So after some pretty bleak GDP numbers yesterday our beloved South African Rand took another beating after the SA economy slipped into a technical recession after two quarters of negative GDP growth. If I had to ascribe the ZAR to a character it would be similar to that of Mike Tyson, the man has taken a beating in more ways than one. Blue eyes, broken ribs and bloody noses.
But he keeps getting back up. He was the youngest boxer to win a heavyweight title, he was the first heavyweight boxer to simultaneously hold the WBA, WBC and IBF titles (similar to the strength we have seen in the Rand from December 2015 to December 2017). And then it all came crashing down, rape convictions and prison sentences,(emerging market sell off thanks to Turkey earlier this year), but he got up again. He engaged in a series of comeback fights and won the WBC and WBA titles (so too will the ZAR). Tyson joined Floyd Patterson, Muhammad Ali, Tim Witherspoon, Evander Holyfield and George Foreman as the only men in boxing history to have regained a heavyweight championship after having lost it. (Lets hope the Rand can come back again).
As South Africans we all feel the effects of a weakening ZAR, all imported items cost more. The simplest way to understand this contagion effect is to look at the Petrol price. If we assume the dollar oil price remains unchanged but the ZAR losses ground, that translates to a higher ZAR petrol price, this then translates to higher transport costs of EVERYTHING, which ultimately means the goods we buy will cost more and when things cost more today than yesterday it means inflation rises. When inflation rises it generally means interest rates will rise, which means your debt costs more and you have less money to spend on the things you like but don’t necessarily need, less disposable income and that means no growth and so the negativity spreads.
We – You and me cannot do anything about the above scenario playing out, it’s beyond our control and we unfortunately are takers of a weak ZAR. We do however feel the need to talk about a weak ZAR and we do feel the need to talk about the need to do something in our personal capacities about a weak ZAR, but what and why? Well, our mates at the braai have just diversified into hard currency Dollars and they bought theirs at R12/$1, so we better do the same, otherwise what will we have to take about? Sound familiar? This is not the something we need to do.
By now we all know that the ZAR will weaken against most major Foreign currencies and history tells us that against the USD it’s typically about 5-6% p.a, never in a straight predictable line (that would be to easy) but that’s the number. So if we know this is going to happen, why are we so surprised when it does? Well its like I said before, it’s never in a straight line, so when it blows out, like it did yesterday to R15.37, we tend to overreact and forget that we have been here before. Jan 2016 R16.87 and it then pulled back to
R11.54 in Feb 2018. Unfortunately this urge to react is human nature, when it gets bad, we think it’s only going to get worse so we HAVE to do something NOW and when it gets better we think it will continue to get better, so we DELAY doing that something.
I have these conversations with my clients year in and year out, as the ZAR story is not a new one. Like I said earlier in the long run it will depreciate and if we know this, we can plan for it and preserve the true value of your wealth. By having a solid plan in place it prevents us from making completely irrational decisions at times when our emotions are at their highest and our willpower is at its lowest. The plan I refer to is not a seperate ZAR plan but rather one that fits into your overall lifestyle financial plan for your now and your future. I think we all understand why we need diversification away from the ZAR, its really just a matter of how we achieve it. In the simplest form, this can be achieved through multi asset unit trust funds, which will have an offshore exposure to foreign assets, so if you are invested in these then you already have some ZAR diversification built into your investment portfolio.
The Plan I introduce to clients, is to assess there financial position for the year ahead. Take stock of your cash flows for the upcoming year, inflows and outflows.
Lump sum Inflows:
- Bonus payments
- Dividend payouts
- Potential Share sales
- Asset sales
Lump sum outflows:
- School fees
- Retirement Annuity contributions
- Tax Free Savings contributions
Once your local commitments are taken care of then the balance is used for foreign currency diversification and investment. As we are doing this in advance, we then have the whole year ahead to expatriate the funds offshore. We get all the admin done in advance (tax clearance, foreign Bank accounts open, Forex dealers ready), and then stick to a simple strategy of phasing the ZAR out over the year. If we agree to fixed tranches during the year, we take the emotion out of having to DO SOMETHING at the completely wrong times. Yes, we may not always get the lowest rate, but you wont be buying at the highest rate either. My clients can sleep easy at night, knowing that they have a plan in place, we don’t make irrational decisions and once the ZAR is converted to USD (or any other currency) it is never viewed as ZAR again. What we do with the foreign currency investment is then another story for another week.
We are all human, and we all behave differently and we all feel the need to do something in times when there is “turmoil”, but this is not the time to do that something. Have a plan, stick to it, take the emotion out of it and everything should work out.