As many of you may know, the Rand has depreciated against the US Dollar since the outbreak of the COVID-19 pandemic.
Below is a readily available graph online from www.XE.com to show you the drop in value.
From 1 February 2020 until 6 April 2020, the Rand has depreciated by approximately 26%.
The Rand has also depreciated by similar values against the EURO and the UK Pound.
Why has this sudden depreciation happened? Is the COVID-19 the only reason for this?
When the COVID pandemic was first fully digested by the world, the reaction from a large percentage of the investment community was to do everything they could to get their investments into cash (particularly US Dollar) so that they could either reinvest into “safer” assets or use to help their investors with the predicted shortfall in liquidity. As with every previous crisis, the reaction by the investment community has been panicked and very emotional.
South African assets are seen as riskier assets due to our economy falling into the label of an “emerging market” (EM). Other major countries in this bracket are Brazil, Russia, Turkey and even China. When the rush to sell out of risky assets occurred, we saw many global investors sell EM assets first, which did not spare us. We further have not helped ourselves by Moddy’s recent downgrade to junk, but the overwhelming drive of the exchange rate depreciation has been the sale of risk assets by the global investment community.
How does this affect me as a South African citizen and client of Chartered Wealth Solutions?
As a South African, the first thing that this does is make overseas travel that much more expensive!
From a local living point of view, the exchange rate can have some blanket effects on you as some goods that we purchase are imported and priced in foreign currency. By far the biggest good is oil and directly, the price of petrol.
We have been extremely fortunate that as this exchange rate has been depreciating, the oil price has hit historic lows. This has countered any increase we would have ordinarily seen due to the weakening Rand. We may not be driving nearly as much as we would during this lockdown but goods that we purchase still need to make it to the shops and our homes which entail transport. These transport costs will remain stable for a while.
From an investment point of view, all local investment strategies that our clients hold have meaningful direct and indirect exposure to foreign currency. The direct offshore exposure is through fund managers who directly invest your money into foreign shares and bonds. This will proportionately increase your investment when the Rand depreciates, assuming the underlying asset at least keeps its same value.
The indirect offshore exposure is through the South African shares you hold as the vast majority of companies have diversified their operations offshore. This means that their earnings are in foreign currency and increase the value of the company when the Rand depreciates. Depending on your personalised portfolio, the South African companies you invest in could have a combined offshore earnings percentage of up to 70%.
We are very comfortable and confident that the asset consultant that looks after your Financial Plan strategy is very well positioned and equipped to make sure you have the right mix of local and offshore assets. By taking the risk of the exchange rate into account, they are always testing to make sure that your portfolios are positioned as best they can be to deliver your investment strategy.
Please speak to your RetiremeantTM Specialist if you have anything further you want to discuss on this topic!