Offshore financial markets look a sorry sight at the moment with stock markets across Europe down 15% on average compared to their value eight years ago. Some properties in the US are more than 60% cheaper than a few years ago.
But what this means for the investor with an appetite for risk is opportunity. According to Paul Hansen, group director for retail investing at Stanlib, there are several signs of a turnaround.
“During the past month the rand has retraced 7,5% of its losses this year against the euro, and this is largely because the risk aversion dominating global markets for much of the past few months is beginning to ease. Investors have demonstrated they’re willing to take on more risk,” says Hansen.
If they’re willing to invest in South Africa, they must certainly be less risk averse because Hansen describes this country as one of the highest risk countries in the world at the moment.
“Our interest rates are double what they are in other emerging economies. The average nominal growth rate of emerging economies is 12%, with an average cost of money of 6%. That’s an attractive gap for investors. But our cost of money is currently 11,5% and still possibly rising, which is unattractive. Our prime rate is one of the highest in the world, plus we have the problem of our wide current account deficit,” says Hansen.
“This positions us as one of the highest risk countries for equity investors in the short-term and our currency has been the shock absorber. Consequently, we have lost 18% against the euro this year (was 29% by end March) — a situation reminiscent of the worst of the rand’s collapse in 2001,” he says.
Last year Coronation Fund Managers warned that the South African Reserve Bank was actually encouraging imported inflation through its policy of buying dollars and the sale of rands into the forex market.
Although other commodity-producing countries such as Canada and Australia saw their currencies appreciate against the dollar 13% and 21% respectively over the past two years, the rand has depreciated 30%.
That means Canada and Australia are paying just 24% and 11% more for a barrel of oil while SA is paying 84% more.
The bank’s practice of building United States dollar reserves is therefore working against its own policy of fighting inflation, according to Coronation.
The rand has lost more on a trade-weighted basis: for instance, it has lost 64% against the euro over the past two years and SA’s reserves are being built into a rapidly declining currency.
That may change. According to Michael Keenan, a currency strategist at the corporate and investment banking division of Standard Bank, the rand will begin to strengthen when the dollar recovers.
“The rand has weakened against the dollar by far less than it has on a trade-weighted basis, which means it is weakening partly because of concerns that are also plaguing the dollar. The implication is that it will strengthen when the dollar strengthens,” says Keenan.
He believes the rand will mostly hover between R7,70 and R8,20 to the dollar for the rest of the year, with occasional spikes out of that range.
The value of the currency has obvious implications for the attractiveness of offshore investing. Hansen says that a month ago he would not have sent money offshore, but at its current levels it is more attractive, though still risky.
“It still looks as though we have some strengthening potential,” says Hansen.