INVESTMENT NOTE THE ROCKETING RAND - Old Mutual Wealth
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INVESTMENT NOTE
29 JANUARY 2018
THE ROCKETING
RAND
DAVE MOHR & IZAK ODENDAAL,
OLD MUTUAL MULTI-MANAGERS29 JANUARY 2018
WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
priced in higher US rates long before they arrived (starting in 2011
already). In other words, even though the ECB and Bank of Japan are
currently accommodative, their next move is expected to be a tightening
of monetary policy.
THE ROCKETING It also doesn’t help that there is an element of dysfunction in US politics,
RAND
as last week’s brief government shutdown showed. In contrast, when
the dollar was surging, the dysfunction was in Europe (which was
struggling to cobble together a solution to the Greece crisis) and places
like Brazil. Last week Trump’s Treasury Secretary Steven Mnuchin said
that a weak dollar would be good for America to close its trade deficit
(he is not wrong, but his predecessors usually held the line that a strong
dollar was nevertheless preferable). But he was quickly contradicted
by his boss.
Amid much fanfare, the rand broke through to R12 to the US dollar
for the first time since May 2015. At first glance it appears to be a Finally, global investor risk appetite is high, as surging equity markets
continuation of the “Ramaphosa rally” as investors price in improved illustrate. When investors are fearful, they tend to look for safety in the
prospects for economic reform, policy certainty and corruption fighting. US (the dollar surged during the Global Financial Crisis). However,
However, as is mostly the case, the global backdrop is crucial. After when fear recedes, they look for opportunities outside the US. There
all, the rand has strengthened 4% against the US dollar this year, but is an element of feedback, since a weak dollar is also beneficial to
is flat against the euro and weaker against the pound. In other words, the giant multinationals listed in New York.
this is a weak dollar story, though the new positive sentiment towards Can the dollar weakness (and hence rand strength) persist? From a
South Africa certainly helps. Other emerging markets have also seen valuation point of view, the trade-weighted dollar is still above its long-
their currencies rally against the dollar. term average and therefore still has room to decline. Bullish investor
sentiment towards emerging markets is another support for the local
GREENBACK BACK TO EARTH
currency. If new leadership in government can follow through with
The dollar surged from 2011, as the US economy grew much faster
some quick-win reforms, the rand could hold its own. It is probably not
than its peers and markets anticipated interest rates rising from near-
overvalued against the dollar yet, and has a history of overshooting
zero levels. The first of these hikes by the US Federal Reserve came in
on the up (as it did on the way down).
December 2015. This was a few days after markets and politics
collided forcefully in South Africa when Finance Minister Nene was
IMPROVED INFLATION OUTLOOK
fired out of the blue, at the worst possible time in terms of global risk
What does the stronger rand mean for South Africa? For one thing, it
appetite. But since the Fed has started hiking (with five in total, taking
lowers the cost of imported items priced in dollars (less so for items
the funds rate to 1.50%) the dollar has declined, apart from a brief priced in euro, see chart 2). Therefore, it softens the blow of the higher
spike following the election of Donald Trump as US president. The oil price. After December’s petrol price jump, January saw a cut and
sell-off has accelerated since the start of the year. February is on track for another reduction based on the current average
Why is the dollar sinking, given that a country with strong economic over-recovery of 30 cents per litre.
growth and rising interest rates normally sees its currency appreciate? Consumer inflation in December rose slightly to 4.7% due to the petrol
Moreover, the other central banks – the European Central Bank (ECB) price hike. December petrol inflation was 14%, but should decline in
and the Bank of Japan – still have an extremely accommodative policy the coming months. Food inflation declined to 4.8%, while it was
stance with negative interest rates, which both reiterated last week. running as high as 11% at the start of the year. This is particularly
The Bank of Japan last week held steady on interest rates (-0.1%) and helpful for poor households, which spend most of their income on food.
its policy of buying bonds to keep the 10-year government bond yield The inflation rate for the poorest 10% of the population declined to
close to 0%. The ECB kept interest rates on hold and its bond-buying 1.6%. Wealthier households spend the largest part of their incomes
programme will remain in place until at least September with the aim on services. The inflation rate for the highest earning 10% was 4.9%
of getting Eurozone inflation higher. A strong euro – it hit $1.25 for in December. Insurance (including medical aid, short-term and life
the first time since December 2014 – works against the ECB’s aims cover) is a big driver of overall inflation. It has a 10% weight in the
by putting downward pressure on inflation and hurting the revenues CPI basket and increased by 8% year-on-year. The biggest item in the
from the Eurozone export machine. basket – actual and implied rent – saw lower inflation rates in December,
indicative of a weak housing market.
