The dollar is weak and the rand is holding its own
It is not so much that the rand is so strong; rather it is that the US dollar that is so weak against emerging market and commodity currencies. This year the US dollar has lost as much as 20% against the Brazilian Real (BRL) and the rand and is almost 16% weaker versus the Australian dollar. By contrast the US dollar has lost a mere one per cent versus the euro this year (See below). US dollar weakness is thus a distinctly emerging and commodity market affair.
Currencies vs the US dollar 1 January 2009=100
USD weakness against emerging and commodity currencies
Source: I-Net-Bridge Investec Private Client Securities
The rand therefore has held its own and may be a little more than its own against the Australian dollar and the Brazilian real as we show below.
The Rand vs the USD, the AUD and the BRL (1 Jan 2009=100)
The rand is holding its own against emerging and commodity currencies
Source: I-Net-Bridge Investec Private Client Securities
The rand has been supported very predictably by flows into emerging equity markets and commodity stocks and out of the US dollar. Both emerging equity markets and commodity markets have moved strongly ahead with emerging equity markets outpacing commodity prices while moving very much in the same direction day by day. The JSE has performed in line with the average emerging market. Emerging markets and commodity markets are plays on global recovery and the JSE and the rand take their cue from portfolio flows into commodity and emerging markets.
Equity markets and commodity markets recovered in March from their depths of despair in early 2009. They were helped initially by a growing sense that the worst about the global economy was known. The recent strength is the response to clear evidence that the global economy has bottomed and that emerging markets are leading the recovery making the case for investing in emerging economy equities and resource companies at very depressed values. We show below how these markets have behaved in a highly synchronised way when measured in the weaker US dollar. We also show in a further figure how the rand cost of a US dollar has come down as the emerging markets have recovered.
MSCI EM Index, JSE ALSI (in USD) and the CRB Index, 1 January 2009=100
Source: I-Net-Bridge Investec Private Client Securities
The ZAR and the MSCI Emerging Market Index in 2009
A predictable relationship
Source: I-Net-Bridge Investec Private Client Securities
Fair value for the rand is about R7.90
Our regression model of the rand predicts a “fair value” for the rand of about R7.90 to the US dollar compared to its current market value of about R7.64 making it about four per cent over valued. Our model relies on the Emerging Markets Index and the Australian dollar to explain deviations from the purchasing power parity of the rand since 1990.
The rand: Actual and Predicted Value
Source: I-Net-Bridge Investec Private Client Securities
Emerging and commodity markets were (unfairly) dislocated by the global credit crisis
Emerging markets were particularly subject to the heightened risk aversion that accompanied the dislocation of credit markets in 2008. Emerging markets were by no means the source of this dislocation but were very much affected, perhaps unfairly, by the rush to liquidity that the collapse in credit inspired. The state of credit markets today tells us that conditions there are firmly on the path to full normalisation. The decline in day to day equity market volatility gives the same impression of growing normality (See below). We measure volatility as the moving 30 day average standard deviation of daily percentage price moves.
Market Volatility 2008-9 Daily Data
Approaching normality
Source: I-Net-Bridge Investec Private Client Securities
Dislocated markets provide unusual opportunities
Dislocated markets provide opportunities to those who sense the worst is over. The dislocation has been severe and the sense of opportunity in depressed markets has been growing. Perhaps the restoration of normal conditions in global equity and commodity markets is imminent. This is our sense of the times. If so the markets in the months to come will respond to the normal concerns about the state of the global economy and the prospects for company earnings the global economy will provide. Our view is that it is earnings rather than the state of credit market conditions that will drive the equity markets in the weeks and months ahead.