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- Allan Gray says it usually repatriates US dollars when the Rand weakens rapidly, to buy the local currency.
- But it's not doing so this time because it believes the currency will be weaker for longer.
- Old Mutual also believes the Rand has priced in a global crisis, and so any upside surprises would be good for it.
- For more financial news, go to the News24 Business front page.
The South African Rand has consistently traded at levels above R18/$ for more than a month now. After hitting its weakest level to date of R19.91/$ on Friday, many analysts agree it's oversold. But unlike in the past, when the rapid depreciation would spur traders to pile up on the local currency, they are divided about its trajectory as an investment case.
Allan Gray's portfolio manager, Sean Munsie, said that usually when the Rand has weakened this much, the investment firm would be repatriating dollars to buy it, but not this time around.
"In the past three weeks, we haven't been doing that. The dynamics have changed. The risks have increased, and we think the next six months could be tough," said Munsie.
The Rand has seen large losses in the past - depreciating by 28% in nominal terms against the US dollar in 1998 and by 26% in the last quarter of 2001. The Rand has lost 26% of its value against the dollar in the 12 months to the end of May.
During the previous Rand crashes, the South African Reserve Bank hiked the interest rates rapidly and even intervened in the foreign exchange market, losing a lot of money in the process. It raised interest rates by around 700 basis points during the 1998 crisis.
The Johannesburg Stock Exchange all-share index lost a third of its value between May and August that year, and government bond yields shot up to nearly 20%. But the South African economy had been growing, and still expanded by 0.5% during the 1998 crisis and by 2.7% in 2011.
But this time, the Rand crisis is mixed with an ailing economy, and flat economic growth since 2019.
"If you strip out that inflationary effect, where the Rand is now is not too dissimilar from 2001, and also during Nenegate. All those times, we were quite aggressively repatriating dollars and converting them to Rands," said Munsie.
While he believes the Rand is oversold, its weakness will land SA with higher inflation levels than the developed world, which wasn't the case last year.
The Rand is at crisis levels
Old Mutual Investment Group's chief investment officer Siboniso Nxumalo says not only is the Rand oversold, but he believes it has already priced in a US recession. Until recently, many analysts predicted that the world's largest economy wouldn't avoid a recession, and according to a recent CEO confidence report by the US think tank, The Conference Board, 93% of CEOs were also preparing for that contraction. But the US job market report for May has surprised on the upside, with 339 000 new jobs created.
"Whenever there is a US recession, the Rand tends to crash. Also, where the Rand is now is where it was during the [past three US recessions]. So, the Rand is pricing in a very negative scenario. The Rand is already at crisis levels," he said.
If the US avoids a recession, there could be room for the local currency to bounce back
Citadel Global believes that given where it is now, there is a bias for a strengthening of the currency in place.
Old Mutual Wealth Investment strategist, Izak Odendaal, pointed out that already the first sign of easing global risk outlook has boosted the Rand.
"The Rand rallied a bit after Congress lifted the debt ceiling deal. The last thing the struggling local currency needed was a big global risk event," he wrote.
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Jason Swartz, a portfolio manager at Old Mutual Investment Group, expects the Rand to strengthen to levels between R17/$ and R18/$ only next year because of all the odds against it.
"The Rand has been a whipping boy for emerging market investors that want to reduce their emerging market exposure," said Swartz.
Swartz believes that fair value modelling isn't working on the rand anymore.
For instance, some models, like the power purchasing parity, suggest that the local currency should be trading around R13/$. Allan Gray believes its fair value is around R15/$ to R16/$, but doesn't expect it to return to these levels soon. So, when the currency hit R17/$, Old Mutual Investment Group and other local investment managers believed it was already oversold. Yet, it still depreciated to nearly R20/$.
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