The explanation probably lies in the fact that it is expectations that
mostly drive currency markets, not necessarily current interest rate Core inflation – excluding volatile food and fuel prices – fell to 4.2%,
differentials (which are still massively in favour of the dollar). The market the lowest level since December 2011. The evidence of the strengthening
2WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
rand since early 2016 is visible in low inflation rates for clothing,
household appliances and new vehicles.
CHART 1:
TRADE-WEIGHTED US DOLLAR INDEX
Producer inflation ticked up to 5.2% due to higher petroleum prices. 110
Producer inflation was only 3.9%, excluding petroleum products, 105
showing that there is limited upward pressure in the inflation pipeline. 100
This means that the Reserve Bank could cut rates once or twice, once 95
the risk of the February Budget and Moody’s subsequent ratings decision 90
has passed. If the Budget delivers tax hikes as expected, it strengthens
85
the case for the Reserve Bank to lower interest rates to ease the pressure
80
on consumers. However, the Reserve Bank’s insistence on maintaining
75
relatively high real interest rates (around 2%) means deep cuts are Jan 11 Oct 11 Jul 12 Apr 13 Jan 14 Oct 14 Jul 15 Apr 16 Jan 17 Oct 17
unlikely. It is also increasingly focused on getting inflation to the mid- Source: Datastream
point of the 3% - 6% target range, rather than just below the upper-end.
A stronger rand is obviously negative for export earnings. Every dollar
earned abroad is now worth less. Fortunately, the prices of commodities
CHART 2:
– accounting for about half of export revenues – have been relatively RAND VERSUS MAJOR CURRENCIES OVER ONE YEAR,
buoyant, reaching new cycle highs. REBASED TO 100
120 South Africa Rand To US $ (WMR)
PORTFOLIO IMPACT OF THE RAND 115
South Africa Rand To UK £ (WMR)
MOVEMENTS South Africa Rand To Euro (WMR)
110
The stronger rand is clearly good for interest rate-sensitive assets, and
bonds have rallied 2.2% this month already. However, longer-dated 105
bond yields are still attractively high, above the average of the past 100
decade and well above inflation, offering prospects for decent real
95
returns.
90
The impact on equities and property is likely to be mixed. At an index
85
level, a strong rand is negative as the main indices (All Share, SWIX,
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Top 40) are dominated by rand hedges. But the rand is obviously not
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the only factor driving the local equity market. The prices of the big
Source: Datastream
non-resource rand hedges on the JSE will take their cue from global
equity markets, while mining companies will be influenced by commodity
prices. Domestically focused shares should benefit from the improved CHART 3:
interest rate outlook as well as the moderate economic recovery.
SOUTH AFRICAN INFLATION
At an index level, listed property on the JSE has seen a substantially 9
increased exposure to offshore earnings over ten years, from virtually
8
nothing to 40% (mostly in Europe). Three of the largest offshore property
7
companies (soon to be two, after a merger between Intu and Hammerson)
on the JSE are not in the benchmark index. They are, however, in the 6
investible universe of property fund managers and therefore most likely
5
in many investors’ portfolios. This pushes the total offshore exposure to
beyond 50%. Listed property had a torrid start to the year as the Resilient 4
stable of companies came under pressure. 3
Currency appreciation will reduce the rand value of dollar assets, such 2
Jan 13 Jun 13 Nov 13 Apr 14 Sep 14 Feb 15 Jul 15 Dec 15 May 16 Oct 16 Mar 17 Aug 17
as the 25% offshore exposure most balanced funds hold. But the dollar
values of these assets are still increasing and the rand will one day Headline Consumer Inflation % Producer Inflation For Final Manufactured Goods %
Core Consumer Inflation %
depreciate again, we just don’t know when. Therefore, now as ever,
Source: StatsSA
investors need to be patient. In the same way that overreacting when
the rand crashed was a bad idea, they need to avoid a knee-jerk
response to the currency’s newfound strength. It is important to remember
that local political developments cause short-term moves in the rand,
while global factors will shape its longer-term trajectory.
