07/04/2020 The Rand, Recent crashes and why it may be an Opportunity to invest now

The rand has started the new week on slightly stronger footing, pulling back below R19 to the dollar, up 2%, after reaching the weakest point on record, at R19.34 in early trade on Monday.

By 16h00, the rand had strengthened to R18.78 against the dollar, while trading slightly stronger against the euro and pound at R20.27 and R23.09, respectively. The JSE rallied along with other global markets on Monday on the back of positive sentiment that there were lower reported coronavirus related deaths over the weekend from the main hotspots.

The local currency has lost almost 40% of its value against the dollar since the start of the year, knocked by persistent economic issues (such as load shedding, which hit earlier in the year) and more recently the global coronavirus pandemic.

However, it was back-to-back downgrades from ratings agencies in the last week – pushing the country into full junk status – that sent the currency over the edge.

The local unit surrendered 3% to the dollar on Friday, hitting an all-time worst level against the greenback, and breaching R19, after Fitch downgraded the country’s credit rating.

The ratings agency downgraded South Africa’s long-term foreign currency debt from BB+ to BB with a negative outlook, citing a “lack of a clear path towards government debt stabilisation” while also noting the impact of the Covid-19 on growth.

According to the Bureau for Economic Research (BER), while trading at record levels against the dollar, the currency is following a known pattern, which gives an indication of where it could head to next.

Historically, in times of high volatility, the rand has weakened significantly, before the market re-balances.

It is a reminder that while the current weakening trend is reaching extreme levels, we have seen this before.

“The key takeaway from these previous experiences is that, whereas it is hard to call the top, the rand does tend to strengthen again from extreme undervalued levels. We expect the same to happen this time around,” the BER said.

Part of the current selling pressure has to do with the global panic around Covid-19. Once that subsides and the global economy starts to recover (let’s say from 2020Q3/Q4), the rand should perform better.

In the previous episodes, it typically took roughly three to five quarters for the currency to regain the levels that prevailed in the quarter before the big blowout, the BER noted.

“Based on this simple historical experience, the rand could be back at the 2020Q1 quarterly average (around R15.40/$) by the third quarter of 2021.”

However, there is an important caveat to consider, it said.

“Even if the global risk premium diminishes post the peak of Covid-19, the rand recovery may be delayed this time because the SA-specific risk premium is set to remain large amid a much worse credit rating profile.”

“Still, on a 12-month view, we would expect the rand to be trading at notably stronger levels.”

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A shock US unemployment number – a record of 6.6 million people claimed jobless benefits over the past week – renewed fears that the current global economic slump will be hard and long. These concerns have fueled a large flight of capital from emerging markets, amid concerns about how they will be able service their debts as growth stalls.

Investment banks and hedge funds are also shying away from emerging market assets as the fear that these countries have not yet felt the full impact of the coronavirus.

The rand has now lost 7% over the past week, with the currencies of Brazil and Mexico both down 5%. The SA currency, as well as the Russian ruble, is 20% weaker than a month ago, while the Mexican peso has lost more than 25%.

Since the outbreak of the Covid-19 crisis in mid-January, the rand is down a third – the second-worst crash in recent years.

Below is a list of the largest slumps in the local currency against the dollar:

1)  -47% Global financial crisis

From 29 September 2008 (R8.05) to 22 October 2008 (R11.87)

The rand went into meltdown mode during this extremely turbulent time. The housing boom in the US gave rise to a subprime lending crisis: people who couldn’t afford it, were given large mortgages. These dud mortgages were then sold off to banks through intricate financial instruments, which triggered a massive confidence crisis in the financial sector, eventually pushing it to the brink of collapse.

Investors sold off risky assets – particularly in emerging markets – and fled to the safety of the US dollar, which saw massive gains during this time.

2)  -33% Coronavirus crisis and Moody’s downgrade

Covid-19 has now killed almost 50 000 people, with economies across the world shutting down to curb the spread of the virus.

