Category: Finance

My 2016 Local Financial Markets Playbook

gingerbread-aA few days ago I read an article that contained a sentence which I consider to be profoundly disturbing written by a prominent economist:

“I am convinced the rand’s undervaluation will correct but I am unsure how it will correct.”

In August of last year I predicted a US Dollar / Rand rate of at least R15 when it was valued at R12.50. Market commentators often refer to the Rand as unjustifiably depreciated but the end of year rate was R15.49.

At least one trading desk ran the joke “sell EM if you have, sell EM if you don’t” two weeks ago in the midst of a huge selloff. Well done to all who saw the opportunity.

It is my belief that the Rand’s value will deteriorate further during 2016. I have prepared a list of key risks which South Africa will face this year:

  • A credit rating downgrade regarding our foreign debt as sub investment grade. Local currency credit should remain investment grade.
  • Confirmation if Jacob Zuma’s intention is to serve as state president for a further term come 2017. This would be oppositional to our Constitution.
  • Additional rate hikes by both the Federal Reserve as well as Bank of England which cause their currencies to become more attractive.
  • Increased nationwide food and water shortages with El Niño conditions estimated to extend well into 2017.
  • The introduction of winter season with arguably less electricity generation by Eskom, a situation which has not shown improvement since 2013.
  • Further slowdown of China’s economy which adversely affects demand for commodities.
  • Unforeseen expenditure to bail out state owned enterprises such as an effectively insolvent South African Airways.

South Africa’s contingency reserve is already depleted and we are only just starting a new year with these problems. On the other side of the spectrum are a few scenarios which can greatly help the Rand:

  • The replacement of President Jacob Zuma.
  • A significant increase regarding the price of oil could result in the return of investor appetite to emerging markets as a whole.
  • India could replace China’s previous demand for commodities due to infrastructure renewal.
  • Strength as a result from a local credit rating downgrade being avoided.

USD / ZAR Forecasts:

  • Good Case: R19 by the first half of 2016.
  • Good Case: R21 by the end of 2016.
  • Excellent Case: R18 by the end of 2016.
  • Bad Case: R28 by the end of 2016.

Excellent Case = Replacement of President Jacob Zuma with a more capable successor.
Good Case = Avoidance of a foreign credit ratings downgrade.
Bad Case = Foreign credit ratings downgrade.

Economic Forecasts:

  • GDP growth of between 0% and 0.5% with the start of a recession in the second half of the year.
  • Retailers will experience tremendous pressure from rising interest rates and lack of disposable income available for consumers. Higher levels of inflation will cause sales volume to decrease.
  • Banks should encounter increased non performing loans.

Should spare capital need to be allocated then an ideal financial advisor would make offshore products available as an option as well as possess multi asset capabilities. Actions by the Reserve Bank can be taken advantage of but be wary because carry trades here are no longer effective, as Japanese investors have recently discovered. Interest rate increases at these levels will likely harm economic growth and cause no swing to reach our inflation target.

Usually a backdrop of rising interest rates would dictate otherwise but offshore real estate is still the asset class of choice in my opinion. A REIT structure can form the composition of the asset holding thereby avoiding the need to be a landlord. One good balance would be to also tilt towards shorter duration T – Bills.

Global equity indicies have fallen quite substantially but are only slightly lower than fairly valued. Should the trend continue then a tentative entry towards developed world indicies is warranted.

This would not be a time to panic because the sale of securities can often initiate a Capital Gains Tax event which can erode returns. Always seek advice from a suitably qualified and independent financial advisor before making any decisions.


Buy The Rumour, Sell The Fact

bullbear I almost never need to change the television channel, it is either showing Bloomberg, BusinessDay TV or CNBC. There are many regular interviews whereby money managers as well as financial advisors can express their views and opinion.

It’s very important for most people to seek guidance from a financial advisor / planner since many individuals don’t have the time nor interest regarding markets. What holds even more importance is the candidate’s knowledge because it is alarming for me to witness professionals from various highly esteemed financial service providers issue recommendations which are based purely on price and not fundamentals.

Over the past few months, many experts had answered that the South African Rand had depreciated to such an extent that it would not be wise to convert their discretionary savings to a hard currency such as US Dollar or Pound Sterling. On more than one occasion, no basis or factual information was provided other than the conversion rate seeming too high. These individuals clearly choose to instead be oblivious to many critical facts which would oppose their view:

  • Rumour: Imminent United States interest rate hike cycle causing capital flight to safety from emerging markets.
  • Fact: Falling commodity prices which negatively affect commodity driven economies such as South Africa and Australia.
  • Fact: Conversion of China’s economy to further dampen demand for commodities.
  • Fact: Rapid deindustrialisation of South Africa’s economy due to labour demands which result in an uncompetitive cost of production.

Most of these points are facts, which together with the concerning rumour should cause the South African Rand to be extremely undesirable. I can only hope viewers did not consider the advice because they would have experienced a severe loss of their initial capital’s buying power. I have illustrated the long term as well as recently accelerating currency depreciation below:


Their advice was to rather invest on the local stock exchange with a bias towards businesses which earn their income offshore. This approach holds some merit as per David Shapiro‘s “The Great Trek” but if you are investing on a stock exchange to primarily gain international exposure, then you’re most likely approaching it the wrong way – unless of course you purchase a counter such as Naspers to gain Tencent with their subsidiaries for free. Why limit yourself to a small amount of companies when there are so many greater opportunities elsewhere?

If your financial advisor ever issues advice simply based on price, then please seek a second opinion. The price of any investment is composed of the underlying future value dependent on broader sentiment. The current price means little before the sum of parts and future prospects are taken into careful consideration.

In my opinion, a more prudent piece of advice would have perhaps been to suggest that global listed property be considered either in the form of an index or even physically as residential with a fixed interest rate, especially at incredibly low levels currently. With most equities expensive world wide (or at the very least fair – valued) and diminishing bond yields from developed nations outside of the United States, it would have been refreshing to hear an alternative view such as this but very few financial advisors would suggest a better suited product if the company they represent don’t offer it.

Regardless of currency moves, one should always review and periodically rebalance based on logically sound expectations. The US Dollar won’t sustain growing strength indefinitely but for the time being I would follow the cycle rather than look through the cycle. There is a reason why the saying “don’t fight the Fed” is considered wise.



Congratulations all who seized the uptrend! My personal target for USD/ZAR is easily R15.00 as a minimum by year end and am buying the dips produced by a better than expected narrowed current account gap. I will continue to buy into any strength followed by profit taking after each double digit reversal.

Best of luck for everyone involved!