Extreme fluctuations create opportunities – and dangers

By Andró Griessel

3/6/2023

With the writing of this, the rand is trading at about R19.70 against the US dollar, and the exaggerated predictions that the rand is on its way to R25 or even R30 against the dollar are starting to resurface… Just like with the previous 12 occasions over the past 28 years, it feels like you need to do something to protect your wealth against this “assault.”

Therefore, I thought it appropriate to dust off and revise an article I wrote about this in September 2018. It provides a glimpse into the past from which we can hopefully learn something.

The accompanying table shows all the times when the rand weakened against the dollar by more than 20% within a year.

When I speak of the rand weakening by 20% against the dollar, I actually mean that the dollar strengthened by 20% against the rand. It may sound like the same thing, but it’s not. If the rand were to weaken by 100% against the dollar, it would mean it is worthless. However, when the dollar strengthens by 100% against the rand (as it did in 2000-2001), it simply means that you have to pay twice as many rands to buy a dollar, or that the value of the rand has halved against the dollar. Please forgive the references to rand weakening, but that’s the terminology commonly used, so I stick to it.

Here are a few things that stand out to me in the accompanying table and other research on this:

• Over the past 28 years, the rand has weakened by more than 20% against the dollar in less than 12 months, on 12 occasions. In 11 out of 12 of these cases, the depreciation exceeded 30%.
   
  These are extreme movements and pose both opportunities as well as risks when it comes to decision-making regarding these inflexion points.
   
  The current cycle of depreciation has already lasted 14 months, and there is no certainty that R19.81 is the weakest level we will see.
   
  So far, this period of depreciation is the fifth largest out of the 12.

• Despite the aforementioned sporadic collapses of the rand, the average depreciation of the rand against the three main currencies has been only 5.09% per year ($), 4.70% per year (€), and 3.79% per year (£) since January 1, 1999. This starting date was chosen because it marks the beginning of euro trading.

• This depreciation has not followed a straight line, and cunning market commentators can unfortunately choose start and end dates to support their points.
   
  For example: If I try to make the point that the rand has weakened very little, I can use 24 December 2001, 21 January 2016, or even 24 April 2020 as a starting point.
   
  The “long-term” depreciation of the rand against the dollar since these dates until now has been a meagre 1.75%, 2.18%, or 0.97% per year, respectively. Of course, the opposite case can just as easily be made by choosing other dates.

• The most extreme devaluation of the rand against the dollar occurred around the end of 2001. Some people took the view at that point that the rand was in permanent freefall and invested money offshore at R13.54/$.
   
  In 2018, I mentioned that the rand could possibly trade below those levels again, and indeed it did in January 2019 and as recently as June 2021, trading below that level from 20 years earlier.
   
  Just as unethical as it would be to use this as “evidence” that the rand does not weaken, it is equally unethical to claim, at points of extreme pessimism, that the rand is plummeting towards worthlessness.

• In no case mentioned above has the rand traded at a weaker rate six months later, and in only three cases has it traded marginally weaker 12 months later.
   
  On average, the rand has gained about 11% against the dollar in the following six months to a year. Note that this was after reaching the turning point… there is no way to know if we have already reached that turning point.

Before I state what I think it means for you as an investor or decision-maker (where the exchange rate plays a role), it is important to once again point out the obvious, which is that neither I nor anyone else knows what will happen to the exchange rate in the near future.

Therefore, avoid one-sided decisions where your opinion of what will happen could result in a six or the loss of your wicket in cricket terms.

• Your long-term investment strategy should be based on the fundamental value of the underlying assets in their home currency, and not on what you think will happen with the exchange rate fluctuation between your currency and the other currency (if applicable).
   
  However, you are not currently exchanging expensive rands for cheap dollars.
   
  That would mean you are trying to saddle an already temperamental horse (especially the expensive US market) with an uncomfortable saddle. You may have to know your seat if you acquire foreign investments at current levels with significant US index exposure.

• Current levels of the rand appear to be an overreaction, and the dollar is likely overvalued by around 20% against the rand. If you are an importer or exporter, decisions regarding the timing of transactions and whether or not to hedge can make a significant difference.
   
  Approach with prudence.

• Extreme exchange rate movements (in both directions) have a significant impact on short-term performance figures.
   
  Keep a pinch of salt nearby because a one-year increase in the MSCI index in rand terms seems to be in the range of 30% again, but (a) it is from a low base and (b) the temporary rand depreciation obscures the fact that the dollar return was only around 3%; half of the index’s “local” inflation rate. When the exchange rate normalises, you will be left with the dollar return, which may be disappointing from current levels.

Andró Griessel is a certified financial planner and managing director of Woodland Wealth. Contact him at info@woodlandwealth.co.za.

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorised financial service provider with FSP no. 5966.