The South African Rand has taken a hit in the past few weeks as a result of many factors including the Coronavirus, rating agency downgrades and a poor economic outlook.
These factors, individually and subsequently combined, have led to the Rand being almost 40% weaker than a year ago.
What about other emerging markets?
They’ve also taken a hit and are performing poorly but none worse than South Africa (see the graphic here). But why? Investors are moving their money away from risky investments (read “investments in emerging markets”) and putting them in investments termed safe-haven assets* like gold.
We’re also the worst because we’re the greatest – seriously. We’re a great country to be compared to in terms of emerging markets and many analysts use the Rand’s performance as a general indicator of emerging market performance. This is because our currency is the most liquid* out of the emerging market currencies.
What does a weaker rand mean?
A weaker Rand implies that purchasing products from a country which has a strong currency (e.g. the US) will become more expensive as you need more Rands for one Dollar. Things that will become more expensive for us include electronics, motor vehicles and essential equipment needed to fight the Coronavirus – most of which is imported from developed countries.
On the flip side, it will be cheaper for those holding strong currencies (US Dollars) to purchase goods denominated in Rands. The agricultural, tourism and mining industries are examples which may benefit. However, the global Coronavirus will limit the movement of most goods mentioned above.
Why would investors choose to invest in or run from emerging markets?
Emerging markets have greater potential for growth. These come in the form of new technologies being introduced, an increase in middle-class citizens and increased trade with developed countries. Remember, more growth = more potential for returns on your investment.
In saying this, emerging markets also have the greatest risk. Think about the risks of investing in South Africa as an example: unstable electricity supply, political instability and corruption. As an investor, you’d take these factors into account when thinking about where to put your retirement savings.
Is now the right time to invest?
Yes, there may be a major opportunity now but you still need to do your due diligence and not forget the basics of investing – like diversification*.
On a final note, don’t also panic and withdraw your investments because of the market turmoil that we’re currently facing. Everyone’s investments are not performing well right now and if history teaches us anything, it’s that the global economy will pick up again.
Words of the Week*
safe-haven assets – an asset which is expected to keep or increase its value during times of market turmoil.
liquid/liquidity – refers to the ability of something to be bought or sold. Higher liquidity implies greater availability which makes it easier to buy or sell.
diversification – in finance, it’s the act of reducing your risk to one specific asset by spreading your investments across various industries, sectors and countries.