The expectation of a deep economic slump and resultant market turmoil have fuelled a flight to safety (particularly to the dollar). This has heaped pressure on emerging markets, particularly those who struggle with debt and growth. South Africa is one of the main culprits, and Moody’s decision to strip it of its investment-grade rating has added to pressure on its currency.

3) -21.9% Eurozone crisis

From 1 September 2011 (R6.97) to 22 September 2011 (R8.49)

The crisis in the eurozone during this time caused turmoil all around the world. As ratings agencies downgraded Italy, and investors worried about the stability of the eurozone, there was a massive influx into safe haven currencies like the US dollar and Swiss franc. Investments in emerging markets all but dried up.

4)  -16.4% Taper tantrum

From 6 May 2013 (R8.91) to 11 June 2013 (R10.37)

This sharp fall was due to the infamous ‘taper tantrum’: a global sell-off triggered by the surprise announcement by then Fed chair Ben Bernanke that the US central bank was considering scaling down quantitative easing, the massive amounts of money it pumped into global markets. Over the course of 2013, the rand lost almost a quarter of its value.

5)  -16.0% Turkey turmoil

From 9 August 2018 (R13.41) to 13 August 2018 (R15.55)

 

This rand shock originated in Turkey, where the economic fallout from a diplomatic spat with the US soon snowballed into grave concerns about the Turkish debt situation. Denominated debt represented half of its GDP, and its president’s meddling in monetary policy aggravated investor concerns.

6)  -14.9% Eurozone crisis

From 28 July 2011 (R6.62) to 9 August 2011 (R7.61)

While the EU had approved a bail-out package for Greece by this stage, the eurozone crisis was still in full swing. During this time, US bond yields spiked to above 3% and investors ditched emerging market assets, including the rand.

7)  -14.7% Chinese meltdown

From 6 January 2016 (R15.62) to 11 January 2016 (R17.92)

The rand’s steep fall was triggered by a shock slump in the Chinese market. Chinese authorities repeatedly had to halt trading after sharp declines in share prices. This instability triggered large losses on global markets and – as China is the world’s biggest consumer of commodities – compounded the slump in metal prices. As a large platinum and gold producer, South Africa was hit hard.

8)  -13.3% Pravin Gordhan fired

From 27 March 2017 (R12.31) to 11 April 2017 (R13.96)

Pravin Gordhan was fired as finance minister on 30 March 2017, which caused havoc in the local market and was followed by credit rating downgrades. Almost a third of the top rand crashes relate to the SA finance ministry.

9)  -13.2% Grexit fears

From 3 May 2012 (R7.69) to 1 June 2012 (R8.71)

The rand fell victim to more uncertainty about the eurozone in the run-up to elections in Greece, with investors fearing that an anti-austerity group of parties could force a “Grexit”.

10)  -12.5% Fallout of global financial crisis

From 9 February 2009 (R9.53) to 5 March 2009 (R10.73)

This was a grim period during the global financial crisis, with massive losses among banks, which continued to receive emergency capital from governments. The MSCI World Index lost more than 9% during this time. In a single quarter, Japan’s economy shrank by 12% and Germany saw a 2% decline in its GDP.

11)  -11.2% Gordhan arrest rumours

From 19 August 2016 (R13.17) to 31 August 2016 (R14.65)

The rand took a hit amid rumours that the then Finance Minister Pravin Gordhan was on the verge of being arrested. This followed a report that Gordhan was summoned by the Hawks to answer charges relating to a so-called rogue unit in the SA Revenue Serivce.

12)  -10.7% Nenegate

From 9 December 2015 (R14.51) to 11 December 2015 (R16.05)

On 9 December 2015, then president Jacob Zuma replaced respected finance minister Nhlanhla Nene with ANC MP David van Rooyen. A sharp sell-off followed, which was halted by the appointment of Pravin Gordhan.

Although the current weakening trend is reaching extreme levels, we have seen this before, and we will see it again. With the huge loss the Rand and our markets have suffered, this may just be a solid opportunity to invest now.

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