The real value of the rand

New analytical data conducted by financial services company AlphaWealth moves to explain the objective value of the rand.

Investec chief economist Annabel Bishop notes that that rand is a highly liquid, heavily traded currency which can see daily turnover of around US$25 billion, mainly foreign activity in the domestic currency as it is seen as a proxy for emerging market currencies.

Andrew Flavell, wealth manager at AlphaWealth, said that there are a number of factors to consider in order to present the volatile emerging market currency in a more objective light.

He highlighted that there have been five years of headwinds for emerging markets. “In fact there has been a perfect storm for emerging markets with commodity backed economies.”

“A Eurozone slowdown, Chinese GDP contraction, plummeting commodity prices, government instability, foreign capital outflow and a rising interest rate environment have made it very hard to make money in emerging market,” Flavell said.

The good news, however, is that South Africa is not alone. Flavell said that South Africa’s peers, including Russia, Zambia and Brazil, have all been under pressure.

“So while some may dub this the ‘Zuma Effect’ it really is a macro theme.”

AlphaWealth said that rather than using one economic theory the table below reflects the average implied value of the rand using four economic theories:

January 2016 Implied USD/ZAR
Interest rate differential R14.16
Cash rate differential R14.51
Inflation rate differential R9.55
Big Mac index R5.69
Fair value given average R10.975
Current spot R15.24
Discount / (Premium) 28%

AlphaWealth said that, at current levels, we are priced in line with the Russian Rouble.

“Whether this is fair or not, really depends on one’s view of the GDP growth forecasts, the ability of the government to be fiscally prudent, the commodity cycle, the carry trade, amplitude of the interest rate cycle and foreign investment,” Flavell said.

Since the liquid trading of the ZAR, the currency has depreciated on average by 7.26% per annum.

“This is an important figure given that the depreciation has not been very far from the inherent depreciation that inflation and cost of debt naturally introduce to the currency,” said Flavell.

“These factors indicate that while it seems crazy that the USD/ZAR is at R15.24, it can be explained.”

Given that the listed investable universe in South Africa is less than 0.03% of the global market capitalisation, the analyst said that one needs to consider offshore investing more from a geographic stand point as opposed to a currency call.

AlphaWealth said that forecasting the rand over the short term is impossible. While now it is oversold from a trader’s perspective, it can stay oversold for a long time.

“Conversely, big money managers globally can flick the ‘carry trade switch’ back on and the ZAR could easily move to fair value,” Flavell said.

AlphaWealth said that a survey among the managers that make up its equity hedge strategy locally put the rand at between R15 – R16 come year end.

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The real value of the rand