Weakening ZAR – What’s Going On?

Lately the news has been filled with reports on the weakening Rand and what is going on in Emerging Markets as a whole. And the reason for the confusion about the cause of all of this, is that there is no “One {story} to bind them all…”

A certain financial adviser I was chatting to remarked “It’s as if Ashwin Willemse has sent the market into a tailspin”. Of course he has nothing to do with it, but I can see the point – there is no “big story” that explains the pressure the markets and ZAR is experiencing.

So what is this invisible hand?

There are multiple contributing factors to this pressure we are experiencing:

  1. Geo-Political Tensions are driving investors into a Risk-Off environment. This is affecting the Global Financial Sector as markets are feeling a bit jittery. Maybe it is still early days, but maybe Trump’s visit with Kim Jong Un might calm tensions somewhat.
  2. Emerging Markets as a basket (South Africa, Mexico, Brazil, Turkey and Russia) have been experiencing record outflows from its bond markets.
  3. In South Africa specifically, the ZAR and ALSI have irrationally overshot on the back of Ramaphosa’s victory, and are reverting to the mean.
  4. SA’s balance of trade and current account.
  5. Government spending is still at all-time highs resulting in an enormous budget deficit.

This increased volatility is likely to last for as long as the ALSI is propped up on a weaker currency. If company valuations can normalise on the back of true Economic Growth and Earnings, we can afford a stronger currency without killing our exporters, specifically our miners.

I think we will be in this for quite a while, so grab your oars and start rowing!