• Login

image of the Purchasing Power Parity Big Mac levels of leading countries

How Palatable is our Rand? Off the scale unliked

How palatable is our Rand? Way off the scale unliked

The Rand has weakened considerably over the last 3 years, from 8:31 against the USD to 15:41 today. This means it has lost 46% of its value.

The reasons are multiple, and include:

  • USD has strengthened against most currencies over the period, so we are comparing ourselves to one of the most productive nations
  • Chinese growth has slowed, with a material impact on all commodity driven currencies, including the Australian dollar which has lost 33%
  • Emerging markets are battling with USD denominated debt in a rising interest rate environment i.e. a large portion of our weakness can be attributed to EM perception contagion

As we all digest the impact of the most recent 10% sell-off this week, its worth looking at the relative attractiveness of the Rand (in terms of cheap or expensive against its peers), and to do so we can use the Big Mac Index.

The Big Mac Index is published by The Economist as an informal way of measuring the purchasing power parity (PPP) between two currencies and provides a test of the extent to which market exchange rates result in goods costing the same in different countries. It seeks to make exchange-rate theory a bit more digestible – Wikipedia

The Big Mac Index is an intuitive way to compare the same thing in many countries – a standard burger. By this measure the Rand is the most under-appreciated, poorly rated, unliked, or cheaply valued currency across a reasonable range of countries. We can buy less with our money than most other nations – and as it weakens further, so does our earnings power.

Against this backdrop, and given grave concerns about what the future holds, it’s important to not panic, and NOT try and trade the Rand. That is a mugs game, with luck more likely to reward impulsive action.

South Africans must build their exposure to international assets, as a long term strategy to benefit from productivity driven growth, not as a knee jerk reaction to the latest bout of Rand weakness. However those who have been sitting on their hands waiting for a better level to convert Rands to Dollars/Pounds/Euros, etc should probably move on a percentage of what they planned to do, as although there will likely be a pull back, with an accompanied momentum driven strengthening, it also entirely conceivable that our currency continues to weaken week by week without getting back to whatever level you are anchoring on.

No one can predict with certainty what happens over the next few weeks and months, but South Africa’s currency has been sold off on fundamental reasons, not just panic. Long term thinking focuses on fundamentals, and capital allocation that is goal directed. This is where your decision making should be.

Leave a Reply

Time limit is exhausted. Please reload CAPTCHA.