The depreciating Rand and your portfolio

By Mike Wood, director at Apio Group

Rand hedge shares and offshore investments are popular among South Africans concerned about the direction in which the currency has been heading. But, should investors be overly concerned about the currency when allocating assets?

There’s a simple saying when it comes to investing: Don’t try and time the market, rather spend time in the market. This is extremely important when offshore investing is taken into consideration.

Apio discusses Rand depreciation

Most people do not think about exchange rates until it is time to travel, import or transfer funds internationally. This is because in our daily lives we generally only deal with our local currency. Unfortunately, the value of our volatile Rand disrupts our daily lives more than you know. A depreciating Rand has several effects on South Africans and can affect inflation, return on investments and general quality of life.

The performance of the Rand affects your investment returns and your wealth manager should be cognisant of when he/she allocates money offshore for a rand denominated fund. This is important because, as offshore investments assist in portfolio diversification, the volatility of the rand can introduce volatility in the investments’ performance in the shorter term. For most portfolio managers, valuation remains the most important factor but understanding the currency risks when offshore assets are introduced into an investment is important.

Factors currently affecting the Rand

The risk-on risk-off environment has played a role in the rand’s devaluation to a degree but the depreciation of the rand can mainly be attributed to local government policy, labour unrest as well as a deterioration of the structural factors of the economy. These include budget deficits, trade balance and debt to GDP levels and recently the land expropriation without compensation issue. A combination of these factors has led to the manifestation of negative sentiment and when one includes the noise from the US and China with on-going Trade Wars etc, this creates a ripple effect for the worlds’ most volatile currency: The South African Rand

A compelling case for investing offshore

Given the diversification benefits, reduced emerging market and currency risk, and maintenance of ‘hard’ currency spending power, investors are regularly reminded of the wisdom of investing offshore and not adopting an investment strategy that focuses only on South African assets. However, a long-term view is required to fully benefit from offshore assets’ return potential. While the case for investing offshore is compelling, it is important to consider where the return from an international investment could come from the exchange rate and/or the underlying foreign investment.

In summary

  • The exchange rate can have a significant impact on the investment return of a foreign investment over shorter time horizons.
  • We believe investors need to take a longer-term view and look past the shorter-term movements of the currency.
  • Investors’ personal circumstances, risk profile and longer-term financial planning objectives are all important factors to consider when investing offshore.

We believe that when investing in international assets, investors need to take a longer-term view and look past the shorter-term movements of the currency. However, this is often more difficult said than done, and highlights the benefits of partnering with a top wealth manager who can assist investors with building and managing a bespoke portfolio while encouraging the investors in staying the course.

All information provided is product related and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long-term investments and the managers give no guarantee with respect to the capital or the return of the fund. Apio Wealth (Pty) Ltd is an Authorised FSP, No.47213