Does the exchange rate really matter when investing offshore for the longer term?

Sangeeth Sewnath, Deputy Managing Director at Ninety One

Paul Hutchinson, Sales Manager at Ninety One

Many SA investors are obsessed with the exchange rate when making an offshore investment. Here’s why it’s less of a factor than you think.

While investors accept that there are compelling reasons for investing offshore: diversification benefits; access to asset classes, industries and companies not available in South Africa; reduced emerging market and SA-specific risk; and maintenance of ‘hard’ currency spending power, they tend to spend an inordinate amount of time trying to call the direction of the currency.

Over the longer term, the performance of the rand contributes to an offshore investment’s overall rand return. Rand depreciation adds to the offshore investment’s total return calculated in rands, and rand appreciation detracts from the overall return. Figure 1 shows that over rolling 5-year periods, the rand has experienced periods of both depreciation (81% of the time) and appreciation (only 19% of the time) against the US dollar. On average, however, the rand has depreciated by approximately 6% per annum over rolling 5-year periods, over the last 22 years.

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