Old Mutual chief economist Johann Els has such a divergent view on how the rand will perform that it often keeps him up at night. On those evenings, he sifts through his analysis repeatedly to ensure his models are correct.
“It’s scary stuff, I don’t want to be proved wrong,” he says by phone from Stellenbosch. It’s a Friday morning after a busy week of criss-crossing between Cape Town and Johannesburg, and Els is looking forward to a wine tasting in the afternoon. “You don’t want to look like the dumb oke in the classroom.”
The affable 61-year-old has reason to be nervous. His take on the currency feeds many of the views taken by Old Mutual’s investment managers, who oversee more than R390bn of assets on behalf of clients.
He predicts the rand will strengthen from about R17.20/$ to as high as R13/$ within three to six months, defying most analyst estimates; data compiled by Bloomberg shows the currency could be closer to R18/$ by the end of the second quarter of next year.
Els is optimistic about the local currency because the dollar will soften as the US Federal Reserve (Fed) cuts interest rates faster than the South African Reserve Bank (SARB). Lower rates in developed countries often benefit riskier markets as investors seek higher yields. South Africa is also now more attractive for investment, with the government of national unity (GNU) able to build on economic growth measures put in place by President Cyril Ramaphosa’s office.
His argument for a stronger rand gained further support when the SARB cut interest rates by 25 basis points (bp) to 8% on September 19 – less aggressive than the Fed’s 50bp reduction the day before. “The gap is opening up between ourselves and the Fed,” Els says.
A massive stimulus programme announced by China this week – its biggest since the pandemic – will also fuel the rand and lift the economy given that the country is South Africa’s largest trading partner, he adds.
There are risks to his forecasts, however, the biggest of which is Donald Trump. A win in the US presidential election by the Republican candidate – who wants to impose tariffs on trade partners, clamp down on immigration, reduce corporate taxes and extend tax cuts he introduced during his first term in office – could result in higher inflation, which may delay rate cuts. “I don’t think his followers understand that,” says Els.
A victory for Democratic nominee and US Vice-President Kamala Harris would be much better for the global economy and emerging markets like South Africa, he adds. Thankfully, Els believes the Democrats have a better chance of winning the presidential election now that President Joe Biden has stepped aside. Of course, he admits, things change and data points shift, and when these do, your views must move along with them. For now, though, he’s sticking to his guns.
Too hot to handle
So, what are the exact levels that Els foresees for the currency? He sees it gaining to what he calls a “R14 handle” per dollar. That doesn’t mean R14/$ on the nose – it’s anything between R14/$ and R14.99/$. Then, within a week or two, it could go to a “R13 handle,” which, again, means anything between R13/$ and R13.99/$.
Exactly when the currency will get there depends on interest rate cycles in the US and South Africa. Unfortunately, however, the currency won’t hold there and will probably start drifting weaker again because inflation in South Africa will remain higher than in the US over the medium term.
Sean Kelly, a director at Joburg-based Parity Wealth Managers, isn’t very bullish on the currency and advises his clients to take most of their investments offshore.
Despite progress with the GNU, improvements in electricity supply and gains in the rand around the May 29 elections, South Africa still faces deep underlying issues. These include high unemployment, water shortages and challenges with its state-owned power, rail and port operators, all of which weigh on economic growth and sentiment.
“Timing the market is impossible,” says Kelly. So, given that offshore markets have outperformed South African stocks, it’s pointless waiting for the rand to improve before moving funds abroad. Parity Wealth Managers is an independent wealth management firm with about R1.5bn in funds, most of which are held abroad.
“If you can get 8% to 12% in an offshore income fund with very little volatility and pretty much consistent returns due to South Africa’s high interest rates environment, why take the risk on a JSE company with triple the volatility, and where returns have been hovering around 6% for the past three years or five years,” Kelly says.
The case for being overweight
Els, who spent time in the Reserve Bank’s economics department after graduating from the University of Stellenbosch, is staying closer to home.
“For investors, a strong rand might provide an opportunity to rebalance portfolios if you are not where you want to be,” he says. As South Africa’s risks reduce, inflation comes down and interest rates decline, bond yields are likely to fall further into next year.
“Investors should be overweight South African investments in their portfolios, not overweight offshore,” Els says. Overweight and underweight describe how portfolios are measured against benchmarks; to be overweight is to hold more shares in a portfolio than a chosen benchmark index.
He recommends being overweight long-term government bonds in the short term, and then gradually taking profits (selling the investments) and shifting to overweight growth assets (such as equities) in the medium to longer term, due to South Africa’s better economic prospects.
The Old Mutual stalwart, who joined the group in 1991, has been right before. During the Covid crisis in 2020, when the rand plummeted in the lockdown, going as low as R19/$, Els stood out, calling for a stronger rand when everyone else saw the currency weakening.
“Nobody believed me,” he says. The currency went to R13.35/$ dollar by June 2021. “Now, the rand is similarly undervalued.”