamentals. Is the world really in such a bad state?

MENTORSHIP BANNER 20173

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