Most of the factors leading to a structurally weak rand in the 1996 to 2001 period were now a matter of history, according to Investec Asset Management’s portfolio manager Michael Power at a presentation on Investec’s view of the global economy.
Power believes the rand will be less volatile than in the past because “the structural capital rebalancing from a very restrictive exchange control environment prior to 1995 has now taken place”.
“There will be no more primary offshore listings. Most institutions are near their 15% offshore limit. Most personal allowances are already offshore, while South African companies are now wary about foreign acquisitions. In addition, the Reserve Bank’s Net Open Forward Position (NOFP) was closed out in May 2003 after being in excess of $23-billion in 1998.
“In all we have seen more than R200-billion flow out of South Africa over the past few years as the rebalancing took place. In future, capital flows will be more orderly and less volatile, which means that the rand in turn will be less volatile,” Power said.
The consequence of this for fund managers was that they could not rely on a weak rand to generate profits, but instead had to look for the companies that to a large extent controlled their own destinies.
“That means we look for companies capable of covering their cost of capital, have pricing power, who each year try to remove expenses from their cost base, by amongst others looking at industry best practice worldwide, and who believe their business model should be subject to a permanent revolution.
Power noted that the current decline in the US dollar is an epochal event.
“The decision made at the G-7 meeting in Dubai last week to weaken the dollar was a watershed in the rapidly unfolding, some would say unravelling, global economy,” he said.
“It is an epochal event, and it should result in change in the mindset of everybody, especially those people who view an ever-weakening rand as an immutable law of economics.
“Post 9/11, we have entered a dangerous period not just in global geo-politics, but also geo-economics. The metric of value long central to global commerce — the US dollar — is no longer the True North about which the world of finance can easily navigate.
“This means that the rand may not be the ‘weak’ currency it generally has been since 1995, at least against the dollar. It may not be as volatile, nor as guilty of infecting the country with inflation as it has been.
It also means that monetary policy in an environment where the dollar is weakening should be different to one where the dollar is strengthening.
“If the external price of money is higher — ‘the exchange rate is stronger’ then the internal price of money could be correspondingly lower — ‘interest rates would be lower’,” Power said.
In Canada, which is also a small open economy, the rule of thumb for the monetary policy conditions indicator is that a 3% change in the exchange rate should be counteracted by a 1% change in the interest rates.
“We also look to companies that ‘Go East Young Man’, as we believe that China will supplant America as the next economic superpower over the next twenty years,” Power concluded. – I-Net Bridge