More Rand Weakness Ahead as Gap for Rate Hikes Narrows
The rand could weaken significantly against the creeping dollar as the Federal Reserve (Fed) continues to raise interest rates to rein in runaway inflation and South Africa’s economic growth stumbles.
US interest rates at their highest level since 2008 increase the appeal of dollar assets, given the higher yield, and as investors seek the relative safety of US investments. An index measuring the performance of the greenback has rebounded 19% this year, putting a strain on emerging markets, which rely mainly on imports and have accumulated high levels of dollar-denominated debt.
The only thing emerging markets can do now is shore up their fiscal positions and engage in sustainable borrowing. It’s difficult because most of these economies are already under pressure. You can only get as far as walking in unison with the Fed before something breaks, so it will have to come from the fiscal side.
While South Africa is better off than most emerging markets because its borrowing is mostly denominated in local currency, the International Monetary Fund in October cut its gross domestic product growth outlook for 2022 to 2.1% against an estimate of 2.3% in July. It predicted economic growth of 1.1% for 2023, down from 1.4%. That’s slower than the emerging market average of 3.7% and global production forecasts.
The Reserve Bank anticipated the surge in inflation ahead of major central banks, which had incorrectly predicted the recovery would be temporary, beginning its rate-hike cycle in November. Since then, it has raised rates by 275 basis points as inflation hovers near 13-year highs. The Fed has had to act more aggressively, raising rates by 300 basis points since March, with price gains close to 40-year highs.
You can’t keep hiking just because the Fed is hiking. We are in a very different position from an economic point of view, from a labor point of view and from a savings point of view.
The Fed is all about inflation. I don’t see the dollar turning.
The rand has weakened by about 13% against the dollar this year. According to data compiled by Bloomberg, the local currency hit a record closing low of 19.04 in April 2020. The rand could test this historic low again or breach it if the economy slips into a recession and the dollar continues. to get stronger.
Making money in turbulent times
There are still ways to make money.
Stocks and bonds have been hammered this year, with equities stuck in a bear market and fixed income heading into one of their worst years. With little room to hide, investors should consider including alternative investments, which give fund managers more leeway to achieve returns when markets fall.
Persistently high inflation, steep interest rate hikes, Russia’s invasion of Ukraine, rising food and energy prices, supply chain disruptions, shutdown of its economy by China and its real estate crisis have contributed to the gloom.
A slowdown in global economic growth is raising concerns about a possible recession.
Volatility will continue to haunt the markets as overvalued US equities disappoint on earnings, interest rates continue their upward trajectory until inflation slows and the dollar continues to run wild. Novare collects funds from pension funds and other clients and then selects the best asset managers to manage the funds.
Alternative assets are “killing”
You need to trade volatility. The best way to do this is through alternative investments.
Alternative assets do not correspond to the traditional categories of stocks, cash or bonds and differ by allowing hedge fund managers to take short or long positions in securities (betting that the assets can go down or gain) or market-neutral funds (which seek to make above -average returns despite market conditions – often using products, such as derivatives that derive their value from an underlying asset such as commodities, currencies, stocks or interest rates). Macro-hedge funds try to take advantage of wide swings in indices caused by major political or economic events.
We are overweight alternative positions, and that has worked well for us. All of our alternative managers have been positive since the start of the year.
Novare is underweight equities and fixed income, meaning it holds fewer stocks than benchmarks. He started to see value in domestic equities, especially in stocks generating dollar income, while adding some bonds.
These conditions that we are currently experiencing allow hedge funds to show their value. For the past 14 years or so, with all the liquidity pumped into the markets by central banks, investors have assumed that markets are always going up. It’s not true.
Market neutral managers have returned 7% this year. Two managers who shorted US interest rates were a hit, while managers who called for South African rate hikes did well. A macro fund is up 50%.
We have a diversified portfolio. I like to think of it as an “Armageddon hedge”. If the war escalates, volatility spikes, stock markets crash further, and bond yields climb even higher, we will still make money.
Jacobus Brink is Head of Investments at Novare Holdings.