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Stronger rand = offshore opportunity

By OrbVest 7 June 2021

A year ago, the rand seemed likely to follow the South African economy into the Covid-19 intensive care ward.

Yet today, the rand has strengthened to its best level against the dollar for almost two years, at around R13.50/$. Some investment professionals suggest it could touch R11/$, while foreign investors are showing an appetite for South African bonds and commodity shares.

So perhaps you’re thinking it was a bad idea to take your money offshore and are considering bringing some rands home to take advantage of gains in local assets?

Before you do that, you need to consider how likely it is that the South African economy will perform better than the US economy in the medium to long term and whether you can take the risk of having all your assets in South Africa.

How sustainable is the rand at R13.50 – or even R11 – to the dollar? Does rand strength reflect the current fundamentals of the South African economy, including recovery from Covid-19, the likely inflation trajectory, and the likelihood of the country regaining its investment-grade credit rating? 

Currently, South Africa’s roll-out of the vaccine is lagging well behind that of the US. By June 1, the US had vaccinated almost 50% of its population, while South Africa had vaccinated less than 2%. The speed of the vaccine roll-out is critical in enabling all areas of the economy to revert to normal, but particularly tourism, which contributes about 7% of SA’s GDP indirectly.

SA’s consumer inflation rate, which fell as low as 2.9% in February, staged a surprising increase to 4.4% in April, driven mainly by base effects and increases in prices of fuel, food and electricity. In the US, the inflation rate was 4.2% in April, also driven by base effects, food and fuel prices. But the South African Reserve Bank’s forecast for inflation over the next two years is 4-4.5%, against the US Federal Reserve’s longer-term target of 2%. The differential of two percentage points means that the rand/dollar exchange rate has to deteriorate by the same level over the longer term, excluding any other factors, to reflect its purchasing power.

Although Moody’s did not revise its credit rating (currently two notches below investment grade) for South African government debt in early May as expected, it issued a report mid-month which warned that the government still faced serious challenges. In particular, these are weak economic growth, a high debt burden and socio-economic inequalities, which “complicate policy efforts”.

The factors that mostly determine the direction of the rand, though, are not South Africa’s internal problems but US monetary policy and emerging market sentiment. Because of its tradeability, the rand has an amplified reaction to both factors. Currently, emerging market bonds are offering a better yield than US Treasuries, but if US interest rates rise in response to inflation threats, investor money is likely to stampede back to the US and the rand will weaken again (along with other emerging market currencies).

Holding all your assets in an emerging market currency therefore increases your risks, but if you have diversified your savings into other markets and currencies (particularly stronger currencies), it provides a buffer against erosion in the real value of your savings over time.

There’s no shortage of market adages to remind you about successful investing: “when low, have a go”, “buy when there’s blood on the streets”, “be fearful when others are greedy and greedy when others are fearful”. What applies to equities also applies to currencies. It just looks slightly different.

When the rand was at its least favourable level against the dollar, at R19.26, investors frantically tried to take more assets offshore. With the rand at R13.50/$, investors have lost their sense of urgency. Yet the rand’s current strength represents a great, and probably transient, opportunity to buy dollar assets more cheaply.

That does create a dilemma of where to put your hard-earned savings.

OrbVest has made it possible to invest directly into medical commercial real estate in the US, which proved its resilience through the pandemic. This specialist sector is expected to continue delivering stable dollar returns into the foreseeable future, as the US population is ageing and technological advances are favouring outpatient care.

OrbVest has an impressive portfolio and has acquired 32 medical offices buildings over the last 7 years in selected states, and generates regular and reliable rental payments from high-quality tenants. This revenue is paid out to investors on a quarterly basis, with returns of 7% a year cash-on-cash, and an anticipated IRR, or total annual return, of 10-17% in dollars.

OrbVest allows investors to choose whether to invest in a specific building, or in a lower-risk product, OrbVest Diversified Holding, which contains a broader portfolio of buildings with a specific risk profile.

Before Covid-19 struck the global tourism industry, a stronger rand made it possible for South Africans to take an overseas trip without wincing as much as usual at the price of a cup of coffee. Now, even if you can’t travel, your rands can. DM/BM

 

*past performance is no guarantee of future results

* OrbVest SA (Pty) Ltd is an authorized financial services provider with license number 50483

 

Brought to you by Justin Clarke, Chief Operating Officer of OrbVest.

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