The rand and your nest

2013-06-23 14:00

Your fund‘s performance will depend on its offshore exposure, writes Neesa Moodley-Isaac 

The recent movement in the rand saw the currency move to multiple year lows (or highs, depending on how you look at it) to the US dollar, says Imraan Jakoet, an investment analyst at Glacier by Sanlam.

“Movements like these don’t only impact the cost of forex (foreign exchange) for your overseas holiday next month, but impact your local and international investments.

“More importantly, these movements impact a number of areas in the economy, which further filters through to the end consumer,” he says.

A key area in which the currency movements may have affected you is through your investment performance. A large percentage of multi-asset class funds have fully utilised their foreign-assets allowance and have benefited from this.

“Some have chosen to hedge out currency risk, while others have remained fully exposed to the currency volatility.

“Any unhedged foreign currency would have certainly benefited fund performance, despite a mixed period for global equities,” says Jakoet.

Neville Chester, senior portfolio manager at Coronation Asset Managers, concurs with this, saying Coronation has for a long time been positioned for the weaker rand and has had a full weighting to offshore assets as allowed by Regulation 28.

“In the current investment climate, a lot of assets are mispriced due to the loose monetary policy being exercised by central banks around the world.

“One needs to be very cautious reacting to short-term moves, and remain focused on long-term investing. We think global equity remains the most attractive asset class, given current valuations,” he says.

Chester says Coronation was at the maximum allowable holding of 25% for offshore assets in its prudentially regulated funds.

“Given the move in the rand and the growth in the underlying assets, this holding moved closer to 30%.

“We have used the recent spell of rand weakness to bring this back to 25% by repatriating the money to South Africa,” he explains.

Jeremy Gardiner, a director at Investec Asset Management, points out that the first quarter of this year saw a continuation of the sustained pick-up inflows into unit trusts, with net inflows of R47 billion.

“Investors, buoyed by a rampant 27% total return from the JSE in 2012, felt safe to venture further into the markets.

“Despite the avalanche of bad news, equity markets have been seemingly unaffected and rising unabated, and this attracted substantially more flows into equity funds than in previous quarters,” he says.

Gardiner says that, as in previous quarters, multi-asset funds (previously domestic asset allocation funds) were once again popular, attracting inflows of R26.2?billion.

“Given that both low- and high-equity allocation funds were in demand, it appears that investors are selecting the appropriate asset mix based on their individual risk profiles,” he says.

Gardiner says it is interesting that global funds saw a fairly substantial drop-off in demand.

“This could indicate that investors believe that they have ‘missed the boat’ in terms of the opportunity to diversify offshore, given the sudden and steep decline in the exchange rate of the rand, particularly against the dollar,” he says.

Jakoet points out that while a variety of factors, including potentially more labour unrest and a further widening of the current account deficit, would see the rand weaken even more into the short term, it is oversold on a longer-term basis.

“Any strength will probably see investors – painfully reminded that the currency can weaken – diversify offshore,” he says.

Jakoet says local equity markets have generally benefited from the currency weakness with the all share index ending May at another record high.

“Key winners during the period were the resources and rand-hedge counters. Stocks deemed as rand hedges are typically companies that generate much of their revenue in foreign currency or from places other than South Africa.

“Examples of these companies include the likes of SA Breweries, Richemont and British American Tobacco,” he explains.

He points out that many market commentators have long anticipated a blowout in the rand in light of South Africa’s large current and fiscal account deficits.

“One of the key reasons the rand has, however, remained reasonably strong was due to large foreign inflows into the South African bond market.

“Inflows were driven by ultralow bond yields globally, resulting in a global search for yield, and by South Africa’s inclusion into the Citi world government bond index.

“Labour unrest may have been branded as the reason for the fall but the risks to the currency have been prevalent for some time,” Jakoet explains.

The effect of the weaker rand

The weakening rand was recently cited by the Reserve Bank as one of the key upside risks for inflation.

The net effect of this for you, the investor, is that if inflation goes beyond 6%, the Reserve Bank would certainly be under pressure to raise interest rates.

“This in turn would directly impact bond prices and the fixed-interest portion of your portfolio,” says Jakoet.

He says in South Africa the opinion on an optimal level for the rand tends to be a little mixed.

“Local exporters certainly gain from the weaker rand, but as a country which typically imports more than it exports (which accounts for the frequent trade account deficits), the weak rand often tends to hurt South African consumers.

“A weakening rand puts pressure on the local oil price, which as a large import item affects all aspects of the South African value chain and is a key driver for inflation.

“Other popular import items, such as electronic equipment and clothing, will indeed also be more expensive which, depending on whether these added costs are passed on to the consumer, may impact consumer spending,” says Jakoet.

Petrol-price pain

Stanlib economist Kevin Lings says based on data supplied by the department of energy, the price of petrol is likely to increase by about 81 cents per litre. This would take the price of petrol (95 octane, ULP) up to R13.20 per litre – the highest on record.

This would mean that motorists will be paying an additional R2.38 to fill up now compared with the beginning of the year.

This 22% year-on-year increase means that for an ordinary car with a 50 litre tank, the cost of filling up will have increased by R119. This leaves less money to meet other necessary expenses.

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