From strength to strength

To date we have seen the rand appreciate substantially, but what does this mean for investors and how does it impact on their retirement fund portfolio?

“Understanding factors driving the strengthening of the rand will assist in providing answers to how investors should react to the currency movement,” says Evelyn Doubell at Investment Solutions

The main reasons for the rand/dollar appreciation are global factors such as:

* The weak dollar - the US favours a weaker dollar because it helps them to resolve their trade deficit and stimulate economic growth.

* The global search for yield - developing markets' interest rates are very low. South Africa's interests rates are significantly higher than the USA even with the 5.5% rate cuts we had in 2003.

* Increased global commodity prices - due to the global economic recovery since quarter 2 last year commodity prices have increased. This has led to appreciation of most resources based currencies such as South Africa, Australia and Canada.

Taking into consideration global factors impacting on the Rand, one would expect the rand to strengthen further, however domestic factors are changing continually and are becoming less favourable for the rand:

* Declining interest rates

* South Africa's current account has weakened as a result of the strong rand.

* Domestic economic growth - a sharp slow down in the mining and manufacturing sectors emphasises the dependability of South Africa as an exporter to have a weaker currency.

The big question for investors is "what do with their nest egg?"

Many investors already have a portion of their funds exposed to foreign currencies.

They need to consider how well their portfolio is diversified across asset classes as well as foreign and local funds to meet their needs.

A younger investor with a 20-year or more time horizon is not constrained by liquidity needs and can afford to have a bigger exposure to offshore funds in their portfolios.

Investors who are closer to retirement should place greater emphasis on their liquidity needs. Their liabilities are in rand terms and they should have enough of their portfolio in local funds to meet these needs.

Important guidelines for the private investor are:

* Stick to your long term goals

* Maintain a diversified mix of asset classes with exposure to different markets

* Be weary of selling your global assets at such low levels

* If you do not have any offshore exposure, current rand strength brings opportunity for this.