Will the rand surprise us?

They say a week these days can be a long time when it comes to our local market. 

So much can happen in such a short period of time.

Just when you think the “match” is going to end in total defeat, someone scores a six with the last ball.

I will never forget that cricket match between New Zealand and the Proteas in 1999 in Napier. 

Lance Klusener, with bat in hand, needed to score 11 runs off the last over of the match against Dion Nash. 

It was tough, and with Klusener eventually needing to score four runs off the very last ball, all I wanted to do was switch off the television. 

Luckily, I didn’t. Because instead of hitting that ball to score four runs, he scored a magnificent six and South Africa won the match.

I know there are countless writings about the South African rand’s poor performance over the last few years and, more specifically, about how we started 2018 with “Ramaphoria” and a rand-dollar exchange rate of R12.38, only to see it tumble right back down to R15.50 in September this year. 

The local stock market did not emerge unscathed, as the JSE eventually exchanged poor growth over three years up to the end of 2017 for negative growth of nearly -10% as at the end of October 2018. 

As with the cricket match of 1999, I find myself wanting to turn off the television.

Don’t get me wrong. 

I’m well aware of the fact that 2018 is far from over, and I know that one swallow does not a summer make. 

But the aggressiveness with which the rand and the local stock market recently (and every so often) improved, makes me think that we may just see a Santa-inspired rally of both the rand and the local stock market this year still. 

More specifically, I think we may see a strong improvement in mainly rand-generating companies, most of whom have taken a severe beating over the last three years.

At the time of writing, the R/$ exchange rate managed to break through the R14/$ mark and, according to technical data, it is very possible that we may even see the rand reaching stronger levels in the near future. 

Its 200-day moving average is currently at R13.19, and if it can break through this level, we can easily see the rand climb back up to similar levels that we entered 2018 at. 

Fundamentally, my fair value (based on purchasing power parity) is priced at R12.15, which will definitely require a brilliant six if we want to end off the year on that note. 

The point I’m trying to make here, is that investors should guard against extreme negativity towards the rand right now.

I referred to strong rand-generating companies above, and I decided to have a look at some of the big guns. 

I specifically looked at which shares were bought and sold by the 10 largest SA General Equity unit trusts during the month of October 2018, the results of which were quite surprising, and they fit perfectly with my message this week. 

During October, the five most bought shares were Standard Bank, Sappi, BHP, Naspers* and FirstRand. 

The five most sold shares were BHP, Anglo American, Naspers, Investec plc and British American Tobacco.  

For those of you who think I made a mistake by including BHP and Naspers in both categories, your eyes are not deceiving you. 

Four out of the ten funds had these two companies on their list of top buys, while five of the ten had these two on their list of top sells.

One of the most fascinating facts emerging from this data, is that two local banks can be found on the list of top buys, which obviously forms part of the strong rand-generating companies I was referring to, while the top sells were dominated by rand-hedge shares. 

Is this coincidence? 

I think not, but I will leave that up to the readers to decide. 

If I’m interpreting the data correctly, however, it seems as though the big guns have started to look into a possible strengthening of the rand and how to position the funds they manage accordingly.

Schalk Graph

Schalk Louw is a portfolio manager at PSG Wealth.

*finweek is a publication of Media24, a subsidiary of Naspers. 

This article originally appeared in the 22 November edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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