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Make hay while the Rand shines

by Andrew Rissik | Aug 02, 2016
  • The ZAR recently crashed through 14.00 to the USD and has been looking like it is surely going to break through 18.00 to the GBP. This rally is likely to last in the short term, but what does this mean for the GBP-ZAR? It’s my view that now could be the perfect time to go long on the UK and get stuck into some GBP-based investments.
    brexit-exit-uk-eu

    First things first: Why is the Rand so strong right now?

    None of South Africa’s economic fundamentals have shifted in any meaningful way since the flash crash of December. So why is the Rand continuing to gain ground on the major currency pairs?

    The answer has more to do with what’s going on outside our borders than with what has happened within. As investors face an increasingly lifeless global economy, they are shying away from low-to-negative interest rates found in most developing countries right now. South Africa is one of the few countries were yields are actually positive for investors with liquid assets. Thanks to this, a dovish Fed and unforeseen events like Brexit, the Rand is in an undeniably purple patch.

    As more short-term yield seekers buy into Rand strength, it may just happen that the currency will strengthen further in the short term. On top of this, I see the ZAR as remaining undervalued at current prices, so you can expect buyers to keep buying in until we get closer to the Rand’s real value. This has created a window of opportunity for investors holding Rands to invest offshore at great rates.

    To be clear, we are in a honeymoon phase right now. So make hay while that sun shines and consider getting some of your investments offshore while these great rates last. This is particularly true for the Pound, which has nose-dived in recent weeks.
    Brexit and the Pound’s plunge.

    While the current noise around Brexit is all but deafening, the truth of the Pound’s current decline goes back much further than 24 June. The Sterling has been struggling against the USD for some time now, and the UK’s economy had been slowing in general long before the European Referendum Act of 2015 was approved in Parliament by the House of Lords in December 2015.

    gbp-vs-currencies

    Some are quick to point out that the UK will be worse off when it leaves the EU trading block. I am of the opinion that, free of the EU, the British may now able to take steps to arrest their years’ long slow decline. Without the heavy regulation and bureaucratic requirements of the EU, the UK will now be able to more nimbly alter its trade agreements and central bank policies.
    Good governance is about decisive and measured action. What I’ve seen coming out of the UK post-24 June has confirmed that the Brits still know what they’re doing when it comes to navigating stormy political and economic waters. Already, we have seen the UK’s leadership act with equal parts certainty and level-headedness. In a Brexit-briefing I attended, High Commissioner to South Africa, Dame Judith Macgregor, laid out the party line being taken by 10 Downing Street with regard to Brexit and South Africa. 

    What Dame Macgregor made certain was that the UK will not be rushed into invoking article 50 (the so-called “exit clause”) of the European Constitution. The end of 2016 is the most commonly cited date at which the article would be invoked. This is so that the UK can negotiate an exit that is beneficial not just for itself, but the EU as well. To this end, Macgregor pointed out that they had set up a new Ministry for International trade for which they are currently searching for negotiators and analysts.

    As an organisation, Sable was expecting a “remain” vote, but perhaps the “leave” vote was a blessing in disguise. A reduction in regulation and the UK’s new-found ability to negotiate independently of the Euro-block may just mean that South Africa will be able to secure a better set of trade-agreements than those we currently have.

    The High Commissioner affirmed that the UK wants South Africa as a strong trading partner. We are the UK’s largest market in Africa and the UK is our largest inward investor. It appears to be the UK’s hope (and surely our own government’s) that, through an increase in bilateral trade and free-trade agreements, both countries will benefit.

    We may well look back on Brexit in many years and see that it turned out to be the best thing to happen to South Africa-UK relations in quite some time. 

    Why South Africans should start looking at getting stuck into the UK

    I have little doubt that the UK will get back on track in the long-term. For now there may be a bit of an investment freeze as market participants wait for the dust to settle, but this just makes investing in the UK easier. Keep in mind as well that the UK will remain in the EU for two years from the date that article 50 is invoked. So, really, the status quo is here for the medium-term, leaving the door open for South Africans to invest heavily in the UK.

    A curiosity of South African investors is that when the Rand starts to tank you can’t find anyone willing to stay in the Republic. Six months ago, when “Nene-gate” rocked our economy and currency, every person headed straight for the exits – women and children be damned. Unfortunately, when the Rand shows strength we tend to remain inside our borders seemingly hoping to think the good times will never end. Six months ago money was flying out of South Africa, but now, with the GBP – ZAR 25% stronger than it was in December, we are not expecting thousands of investors to head for the doors into foreign markets like they did when they were in full-blown panic mode.

    This should not be the case, we know what kind of a country we live in, our currency is volatile and extremely sensitive to political risk- of which there is plenty. As such, when the Rand is strong it always a good idea to diversify your investments. 

    I am not saying you should divest from South Africa completely, rather you need to take advantage of these favourable conditions while you can.


    To transfer funds internationally or to get advice on structuring offshore investments send an email or give me a call +27 (0)21 657 2153.


    Disclaimer: The information in this article is intended as a guide only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issues. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult a financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

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