Currency war paves the way for stronger rand, low inflation and interest rates

The South African currency might strengthen to as much as R6,20 per US dollar in the next 12 to 18 months amidst the currency war between America and China. This will locally pave the way for considerably lower inflation and lower interest rates, PSG Konsult investment economist, Dawie Klopper, said today at an investment seminar by the group’s Pretoria East office.

The currency currently maintains a level of just under R7 per dollar, which indicates a possible strengthening of more than 10%.

Whilst the sturdy rand will exert further pressure on local exporters, it can however result in inflation dropping to even below the 3% level. This will pave the way for substantial decreases in local interest rates. As a result, stock prices will receive a boost, while commodity prices will also benefit from the “war” between the two superpowers.

“The struggle comprises mainly of the USA intent on reducing its debt levels by lowering the purchasing power of the dollar - that is, by allowing inflation to escalate. Against this, China does not want to strengthen its currency simply to help America. China expects America to become more competitive itself by lowering prices.

“The expectation is that America will eventually win. This is a struggle between inflation and deflation, with China trying to force deflation on the rest of the world and America that wants inflation,” Klopper said.

Meanwhile, a stronger South African currency will result in a further decrease of inflation, which will put the SA Reserve Bank in a position to lower interest rates. Should the war between America and China continue and intensify, there could be enough space to lower local interest rates considerably by between 2 to 3 percentage points.

South Africa currently has four options to stop the rand from strengthening. Of these, the lowering of interest rates to make investments in this country less attractive and the abolishing of exchange control are the best. The latter however cannot solely be relied upon. The other two options, namely the imposing of tax on capital entering the country and the purchase of American dollars, would not be good choices.

“Lower interest rates will naturally help the South African consumer to clear debt, provided it is managed correctly, and creates investment opportunities,” Klopper said.

There is however the issue of local exporters who are under pressure as a result of the strong rand. While higher commodity prices will to some degree help to soften the impact thereof, it will eventually force exporters to be more efficient.

“It is true that the South African balance of payments cannot support a stronger rand, but as America gains the upper hand in the currency war, there should be a correction in this regard,” said Klopper.

Investors who want to invest overseas must however not wait for the South African currency to strengthen to around R6,20. There are already some multinational consumer stocks which in rand terms are dirt cheap.

PSG Konsult portfolio manager, Chris Wehmeyer, said there are seven multinational companies to look at for good exposure in emerging markets. They are British American Tobacco, Coca Cola, Philip Morris, Unilever, Nestlé, Novartis and Reckitt Benckiser.

Of these, attention should especially be given to Nestlé, the world’s largest food producer, and Unilever, which is the world’s third-largest manufacturer of fast-moving consumer goods. It is because these two multinational groups in particular will benefit from the awakening Eastern markets, where strong growth in the middle income group is expected.