How to hedge against the Rand

2011 marked a 20-year high against the US Dollar, but that is all a distant memory now. A perfect storm – consisting of questionable national politics, a slump in emerging markets and an ongoing global commodity rout – has caused the Rand to devalue and South African investors are now looking offshore.

Why South Africa is struggling to hold on to its wealth

The SARB’s Q4:15 cash flow statistics show that for 16 consecutive quarters outflows have surpassed inflows. The last time we saw anything like this was between 1995 and 1999 when there was an emerging market crisis, as well as domestic political instability, following the 1994 elections.

This time around, however, things are a bit different. The political problems that are rocking the Rand are less about revolution and more about shameless graft. The worst of it come on 9 December 2015, after the shocking removal of Finance Minister Nhlanhla Nene, when the Rand went into a short-lived but brutal freefall. Since then, public calls for Jacob Zuma’s resignation have intensified and accusations of graft and corruption are flying thick and fast. While bringing these stories to light is good, the Rand takes a hit with every report that highlights endemic corruption.

In addition to this, emerging markets are currently in crisis. Unfortunately, our government has not been able to navigate our economy through these tough times. Worries over private ownership, especially in immovable property, and declining confidence in the business landscape have caused the local currency to devalue at an accelerated rate.

A factor that has contributed massively to the Rand’s decline since 2011 is the prolonged slump in commodity prices. This has caused mine closures, a slow-down in industrial production and has contributed massively to the worsening unemployment landscape in the Republic. The fewer people have jobs, the greater the likeliness of social dissatisfaction and unrest. This spooks investors and discourages new entrants to the South African market.

South Africans and offshore property

In times such as these, many wealthy South Africans are asking advisers where they should be investing their Rands. At this point, many people are simply buying foreign currencies. Australian and American Dollars, British Pounds and Euros are all frequently bought by South Africans in an attempt to have a relatively liquid Rand hedge. However, these investments are not always ideal for someone looking to not just preserve their wealth, but also grow it. For these individuals, offshore property is often a good investment.

South Africans have traditionally seen the UK as a great place to invest in property. Although London is incredibly overpriced right now, there are other parts of the UK that could be kind to investors. The proposed government-backed plans in the north of England should be of interest to anyone looking to get into a real estate market that still has growth potential.

Mainland Europe is another increasingly popular destination for South African offshore property shoppers. Several European countries offer citizenship by investment schemes that allow South Africans to acquire EU residency and, eventually, citizenship. This is a massive bonus for South Africans who have desires to work and live overseas for an extended period of time.

The potential light at the end of the tunnel

Diversifying your investments is always a good bet. Investing in property in a stable economy is also a relatively safe, if somewhat unspectacular, way to preserve your wealth. Panicking and divesting yourself of all things South African is, however, not the most prudent course of action. While the country is beset by numerous problems, both political and economic, there is cause for hope.

When we compare the Rand to other commodity currencies like the AUD and the CAD, we see that while we have struggled, we haven’t completely collapsed. Commodity prices appear to have bottomed out and there could well be a recovery over the next few years. In addition to this, encouraging rulings from the Constitutional Court and the unwillingness of some ANC members to remain silent on corruption, could help inspire investment in this country. Since the political issues receive the most press attention, we can only hope that the current impetus is not lost to apathy.

For now it is very much a case of wait and see.