Peter Brooke 00:00

Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 21 of 2023, and I want to talk about the Rand. It's currently at 19.25 to the US Dollar, and 20.8 to the Euro. And we've been one of the weakest currencies in the world over the last year, hanging out with the Argentinian Peso, the Russian Ruble, and the Turkish Lira. This has caused dismay amongst South Africans, who see the Rand as a symbol of virility, and things are clearly not going so well.

Peter Brooke 00:32

I prefer to see it as an asset, which we buy and sell depending on how it fits into our philosophy of theme and price, and then linking this to the client outcome we're trying to deliver. For instance, in the Old Mutual Flexible Fund, which I managed, we had 36% invested offshore in April 2020, when South Africa was downgraded to junk status. Roughly a year later, I bought back to take advantage of cheap prices and had only 26% invested offshore.

Those investments we bought delivered good returns, and we saw better opportunities overseas, while at the same time we saw clear problems in South Africa. Therefore, we took money offshore, and we're now at 42% invested overseas, just below the maximum 45% limit. And this doesn't account for the Rand hit shares like Anheuser-Busch, Bidcorp, and Richemont, which we also own in the fund. Now, if I had known the Rand would weaken by 36% against the Mexican Peso in the last year, I would have taken more offshore and bought the Mexican equity market. But I didn't know because I don't know the future. All we can do is follow our process.

Peter Brooke 01:41

On that basis, the Rand theme had deteriorated, as the current account moved out of surplus and into deficit. At the same time, South African shares got more expensive and global shares outside the US had got cheaper, justifying selling the SA shares is where we cut by more than 20% a fund and buying offshore assets.

So, the key question is what does our process say now? Firstly, I would say the theme is negative. Our exports are under pressure, lack of production due to Eskom, lack of transport due to Transnet, and lack of demand and weaker prices due to a slowing global economy. On the other side of the current account, imports are accelerating as we buy diesel, generators, and solar panels. The other theme driver is the capital account. And here we have outflows as foreigners dump our bonds, while local pension funds move up towards the 45% limit. And many commentators now advise moving 100% offshore.

Peter Brooke 02:47

Outside of theme, we also look at price. And that's half of the equation, and we are now cheap. This leaves us a little bit stuck. Bad theme and cheap price is a value trap. However, the beauty of a free floating currency is it acts as a shock absorber. The lower price fixes the current account as exports increase and imports decrease. This response will be quick where it is optional, such as canceling the family overseas holiday or slow where it is not, where you have to buy a generator to keep in business. However, time starts to move to being on your side. In this case, on the side of the Rand. The longer the currency stays weak, and the more solar panels we have imported, the closer to solving the problem.

Now, if you think of the current account, like the earnings of a company, then we can think of the capital account like the price earnings or the multiple. This is much harder to guess as it is driven by sentiment. The good news is foreigners have sold 10 and a half billion dollars’ worth of South African government bonds this year, weakening the price and moving them cheaper onto a yield of 12%. The bad news is they still own 26% of the bond market. Soc, they can keep selling. Although from their perspective, the higher the yield, the harder it is to sell. And this is why I would never give a point forecast on the Rand, as we would have to guess what these bondholders will do.

What we do know is the more they sell, the less they have helping the current account through lower interest payments. When the current account and the capital account start to improve, we will move into improving theme and cheap price, which is buy lots. Now, we're facing a global recession and having an election next year. So, I don't think we're there yet. But the probabilities are steadily improving. Bad news eventually becomes good news. And this is driven by the price changes we're currently seeing now.

I hope you enjoyed this perspective. Until next week.