Troubled times for the Rand – What should South African investors do?
Written by Carl Turner on October 27, 2015.
The South African Rand is having a tough time lately having hit an all-time low against the US dollar in August of this year. The currency has been in the struggling to keep pace for some time. Over the past five years it has lost 99% of its value against the US dollar with $1 worth ZAR13.63 at the time of writing.
The reasons for the Rand’s woes are quite clear. The South African economy’s reliance on the sale of commodities has meant that it has been hit particularly hard by the situation in China, its biggest trading partner. As the Chinese economy has suffered demand for South African raw materials has tanked and there is no indication that the situation will improve in the short term. South Africa’s economic problems have been exacerbated by instability in the labour market with widespread unrest in the mining industry and other key industries and electricity outages caused by poor infrastructure. South Africa also faces the same issues as many other struggling world economies at the present time – low consumer confidence, reduced government spending and falling interest rates.
Various analysts and organisations are predicting a far from rosy outlook for South Africa over the coming months. First off, the World Bank cut its own forecasts for the country’s gross domestic product (GDP) citing falling commodity prices, a volatile rand and poor consumer and business sentiment. Then the International Monetary Fund (IMF) slashed growth estimates for 2015 from 2% to 1.4% and for 2016 from 2.1% to 1.3%. Finally the South African Chamber of Commerce and Industry (SACCI), which revealed that business confidence reached a 22-year low last month in September.
None of this will come as good news for the 25% of the population who are unemployed (although in reality experts think the actual figure could be as high as 40%). Nor will it please South African business owners who are struggling with the lack of demand.
As for the Rand it is likely to fall still further against the US dollar, which is predicted to strengthen in the next few months as analysts expect both growth in the US economy and finally - a rise in interest rates by Federal Reserve before the end of the year. Investors are likely to shift funds from South Africa as US bonds have rallied and have become a more attractive prospect.
The only real question mark is just how far the Rand will fall. The Dutch investment bank ABN Amro are predicting it to drop to 13.50 against the dollar by the end of 2015 before recovering slightly in the first quarter of 2016 but none of us have a crystal ball.
Faced with these bleak prospects, South African investors will be wondering where to invest their money. In the current volatile market where inflation is a threat, Rand bank deposits are certainly not the way to go. The key to riding out these troubled times is diversification. A portfolio which is diversified across different asset classes as well as different geographical areas is in fact, key to successful investing at all times but especially in times of economic turmoil. To make life easier, there is a huge choice of diversified funds to choose from to suit all investors from the most conservative to the more adventurous.