Thursday, 07 April 2011 - 20:00Sharenet is pleased to announce the launch of our new publication, The Sharenet Daily. We have built on the success of our Daily Equity Report, while adding more content and helpful information. The result is a publication that gives readers a quick, easy to read and informative synopsis of market activity, company results and news on the JSE for the day, as well as an overview of what transpired on important overseas markets.
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Rand Fair Value
Talk to anyone who’s been investing for longer than 10 years and you will no doubt get to hear their views on the rand. The performance of their offshore investments over this period will no doubt heavily bias their views. Many investors got burned at the turn of the century mainly as a result of three factors:
This scarring often heavily influences investors’ decision making going forward. The poor returns were amplified because both asset returns AND currency movements worked against those investors with money in developed market equities over the past 10 years or so.
One of investing good lessons is that you can’t change what’s happened in the past, and that all investment decisions should be based on future return expectations. Investors should therefore try, as best as possible, to forget previous successes and failures without forgetting the lessons learnt along the way.
Another investment lesson is that performance is never in a straight line.
Below is a chart of the ZAR v USD over the past 26 or so years. The black smoothed line is the value of 1 USD on Purchasing Power Parity (PPP) basis. The theory behind PPP is that over the long term currencies should move relative to one another based on the inflation differential, so that over time goods and services will have a similar cost across countries to avoid arbitrage of goods and services between countries. The chart clearly shows that this is the trend over time.
Clearly there are some flaws with this process as different countries have different skill sets, there are transportation costs and import duties, etc. For this reason when looking at this method one needs to take a long term outlook (i.e. longer than 5 years) and only act when there is a sufficient margin of safety. Furthermore, investors should ensure that the assets that they are investing into in the foreign currency are fairly or attractively priced.
On this chart it is clear that December 2001 wasn’t a great time to be expatriating ZAR, but what is also clear is that the ZAR can trade in cheap or expensive territory for an extended period. The ZAR stayed one standard deviation too strong for a decade from the end of 1986 to the end of 1996, but over this period still depreciated from R2.26 per USD to R4.68 per USD (7.6% per annum) as a result of the inflation differentials between the two countries.
An investor looking to take money offshore one would rather be taking it over now than at the end of 2001 or even 2008. At current levels there is a margin of safety built into return assumptions, one doesn’t need to forecast significant rand strength, and if the rand does trade back to fair value (currently sitting at R8.71) over the next 10 years (an extremely long period) then investors would gain real increase of 3.5% per annum to their USD returns, and 5.4% per annum should fair value be reached in 5 years. Should the ZAR stay strong, investors should only expect the inflation differential (likely to be around 3% per annum for the next 5 years or so).
As always, investing is a long term pursuit (speculators operate over the shorter term). Being a long term investor doesn’t preclude you from transacting over shorter term periods should circumstances warrant (i.e. if the ZAR weakened to R10 to the USD overnight we’d be looking to repatriate offshore assets), but does require that you think for the longer term.
To vote in our poll on where you think/want the ZAR to end the year vs the USD click through to our Facebook page and find the question on our Fan Page’s wall.
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