Now is the time to invest offshore, but keep equity exposure low

I have enclosed below the long-term rand /US$ currency chart to depict why we are advising clients to exchange rands into US$ at the current ‘apparent’ optimum buying level of 6.70 to theUS$. We believe that on a 3-4 year view looking forward, the  rand /$ exchange rate (which is historically cyclical) will weaken as interest rates start to rise in the first world countries offshore, or alternatively, if there is another ‘global shock’ to the world financial markets (sovereign debt default in Europe or US). Assuming a global shock were to occur, this will cause the ‘risk off’ trade to go to extreme levels like it did in 2008/2009 and cause a ‘bottleneck’ by the foreigners to exit our emerging market investment space (bond & equity markets). This will cause the rand to spike (to the top red line on the graph) as it has done in the past – this risk off trade has happened twice in the last 10 years and on both occasions the move when it happens is rather vicious as depicted by the chart below.

See graphs HERE

The chart depicts the bottom red parallel trend line as being the ‘optimum’ time to sell rands and buy US historically; the top red parallel trend line depicts the exact opposite strategy (i.e. switch back & sell your US$ and buy back into rands to book your capital gain profit on the currency). The red headed arrows also depict the optimum times in history to have bought US$ with ZAR.

The following chart below is the long term chart of the SP 500  index (which is the biggest share/equity index in the USA)  and reflects that each time the rand has weakened dramatically in the last 10 years (this has happened twice) the USA index for shares and global shares have fallen dramatically in unison to rand weakness. Thus, the correlation between rand weakness to theUS$ currency and the fall in US shares (and consequentially most global shares) is an almost 100% correlation over the last 10 years to date due to the “risk on / risk off’ strategy” that the big players are currently following on their proprietary trading desks and client trading portfolios.  

We believe the same ‘video tape’ will be played out over the next 2-4 years with the rand moving back to the top red line (around 10.00 – 11.00 to the US$) and the SP500 having the potential to drop back to the bottom trend line in the below chart. This we believe would be as a result of the global sovereign debt issues escalating over the next 3 years.  

Contrary to most asset management institutions which are suggesting ‘taking profit’ on their South African shares and taking the funds offshore by investing into foreign shares/equities – we believe these assets should be held rather in cash offshore and not shares.   We thus agree with the first part of the investment strategy (exchanging rands into US$ at current levels) and take a view that the rand is very overvalued at the moment due to offshore interest rate  being at extremely low levels that will eventually change and move higher. However, we do believe the more prudent strategy will be to not take the proverbial “double bet” of US$ and shares BUT to rather take a “single bet” – just in the currency exchange. The last two times theUS$ / ZAR currency gain has been diluted substantially by the fall in the various global equity components offshore thus neutralising the investment strategy to a large extent.   

The above two charts when compared and read against each other along the date lines on the bottom axis  – depict that over the last 10 years the correct investment strategy historically when exchanging rands for US$ at the optimum exchange levels (2000/2001 and 2007/2008) was to hold cash and not global shares with the US$’s purchased. 

We believe that the same investment strategy should be followed for the period 2011 – 2014. This is not only based on technical and cyclical analysis: history and correlations over the last 10 years, but on the global economic fundamentals (sovereign debt issues) which suggest that theUS$ cash strategy for the next three years will out-perform over US$ shares. If the rand/$ does increase from R6.70 back to the top red line (around R11.00) by mid 2014, an investor sitting with US$ cash for that period will achieve a return of approximately 64% on the currency gain in rands. This equates to an annualised return of 21.39% p.a. with no ‘equity dilution risk’ that has historically caused this investment strategy to return substantially less if you were in shares. 

There are various unit trust funds that are designed to accommodate the above investment strategy view over the next three years. Please feel free to contact us for a personal consultation in this regard as we sincerely believe that this may be the best return made over the next three years for South African investors. 

There are no guarantees to the above investment strategy but the cyclical, technical and fundamental strategies suggest it could well be correct. It is only the current valuation based argument that is suggesting that the SP500 shares and global shares will not drop when the rand weakens. We believe that the ‘sovereign debt risk’ issue will continue to escalate substantially over the next 3 years and overtake the valuation based (PE Ratio) argument for global shares and that this will cause shares to under perform significantly (back to single digit P/E multiple levels overseas by 2014).   Time will tell.

Rod Low – Director of  (

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