Investec Asset Management on Friday quelled optimism over the recent surge in the rand’s value by forecasting a 10% depreciation per annum over the next two years.
John Stopford, Investec’s portfolio manager said although the rand had unwound its losses of late last year, it remained a fundamentally risky currency — as demonstrated by its depreciation and subsequent appreciation over the last year.
”The balance of payments is still reliant on short-term capital flows and while some structural issues — such as the Net Open Forward Position — have been addressed, others such as the need for exchange controls, continue to highlight fundamental weaknesses,” he said.
Stopford also maintained that taking into account recent inflation differentials, the rand was currently neither overvalued nor undervalued. But the differentials implied the rand would, at the very least, depreciate nominally over time, especially if competitiveness was to be maintained, he said.
Stopford, who conceded the rand had made a ”spectacular” comeback of late, said that many of the roots of its rebound could be found in last year’s December crisis.
”Following its collapse, the currency was very oversold and extremely undervalued, which made imports and foreign travel expensive but encouraged the export sector and tourism.
”The depreciation-induced acceleration in inflation led to a sharp rise in domestic interest rates at a time when global interest rates were falling. This attracted speculators to hold the currency for its ‘carry’,” he said.
Stopford, however, admitted that there were also reasons for the rand’s surge that were not related to the last year’s December downfall.
”In particular, growth has held up very well despite tighter monetary policy and disappointing global demand. In general, investors have become disillusioned with the major economies and their currencies and have sought better returns elsewhere.
”Additional support has come from the positive price performance of commodities, especially gold and platinum, as well as South Africa’s geographic remoteness at a time of global tension,” he said.
There have even been technicals that suggest the rand could appreciate further in the near-term, with targets of between R8,80, R8,50 and even R8,00 to the dollar coming into focus, he said.
That said, Stopford maintained the currency was clearly overbought and that much of the good news was because of the rand’s price.
”Overall, Investec Asset Management views the current strength of the rand as corrective and has yet to see convincing evidence that the fundamentals have turned around more permanently.
”Further near-term strength is nonetheless possible and a period of relative stability is quite likely judging from other emerging market post-crisis periods.
”Ultimately though, we expect the rand to weaken moderately in real terms over the next two years and cannot rule out the possibility of another currency collapse if the global cycle turns down,” Stopford concluded. – Sapa