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Competitive local elections drive Rand rally

by Andrew Rissik | Aug 05, 2016
  • What a brilliant set of results we are seeing from the local elections. At last South African voters seem to be judging politicians on delivery rather than shallow rhetoric. This indeed bodes well for our maturing democracy. The question now on everyone’s lips: How will this affect the Rand?
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    The New Year’s Rand blow-out

    Earlier this year, we called a possible R12.50 to the US Dollar before the end of the year. In our view, the Rand was hugely undervalued after “Nene-Gate”; it was further punished when the ratings agencies were looking at us a few months ago. This left the ZAR touching record lows.

    What’s changed since then

    Well, there are two main factors:

    • Our market is currently in a period of relative calm
    • We are out of the gaze of credit ratings agencies until December

    The agencies will only shift their attention back to us at the end of the calendar year. They will want to see whether we are implementing the promises made last time they were in town, but for now we are in the clear.

    So in the absolute short term, the more balanced results of the local elections will definitely contribute to Rand strength. What a change to have some real, positive sentiment in our country! However, what needs to be considered is what the real issues driving this strengthening are, apart from undervaluation and positive news about the elections.

    What else is driving this rally

    Simply put: The grass isn’t greener on the other side. Yield-seeking money managers have been sweetened on emerging currencies like the Rand. They need returns on their clients’ cash. At a time when the UK has dropped interest rates close to zero and many other countries have rates in the negatives, there are few better currencies to invest in than the ZAR.

    The SARB has recently been on an interest rate increase cycle (the rate is currently sitting at an enticing 7%) and the yield differential is now big enough to justify the currency risk. The Reserve Bank has also been committed to containing inflation in the Republic and it sees rate hikes as a powerful tool in this regard, so we can expect to see rates rise for the foreseeable future.

    So, with all these factors at play, why not take advantage of the short window between now and December to make offshore acquisitions whilst the Rand is relatively strong. After all, a good buy is what makes a good investment.


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