Rand falls victim to ‘Greek tragedy’ – at R8.50 on the cheaper side of fair value

Greece, which continues to grapple with its uncertain economic future in the Eurozone, is exerting undue influence on financial markets. Despite its relatively small economy, the country is boxing above its weight as the world waits for some kind of reso

As we have come to expect, the rand – as one of the most liquid emerging market currencies in the world – has not escaped unscathed. It is back to the highs of last December, unwinding all the gains it has made on the back of relatively good economic news this year. Over the last few days, the rand ranks second only to Poland as the worst performing emerging market currency. Over the slightly longer term, however, the rand has benefited from SA’s inclusion in the Citi World Government Bond Index, with deprecation close to that of the Australian dollar and a better performance than its Indian, Mexican, New Zealand, Brazilian and Polish counterparts.

Broadly, therefore, the rand is performing in line with commodity-producing countries, which is expected considering that gold and commodity prices have fallen quite aggressively over this period.

Inflation and interest rates outlook

As the rand nears the R8.50 level we expect investors to see value and we should see some stability returning. Of course, a spike in the currency remains a possibility for as long as European risks prevail. However, in our view, a rand trading at around R8.50 remains on the cheaper side of fair value and is not a bad level for our exports either. Encouragingly, the weakness has not been particularly inflationary given that the oil price has fallen off aggressively and the rand oil price remains unchanged on the month. The Rand is likely to remain between R8.50 and R7.50 against the US Dollar for the remainder of the year.

Against the backdrop of global uncertainty, where growth is going to remain under pressure, we believe the SARB will continue to be very concerned about the risk of a protracted period of sluggish growth. We expect GDP to come out at a disappointing 2.7% for 2012, but at least CPI should be back inside the SARB’s target band by third quarter of this year. We therefore don’t expect any upward move in interest rates for the rest of the year, and possibly for the next 12 months.

The SA bond market

South African bonds have been relatively well behaved over this period. Despite the fact that they have had a negative month, the sell-off has been more muted than the currency movement would have suggested. Bond yields are again starting to reach attractive levels of around 9% (30-year bond), considering cash remains anchored at 5.5%.

Our funds

We were conservatively positioned going into this move, as most of our bond exposure has been in high-yielding corporates and short-dated government bonds. We have started to slowly add longer-dated bonds to our portfolios into the sell-off and will continue to do so if yields continue to rise.

In terms of the Investec Diversified Income Fund, which is mandated to have up to 25% international exposure, we have just over 11% of the portfolio in offshore assets, which has buffered the portfolio well. We will look to reduce this at these weaker currency levels.