The strength or weakness of the rand does affect your investment returns, but the exact impact depends on your specific investments.
The rand affects different investments in different ways
Depending on which investments you have, fluctuations in the value of the rand (known as currency risk) can have either a positive or negative effect on your portfolio returns. Considering how movements in the rand affect different parts of your investment portfolio can help ensure that you still achieve your investment objectives despite currency volatility.
The rand is an emerging-market and highly traded currency that is considered one of the most volatile currencies. This unpredictability can create anxiety for investors. But if you understand the role it plays in your investment returns, you can make better, more informed decisions about your investments to manage the impact.
So, how exactly does the rand affect your portfolio returns?
How does rand strength or weakness affect your investments?
Managing rand currency risk is all about managing the impact of changes in the value of the rand compared to other currencies, as measured by the relevant exchange rates. As a result, how the rand will impact your returns will be determined by the extent to which your investments are exposed to foreign currencies and economies.
Companies that depend solely on the South African economy may not be directly affected by rand volatility. However, they will still be indirectly affected by rand movements through the impact on other economic factors, like the currency risk for the cost of inputs for their products, inflation and the impact on their client base.
On the other hand, local companies or sectors that have direct exposure to foreign markets will be directly affected by exchange rate fluctuations. For example, companies focusing on exports will benefit from a weaker rand, since their goods will be cheaper to foreign buyers. This means that if you buy shares in such a company, your return on your investment could increase when the rand weakens. The opposite applies to importers, where the increase in the cost of goods will negatively impact margins in the short term. Similarly, companies that generate a large part of their revenue from outside South Africa in foreign currency, will also benefit from rand weakness due to a favourable translation of earnings.
A weaker rand is also generally positive for one’s offshore investments. If you have savings in an offshore bank or trade in forex, for example, and the rand weakens relative to the currency you are invested in, your return (in rand) will be positive. In other words, if you buy US dollar at an exchange rate of R14/US$, then your return will be positive if the rand trades at R20/US$ (a weak rand) and will be much lower if the rand strengthens to, say, R7/US$.
What does this mean for your portfolio?
Market and currency volatility are unavoidable at the best of times; it is part and parcel of investing. Since the start of the pandemic and its impact on economies across the globe, market volatility has been even more prominent. Economies are unstable, and while the global economy is starting to recuperate, it may still be a while before there will be some sense of stability.
That's why it's important to diversify: not all asset classes and sectors will react in the same manner to market events and they won’t all go up or down at the same time. To manage the impact of factors like rand volatility on your returns and smooth out your returns for better long-term outcomes, it's a good idea to invest across different types of assets from low-risk to growth assets, sectors, markets, currencies and geographies. Your investment returns will still fluctuate and there is always downside risk, but if you have a well- balanced portfolio that's regularly reviewed, put together with the help and expertise of a professional advisor, your portfolio will be well-placed to meet your financial objectives over time.
What else can you do to improve your investment returns?
Professional advice can save you lots of time, effort and regrets
Local and global markets, economies and currencies together form an intricate system that continuously both contribute and deduct from your investment returns. To make the most of the available opportunities and to manage the impact of the rand, it's important to make informed decisions about where and how you invest. A professional advisor can help you construct a suitable investment portfolio and manage it carefully. They can help you avoid emotional, knee-jerk decisions based on adverse news and market movements that will compromise your long-term returns. Contact us if you would like to get in touch with one of our accredited advisors.
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This information is intended for general information purposes only and does not constitute legal advice.
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