';
Views Article – Sharenet Wealth

South Africa

10 CRUCIAL LESSONS FOR JSE INVESTORS IN THE ZAR/USD

The common perception is that predicting where the Rand will go is a mugs game. This is indeed true on the short term – after all who can forget the various stupendous statements or actions from senior government officials, clearly with no economic aptitude, that sent the Rand into nosedives in the last decade of unforgivable mismanagement of our economy.

Since the offshore earnings component of the JSE TOP-40  is now well north of 65%, the gyrations of the Rand have a huge impact on the JSE. The correlation between the JSE and the ZAR/USD is now at all time highs which means the JSE investor needs to understand the Rand to be successful. If the Rand tanks, this leads to a flight to safety in the Rand hedge stocks, which due to their large market capitalization, propels the JSE up.

Below is a almost 50 year history of the Rand from which we learn our first four most important lessons:

LESSON-1 :
The ZAR/USD is a one-way ticket to depreciation at the rate of 6.4% per annum. This is “baked into the cake” due to our purchasing power parity and inflation differentials with the US.
LESSON -2 :
The ZAR/USD is depreciating exponentially, since an exponential regression trend gives the highest statistical correlation of a stunning 0.945 (a 94.5% correlation)
LESSON -3 :
To preserve your assets in US Dollar terms, your local gains need to be at least 10% per annum to keep up with local inflation and baked in Rand depreciation
LESSON-4 :
The ZAR/USD can fluctuate to wide extremes from its mean depreciation, and is a volatile currency subject to more panic and euphoria than most EM currencies, but the long-term depreciation remain immutable.

Looking at the above chart again, we conclude that we are currently below mean depreciation and the elastic forces that would bring us to R18 to the Dollar are currently very high. We will get there, there is no doubt about that, its just a question of when, and currently the odds favor sooner rather than later.

There are some very important lessons to be learnt by the JSE investor regarding seasonal movements of the ZAR/USD. There is a strong multi-decade annual and tri-annual season cycle for the ZAR/USD with the tri-annual cycle being particularly powerful. However for the purposes of this exercise and simplicity, lets focus on the annual seasonality of the ZAR/USD. The chart below shows an almost 5-decade seasonal pattern of depreciation for the Rand against the US Dollar, with green bars representing annual depreciation (Rand gets weaker) monthly averages and red bars representing annual appreciation (Rand gets stronger) monthly averages:

LESSON-5 :
On average the Rand depreciates 9 month in 12 (75% of the time)
LESSON-6 :
May month is a sure-bet for strong deprecation in 73% of cases
LESSON-7 :
February, September and December months are statistically in favor of a stronger Rand (more than 60% of cases)

Looking at percentages of months that depreciated (or appreciated) as we did above does not tell the full story however. Let us examine, for each month since 1970, the sum of all depreciations divided by the sum of all appreciations to get a “Loss-to-gain” ratio:

LESSON-8 :
May and August are statistically very significant depreciation months with losses outpacing gains more than 5 times to 1.
LESSON-9 :
August may only depreciate 58% of the time but when it depreciates, it depreciates BIG (hence the high loss/gain ratio)

From this we can conclude that :

LESSON-10 :
Ignore Rand depreciation risks in May and August at your peril.

Below is a history of the average depreciation of the Rand in the month of August over the last 48 years. Although we depreciate only 58% of the time, the depreciation months swamp the appreciation months over 5 times to one. This is a very viable gain/loss ratio to short the Rand. You may only win 58% of the time but when you win your gains swamp your prior losses by a factor of five or more!

So enjoy this current bout of Rand strength, because in August the odds favor a 1.5-2% average depreciation in the Rand, potentially much higher even, and this should juice the Rand hedge shares on the JSE again. In fact for the remaining 2 weeks of July you may be able to prepare and pick up some solid Rand hedges that have been falling of late and available as good buy on the dips. There are plenty of candidates.

For example, here are all the large rand-hedges in the SA TOP40, taken from our free JSE Scanner available at //www.sharenet.co.za/v3/frontend/share-scanner.php

Like this article? Get more like it and exclusive market alerts before the general public by subscribing to free Sharenet newsletters using the form below.

Register

We want to get to know you

* Required Fields

Dwaine van Vuuren

Retail-side Research RecessionAlert, Sharenet Analytics

Dwaine is a full-time trader / investor and a gifted numbers man. By combining his IT prowess, research insights and analytical ability he developed and grew PowerStocks Research and RecessionAlert.com into the preeminent trading tools they are today.

A clear and engaging educator, his insights into market movements and investing strategy will have you taking notes furiously. He'll soon have you trading with confidence and discipline.