329 JANUARY 2018
WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
EQUITIES - GLOBAL
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
Global MSCI World US$ 2 234.0 1.22% 6.23% 6.23% 23.84%
United States S&P 500 US$ 2 873.0 2.24% 7.44% 7.44% 25.08%
Europe MSCI Europe US$ 1 915.0 1.65% 6.57% 6.57% 26.57%
Britain FTSE 100 US$ 10 871.0 1.57% 4.52% 4.52% 20.53%
Germany DAX US$ 1 555.0 0.91% 7.02% 7.05% 35.10%
Japan Nikkei 225 US$ 217.6 1.14% 7.71% 7.71% 28.93%
Emerging Markets MSCI Emerging Markets US$ 1 263.0 2.43% 9.07% 9.07% 37.73%
Brazil MSCI Brazil US$ 2 348.0 5.34% 16.07% 16.07% 25.76%
China MSCI China US$ 99.0 2.18% 11.90% 11.90% 57.51%
India MSCI India US$ 638.4 1.43% 4.48% 4.48% 36.70%
South Africa MSCI South Africa US$ 656.0 5.64% 8.43% 8.43% 36.38%
EQUITIES - SOUTH AFRICA
(TR UNLESS INDICATED OTHERWISE)
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
All Share (Capital Only) All Share (Capital Index) Rand 61 596.0 1.12% 3.51% 3.51% 15.34%
All Share All Share (Total Return) Rand 8 755.0 1.13% 3.61% 3.61% 18.74%
Top 40/Large Caps Top 40 Rand 7 735.0 0.87% 3.85% 3.85% 20.61%
Mid Caps Mid Cap Rand 17 345.0 2.84% 2.18% 2.18% 6.35%
Small Companies Small Cap Rand 21 506.0 1.74% 2.30% 2.30% 2.98%
Resources Resource 20 Rand 2 416.8 -1.45% 5.71% 5.71% 12.14%
Industrials Industrial 25 Rand 15 686.0 0.57% 3.77% 3.77% 22.89%
Financials Financial 15 Rand 9 945.0 4.38% 2.45% 2.45% 25.35%
Listed Property SA Listed Property Rand 2 335.9 2.72% -5.20% -5.20% 8.25%
FIXED INTEREST - GLOBAL
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
Global Government Bonds Citi Group WGBI US$ 965.7 0.76% 1.86% 1.86% 8.65%
FIXED INTEREST - SOUTH AFRICA
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
All Bond BESA ALBI Rand 600.4 0.79% 2.16% 2.16% 10.71%
Government Bonds BESA GOVI Rand 599.1 0.79% 2.18% 2.18% 10.90%
Corporate Bonds SB JSE Credit Indices Rand 127.6 0.31% 1.10% 1.10% -12.76%
Inflation Linked Bonds BESA CILI Rand 250.0 -0.42% -1.04% -1.04% 0.28%
Cash STEFI Composite Rand 385.0 0.14% 0.54% 0.54% 7.51%
COMMODITIES
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
Brent Crude Oil Brent Crude ICE US$ 70.5 2.60% 5.25% 5.25% 25.93%
Gold Gold Spot US$ 1 356.0 1.50% 4.55% 4.55% 14.05%
Platinum Platinum Spot US$ 1 019.0 0.59% 9.57% 9.57% 4.30%
CURRENCIES
DESCRIPTION INDEX CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR
ZAR/Dollar ZAR/USD Rand 11.89 2.86% 4.09% 4.12% 12.19%
ZAR/Pound ZAR/GBP Rand 16.86 0.47% -0.71% -0.71% -0.36%
ZAR/Euro ZAR/EUR Rand 14.78 1.13% 0.52% 0.52% -3.60%
Dollar/Euro USD/EUR US$ 1.24 -1.61% -3.15% -3.15% -13.71%
Dollar/Pound USD/GBP US$ 1.42 -2.38% -4.81% -4.81% -11.15%
Dollar/Yen USD/JPY US$ 0.01 -1.86% -3.62% -3.62% -5.53%
Source: I-Net, figures as at 26 January 2018
429 JANUARY 2018
WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
THE WEEK AHEAD
SOUTH AFRICA
• Credit growth
• Trade balance
• Fiscal balance
• Absa Manufacturing Purchasing Managers’ Index
• New vehicle sales
US
• Personal income and spending
• House price index
• Quarterly employment cost index
• ISM Manufacturing Index
• Non-farm payrolls and unemployment rate
EUROPE
• Eurozone economic sentiment
• Eurozone GDP growth
• Eurozone unemployment rate
• Eurozone inflation
JAPAN
• Unemployment rate
• Retail sales
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