In the middle of July, we published an article about the new weakening trend of the rand and urged you to consider buying rand-hedge shares. We also talked about the rand’s new weakening trend in the October Confidential Report and suggested that, if it fell through R13.60 to the US dollar, a downward trend was inevitable.
Now, with Gigaba’s uninspiring mini-budget last Wednesday which put the tax collection shortfall at nearly R51bn, the rand has fallen back sharply to reach R14.20. There can no longer be doubt. The ratings agencies have expressed their displeasure with the budget and the almost inevitable worsening of the country’s fiscal strength.
We see this trend continuing, probably throughout 2018 and into 2019. An unwelcome result from the ANC’s December elective conference is a distinct possibility and that will certainly be accompanied by further rand weakness.
Technically, the rand is breaking down out of a classical “saucer bottom” and looks headed towards previous record levels around R17. This development requires that you shift your investment perspective towards rand-hedge counters. Shares which receive some or all of their income in a hard currency suddenly become much more appealing. Of course, all listed shares are to a greater or lesser extent rand-hedges – simply because they are assets – and as the purchasing power of the rand diminishes, so assets are re-priced upwards.
Note: this charted is inverted – thus a weakening trend is an upward, not a downward move.
Obviously, the question on everyone’s minds is where will Gigaba find the extra R51bn – and more. It is almost impossible to raise taxes, but a VAT increase in February is a possibility. We think the probability of a reduction in government spending is virtually zero. Other than that, he must look to begin his own “quantitative easing” program – in other words, he must begin printing in the style of Robert Mugabe – with the inevitable inflationary consequences.
To do that he will need to gain control of the Reserve Bank – and there is evidence that he is trying to achieve that. The governor of the Reserve Bank is really our last bastion against the significant debasement of the currency – so watch the press for stories about his imminent replacement. In the meantime, concentrate on the rand-hedge component of the shares that you look at.