The rand may be cheap versus its theoretical “purchasing power parity” (PPP) level but not by much.
According to the PPP model the rand is only 6% cheaper than its fair value of R/$12.80. Following the “Nenegate” debacle last December the rand was 25% undervalued. Admittedly the rand has at times overshot its fair value. For instance, in mid-2010 (during the FIFA World Cup) the rand was 15% above fair value. However, given the threat of a sovereign credit rating downgrade to sub-investment grade, and an economy teetering on the edge of recession it seems unlikely that the rand should be anywhere close to its PPP fair value.
Despite the steady underperformance of “rand hedge” shares since the start of the year, coinciding with the rand’s appreciation, we would recommend exercising patience. The rand hedge stocks listed on the JSE typically exhibit sound prospects in their own right, not only appealing for their rand hedge credentials alone. With the JSE ALSI 40 index now deriving over 70% of its earnings from offshore, an absence of rand hedge shares in an investment portfolio would put it at considerable risk of underperforming the market benchmark.
Given the extent to which the rand has closed-in on its theoretical fair value in spite of the near-recessionary economy, looming credit rating downgrade and rising political uncertainty, the current rand strength offers an excellent opportunity to diversify into offshore markets.Source: Overberg Asset Managers.
Orca, take note PPP
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