Dont panic on weak rand!

"With the rand losing value against major currencies, especially the volatile US dollar, some investors are scrambling to get their money offshore before it depreciates further. While there is a strong case for investing offshore, the value of the rand should be just one aspect of the decision," advises Marius Fenwick, Chief Operating Officer, Mazars Financial Services.

Fenwick points to the example and very costly lessons learned by panicked investors who, when the rand depreciated sharply in 2001 catapulting up to R13 to the US dollar and a staggering R19 to the UK pound, rushed offshore buying overpriced assets, with a grossly undervalued currency. The result was that they found themselves in markets that were going negative and giving flat returns, in a currency that everyone thought would only continue to depreciate. Even to date, some investors have still not recovered their investment in rand terms.

"It is generally accepted that currently the fair value of the rand is around R9,50 to the USD. We have, however, learned that the rand has the tendency to move aggressively under-valued as well as over-valued. It is therefore possible for the rand to depreciate to R14,00 and then over correct to R7,00. A static expectation of where the rand will trade for any length of time is all but impossible."

Since the financial crisis began in 2008, international investors have been pouring money into emerging markets, particularly South Africa, with the result that our currency strengthened beyond its fair value.

"The lesson in all this is that the rand has a tendency to recover and investors should bite the bullet and not give in to panic and move their money offshore for currency reasons alone. We will see a recovery in the rand but it will take patience and faith in the South African markets to realise the returns," says Fenwick.

There are however compelling reasons to invest offshore.

"Offshore assets have re-valued since 2008 and are currently at fair value as opposed to local assets that are fully priced. The long term prospects of offshore assets have been better than that of local assets since 2008. This is evident by the returns thus far this year with offshore assets providing double the returns of local assets so far this year. This trend of offshore equities outperforming local equities is likely to continue for the next couple of years."

Furthermore, the first principle of investing is diversification, and offshore markets offer investors a far wider range of choices than the Johannesburg Stock Exchange (JSE). The JSE is predominantly made up of basic materials, industrials, financials, some consumer goods and healthcare. International markets offer more investment diversity with many huge utilities, technology, and consumable services stocks to choose from. There is also the opportunity to diversify between countries.

Fenwick advises that the rand should only account for about 30% of a decision to invest offshore. Some investors remain extremely negative on the future of this country given our present socio-political and economic realities.

"To those unable to see the potential in South Africa, take as much of your money offshore as you can. But understand that is a personal decision. Remember that in 2001 and 2002, South Africans thought the rand was going to collapse completely and the country was facing ruin. Neither outcome occurred, and South Africa remains the powerhouse of Africa. Our stock exchange is by far the most sophisticated on the continent and a lot of investors gain access to the African growth story via the JSE."

History has shown that the rand has a tendency to return to fair value. Investing offshore should be for the reasons mentioned above, and now is as good a time as any. However, if you're close to retirement and you’re going to rely on your income in rands, the bulk of your investment should be in rands, with 30-40% invested offshore. If, however, you’re still in your 20s or 30s, you can afford to be more aggressive and take between 80 and 100% offshore exposure.

Source: http://business.iafrica.com

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