Is the South African Rand overvalued?
As South Africans, we are invested in the Rand, whether we like it or not. We are bound to what happens to the Rand. What effects do the political instability and economic imbalances have on the Rand? From research, it is clear, that as humans, our preference to avoid losses is stronger than our desire to obtain gains. Investors are likely to make poor investment decisions when driven by emotion rather than valuation and fundamentals. And the Rand is probably the most emotional trade of all.
Difference between life and death
This makes sense in a certain context. When man lived on the savannah with the lions, for instance, this propensity meant the difference between life and death. If you heard a rustle in the grass, it paid to go on high alert and get defensive. (90% of the time you might be wrong—but if you took no action at all, 10% of the time you were lunch.)
According to the Big Mac Index, the South African Rand is still undervalued. The Big Mac Index is one of the world’s great economic indicators. It’s published annually as a way of measuring the purchasing power parity (PPP) between world currencies. It uses the McDonald’s Big Mac as its basis because of its ubiquity in the global marketplace.
According to this index, South Africa has one of the most undervalued currencies in the world, where at July 2017, it was undervalued by 57.3%.
So where does this leave the Rand?
Currently, the Rand is considered undervalued because its value in foreign exchange is less than it should be, based on economic conditions. However, there are multiple influences, including the growth of the economy, the demand from investors, the effects of risk, and more.
Recent data suggests that we could be at the start of an economic turnaround. Higher resilience is expected from the Rand. Some of the factors that could contribute to this are better trade balance as an emerging market and some reduction in political uncertainty.
What does this mean for Investors?
The Rand has shown to be quite rebellious, and leading indicators for the South African economy are showing signs that the rand is in fact about to change direction, ending a trend that has seen it lose more than 50% of its value against the greenback over the past five years. There is strong evidence that the over-riding message for global investors is to have a diversified portfolio.