We are always trying to get the best price on things and that too translates into our need to time the market entry price but also in the offshore realm, the currency level. History shows that it is notoriously difficult, closer to impossible, to time the markets correctly. One needs to be reminded that timing the market is a decision that must be taken twice; if you have made a decision to exit a certain investment you need to make a further decision to enter an investment again.
A simple calculation proves that odds are not in your favour (mind the reference to the “Hunger Games trilogy”). The best investors don’t even have a 55% success rate in getting their investment decisions right, but let’s say for example that you have a crystal ball and are able to get the calls right 60% of the time. To get it right twice (on exit and entry), you only have a 36% chance of making the right decision (60% * 60% = 36%).
Let’s go back to the currency, the USDZAR. Unfortunately, investors tend to panic and start taking ZAR offshore when there is fear in the currency market and the USDZAR exchange rate begins weakening, at R15 to the USD or R16 to the USD the fear sets in and it looks like R20 to the USD is a very real outcome. In fact, the opposite is also true, once the Rand moves below R13 or R12, investors and analysts start making predictions that it will move closer to R10 to the Dollar and investors make the decision to repatriate Rands back.
During 2015, the Rand moved from R11.50 to R14.44 towards the end of November (a 25% decline in value to the USD). It was then pushed over the edge on the back of Nenegate and the “weekend special finance minister”, weakening dramatically to a very weak R15.87 to the Greenback (a further 10% decline). You will recall it eventually reached R16.87 to the USD in January 2016.
If one looks at historical trends in the currency markets, it is shown that long term investors shouldn’t take tactical views. In the currency markets long term trends are a little clearer due to the economic principal of the inflation differential between two counties. In our case, SA inflation is more than the US, and will be for the foreseeable future (we think the differential might increase putting further pressure on the Rand).
So much harm can be done to your savings when trying to gain a few percentage points in the market. As you can see from the above chart, should you have sold your Rands in Jan 2016, you
would have lost 30% of your assets in Rands as the USDZAR exchange rate retraced all the way back to below R12 to the USD.
So, what should an investor do? As part of a diversified strategy investment portfolio, our opinion is that it is sensible to have a decent allocation to offshore assets (at least 30%). We typically have the bulk of our savings, being retirement funds and property (as well as generate income in South Africa) and to have all the eggs in one basket doesn’t make investment sense especially given the political and economic risk inherent in our country.
Having a healthy 30% odd offshore exposure can have a severe impact on your short-term asset prices as the Rand can move aggressively from either a strong to a weak position. But on a longer-term view, more than 30 years as is the case in the chart above, the trend is your friend. Don’t fight short term market movements or noise and stay committed to your long term offshore strategy.