ARTICLES

Rand Recovery

The rand is arguably one of the most volatile and difficult currencies to predict. It is very liquid and is the preferred emerging market currency of international currency speculators. It has become a ping-pong ball which reflects the spasmodic shifts between “risk-on” and “risk-off” sentiment on the world stage.

If international investors get scared, then the rand falls – and quickly – as they withdraw their funds from here and buy long-dated US treasury bills. And then it rallies gradually as panic fades and awareness grows of our low inflation rate, relatively stable and high real interest rates.

Last Thursday (11-6-20) Wall Street had a momentary panic attack which drove the S&P down 5,9% in a single day. This panic was caused by a sudden renewed fear of a “second wave” of the coronavirus pandemic and concerns that the recovery in the US would not be as rapid as previously hoped.

The rand, which had been strengthening steadily to that point, responded by immediately collapsing from around R16.43 to the US dollar to R17.30. It lost over 5% in just two hours. Then, as the panic in the US subsided, it stabilised and began to claw its way back. Consider the chart:

(Chart by Dynamic Outcomes: https://www.forexforecasts.co.za/resources/live-charts/)

That panic may not yet be over and there may be further downside both in the S&P and the rand, but it shows clearly how the rand is a sensitive and volatile barometer of international sentiment.

What seems undeniable to us, however, is that the rand is fundamentally under-valued on world markets and that it is steadily strengthening over the longer term. While there can be little doubt that the economy’s situation is parlous from a local perspective, everything is relative and overseas investors tend to see us as a better investment opportunity than other emerging economies such as Brazil, Turkey or Russia. Consider the chart:

Here you can see the upside breakout above the R15.50 support level in late February 2020 and the sharp impact on the rand as international sentiment, faced with COVID19, moved rapidly to “risk-off”. This was followed by a “double top” in April 2020 and then a fairly quick recovery – which is still on-going.

We see the rand as exposed to periodic waves of “risk-off” sentiment, but as continuing to strengthen over the medium term. This perception should inform your decisions on rand hedge shares as you look forward to next year and the inevitable recovery of the world economy. The simple fact is that international investors will always be flighty – but they always are drawn to real rates of return on our long bonds and so, as soon as any panic is over, they return here in their droves.

DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

PDSNET ARTICLES

The Creation of Money

The money supply of a country is a symbol of the goods and services of that country. Obviously, if the size of the money supply is increased more rapidly than the real growth of its economy, then you have more money chasing the same goods and services, resulting in rising prices. Since, over the long term, the only organisation that can create money is the government,

V-Bottom is likely

The 10% collapse of Wall Street, which is a direct result of Trump’s random policy of on-again, off-again tariffs, is very similar to what happened to Wall Street in February/March 2020 when investors tried desperately to accurately discount the impact of the COVID-19 pandemic.

Normally, corrections in the market

The Trump Correction

It is relatively unusual for the activities of American presidents or what they say to have an impact on the New York Stock Exchange, especially during their first 100 days in office. Trump, however, is the exception. His confused, on-again, off-again rulings on tariffs have rattled the market. Markets hate uncertainty and even Trump himself doesn’t appear to know exactly

Dividends

Investors know that the return on a share is made up of a capital gain plus the dividend. Private investors are mostly attracted to the prospect of making a capital gain on the shares which they buy and do not often consider the dividends. What they perhaps do not realise is that a capital gain is actually just the dividend in a different form.

Quarterlies

One of the major differences between the US equity markets and the JSE is that listed companies in America are required to report every 3 months, not every 6 months as they are on the JSE. The quarterly reports of the S&P500 companies are closely followed by investment analysts and predictions are made for their profits.

Gold's Record Run

On Friday last week, gold reached a new all-time record high of $2871.42 per ounce. Its gain in rands has been even more impressive rising from less than R1000 per ounce in August 1992 to last Friday’s close of R52864.85.

In our Confidential Report of March

Growth by Acquisition

Hudaco (HDC) is a master of growing by acquiring smaller businesses in similar fields of activity or businesses, which then complement its existing suite of businesses. It has been making these bolt-on acquisitions for many years and has developed great expertise at selecting and evaluating appropriate targets.

These bolt-on acquisitions are mostly small

The Impact of News

Old Wall Street wisdom says the following concerning news which comes out about individual listed companies:

1. Good news which is expected - causes the share price to drop.
2. Good news which is unexpected - causes the share price to rise.
3. Bad news which is expected - causes the share price to rise.
4. Bad

Karoo

In April 2018 – nearly seven years ago – we wrote an article about Cartrack. At the time we suggested that it was the ideal investment for private investors because it was a service company with debit order income and almost no working capital that was growing rapidly both locally and internationally.

Tweets

Over the Festive Season, we have been communicating with you via our tweets on “X”. The chart below shows the timing of our individual tweets and what subsequently happened to the S&P500 index.