Tuesday, 22 September 2015 - 20:00
Seed Weekly - Currency Valuation
We have written many reports on the local currency, as it is an emotive topic that is on the lips of many clients and investors. With the allocation to global assets becoming an ever more important consideration in constructing a properly diversified portfolio, and dramatically relaxed exchange controls that effectively mean that most South Africans aren’t limited in their ability to take assets offshore, it is important not to allocate assets offshore in a haphazard way.
We see the valuation of the currency as part of the decision to taking assets offshore. The other key consideration is the valuation of the assets that are being invested into (i.e. global equity, global property, global bonds, etc).
South Africans have seen a consistent devaluation of the rand over the past four and a bit years and the question is, “how much further can it go?” My mother always taught me that ‘can’ is a very loaded word, and it is with this mind-set that we make our decisions. Theoretically the rand could go to R100/$ (US dollar), and I’m sure that as long as we have higher inflation than the US it will go to that level at some point in the (distant) future! For the purposes of our investment decision making process, however, we typically take a 5 year view and look at a range of probable outcomes.
Going back more than 30 years we have constructed a model, below, that indicates the ‘fair value’ (solid black line) of the rand vs the US dollar using the Purchasing Power Parity (PPP) method (as described in previous reports). Around this fair value we show the actual exchange rate (solid blue line) as well as range of what we consider to be ‘normal’. With the rand recently briefly hitting R14/$ earlier this month, we have now breached what would be considered a normal variation from fair value.
According to this model, fair value to the US dollar is currently R10.36. With South Africa facing structural headwinds, we don’t think that the rand will trade at fair value any time soon, but also agree that investors shouldn’t expect consistent continued depreciation in excess of 5% pa (current inflation differential).
A blow out of 2001 proportions would see the rand trading at over R20/$ in April 2016! As can be seen from the above chart this would require an extremely frightful set of circumstances – but wouldn’t be unprecedented. Should we see the rand strengthening as it did from early 2009 (tail end of the Global Financial Crisis) to early 2011 we’d expect it to trade below R9/$ towards the end of 2017. Naturally these two scenarios are extremely different, but are the bounds within which we operate (rather than worrying what would happen if the rand weakened to R100/$).
Practically, in our local Multi Asset Funds (Seed Flexible and Seed Absolute Return Funds), we have maintained our global allocation near 25%, the Reg 28 (pension fund guidelines) limits. One of the reasons for this decision is that our research indicates that an optimal strategic allocation for investors (saving for retirement in South Africa) to global assets is around 30% – 40%. In this context 25% remains underweight so we’d need global assets (and global currencies versus the rand) to have a much poorer outlook before significantly reducing this allocation. Notwithstanding the above, we will look to use significant further rand weakness to hedge out some of the global currency while retaining exposure to the underlying global equities that are offering much better prospects than local assets.
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Tue, 22 Sep 2015
A company formed by genome pioneer Craig Venter will offer clients of a South Africa-based insurance company whole exome sequencing - sequencing all protein-making genes in the human genome - at a price that marks yet another dramatic decline in the cost of gene sequencing, the two companies said on Tuesday.. . .
World Markets (Spot Prices)
|JSE Top 40||17:00||44523.72||-856.20||-1.89%|
|JSE Indust 25||17:00||65569.53||-1068.77||-1.60%|
|USD / ZAR||19:59||13.6794||0.2169||1.61%|
|GBP / ZAR||19:55||20.9856||0.1284||0.62%|
|AUD / ZAR||19:55||9.6890||0.0799||0.83%|
|USD / JPY||19:59||119.9840||-0.5360||-0.44%|
|EUR / USD||19:59||1.1122||-0.0066||-0.59%|
|GBP / USD||19:59||1.5366||-0.0140||-0.90%|
Click here for the Sharenet Spot Price page
The JSE Today
* Includes all listed instruments on the JSE
|Index Name||RP||Move||% Move|
|Financial & Ind. 30||69,853.10||-1062.92||-1.50%|
|Oil & Gas ||8,253.88||-211.63||-2.50%|
|Oil & Gas Producers ||44,379.56||-1137.94||-2.50%|
|Basic Materials ||19,924.47||-768.90||-3.72%|
|Forestry & Paper ||45,155.76||-1157.13||-2.50%|
|Industrial Metals ||5,339.45||-613.96||-10.31%|
|General Industrials ||155.32||-.98||-0.63%|
|Consumer Goods ||70,838.91||-1242.31||-1.72%|
|Automobiles & Parts ||6,883.95||-22.65||-0.33%|
|Health Care ||9,044.93||-129.62||-1.41%|
|Index Name||RP||Move||% Move|
|Food Producers ||8,633.64||-35.66||-0.41%|
|Personal Goods ||1,039.21||-16.78||-1.59%|
|Consumer Services ||15,321.99||-301.23||-1.93%|
|General Retailers ||7,915.63||-32.11||-0.40%|
|Travel & Leisure ||5,738.60||-40.39||-0.70%|
|Support Services ||3,031.98||29.88||1.00%|
|Non-life Insurance ||57,935.41||-252.67||-0.43%|
|Life Insurance ||37,983.27||-805.46||-2.08%|
|General Financial ||4,494.81||-61.20||-1.34%|
|SHARIAH TOP40 ||3,170.52||-77||-2.36%|
|FTSE/JSE SHARIAH ALL||3,384.57||-76||-2.20%|
|FTSE JSE Fledgling ||6,602.99||-18||-0.27%|
|FTSE/JSE Alt X ||1,505.25||-5||-0.32%|
|SA LISTED PROPERTY ||644.37||0.09%|
|CAPPED PROPERTY ||570.67||-0.05%|
|FTSE/JSE RAFI 40||8,884.99||-189||-2.09%|
|Capped Top 40||23,725.55||-448||-1.85%|
|Capped All Share||25,286.64||-448||-1.74%|
|JSE TABACO ||9,318.66||-234||-2.45%|
Click here for the Sharenet Index Summary page
Latest Consensus Changes**
|RMI||RAND MERCH INS HLDGS LTD||SELL||18/09/2015|
|RMH||RMB HOLDINGS LIMITED||HOLD||17/09/2015|
|TRU||TRUWORTHS INTERNATIONAL L...||BUY||15/09/2015|
|MPC||MR PRICE GROUP LIMITED||SELL||15/09/2015||
|Expected||Company Name||Fin. Date|
|23/09/2015||BLACKSTAR||June 2015 (Interim)|
|23/09/2015||BOWCALF||June 2015 (Final)|
|23/09/2015||COGNITION||June 2015 (Final)|
|23/09/2015||IPSA||March 2015 (Final)|
|23/09/2015||KIBO||June 2015 (Interim)|
|PSGFIN PREF||31/08/15||17/09/15||28/09/15||ZAR 3.9079|
|BSS||BSI Steel Ltd.||22/09/2015||Confirmed|
|RDI||Rockwell Diamonds Inc.||23/09/2015||Confirmed||
Stock Exchange News Service
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