Yesterday the Reserve Bank's governor Gill Marcus announced that the MPC had decided to leave the repo rate unchanged at 5.5%. In her address following the MPC meeting, Marcus said:
- "Since the previous meeting of the MPC, the rand has traded in a range against the US dollar of between R6.68 and R8.33 per US dollar, and has depreciated by around 15.6% against the dollar, by 11.0% against the euro and by 12.7% on a trade weighted basis. "Since the beginning of the year the rand has depreciated by 18.6% against the US dollar."
- "However the degree of this risk will depend on the extent and persistence of the depreciation trend, which in turn will be influenced by the duration and intensity of global risk aversion."
- "At this stage the MPC still considers the upside risk to the inflation outlook from this source to be relatively moderate, but rising."
In plain English:
- The rand is in a bad mood (source businesslive)
- Local currency is not being driven by worsening rand fundamentals - it's all due to the liquidity crunch in Europe and the state their banks are in
- The rand will always be "sentimentally" sensitive to changes in global risk perceptions than most of its emerging market peers.
- With global uncertainty on the rise … investors are investing out of emerging countries assets.
- Growth forecasts for South Africa may well be downgraded adding fuel to the fire
- Unwinding of carry trades. Carry trading is where an investor borrows money from a currency with a very low interest rate (JPY,GBP,USD) and invests in one with a higher one (AUD,NZD,ZAR) making their return on the difference. As soon as the currencies with the higher rate start to weaken the difference can be lost so you see a huge unwinding of trades which can weaken them even further, leading to a snowball effect.
So what should you be doing?
Stick to your original investment plans. It is essential to always align your investments with your time horizons:
- For long-term goals we consider long-term, growth-oriented investments like general equity unit trusts. With this long-term view there is no need to 'time the market' and take profits at exceptionally high market levels. The longer your investment time horizon the greater you can afford exposure to equity funds. Don't make the mistake of disinvesting if you are a long-term investor. While risk sounds like something to avoid, there can be an upside - greater risk may offer the opportunity for greater rewards over the long term.
- Balanced Funds are actively managed and ideal for time horizons of 5 to 7 years and generally have lower equity exposure compared to funds with full equity exposure.
- Your short-term goals call for investments that are more conservative, and more accessible. For example, if you're investing to save for a deposit on a home, you'll want quick and easy access to your funds and you will not want to take on any major risk.
Silke Financial Services offers advice on funds at all levels of risk. We research the market in order to find the most appropriate funds at all risk levels. But don't make the mistake of disinvesting if you are a long-term investor. |
