“I think that the event itself had a big impact, however if you take a five year graph of the relative performance of the US Dollar to several big emerging market currencies, you kind of get the same pattern, which is why I say that it is part of the same ocean current that developing markets are currently fighting.”
To market to market to buy a fat pig Stocks in Jozi yesterday benefited from the higher close in New York the session prior, we had missed the Friday rally in the US. Stocks in Jozi, Jozi ended the session up 1.41 percent, the finance minister was fielding all sorts of questions later in the day. He was at the centre of capital, in the capital of capital for Africa. In other words, he was sitting on the floor of the JSE in Sandton. That is the capital of capital across the continent, whilst there may be some economies that are bigger than ours (at the official country Dollar rate), our capital markets are far bigger and liquidity is far deeper.
Let me quantify that sentence for a little, our official GDP according to the World Bank for 2014 was 350 billion Dollars. In Nigeria the same measure was 568 billion Dollars. Let us suggest that all things being equal, the World Bank rate of growth was correct, Nigeria to grow by 6.3 percent last year, and our growth to be a very tepid 1.5 percent. The Rand slipped heavily to the Dollar last year, in fact over the calendar year it was 25 percent weaker than in the prior year.
According to the parallel market in Nigeria however (Lagos parallel market rates), where the real exchange actually happens, on the street and not in the unicorn world of the “official rate”, the Nigerian Naira is around 324 Naira to the Dollar. In January last year, the rate was closer to 200 to the Naira, close to the “official” (unicorn) rate. So what then what do you measure you economy in, when there is a rate that real people actually use on the ground and a rate that the government sets for the purposes of what, I am not quite sure? Hence my snarky comment about what really is the biggest economy on the continent.
OK, enough of that, it doesn’t lead to globe building, which is what I am in the interest of doing. Talking of which, did you see that Google computer, AlphaGo that is now officially ranked inside of the top ten rankings of the Go rankings. Grandmaster Lee Sedol lost to the Google computer. The last of the best of five is tonight, Sedol can’t win, he is down 3-1, he did actually mange to win a single game. Artificial intelligence may have been around for a long time, see the Wired story. Google stock? Well, that climbed a touch, along with the rest of the market in New York, New York last evening.
The Dow closed at the best level for the year, it is still down for the year. Needless to say, the first trading day on 2016 was a horrible, no good, awful day. The broader market S&P 500 closed marginally lower on the day, energy stocks slipped as oil prices unwound a little. The Iranians are not going to stick to any production freezes, they are yearning for hard currency. In the words of Sarah Palin (who is a world apart from Tehran), drill baby, drill! The journal has an article which explains -> Oil Prices Fall Sharply on Oversupply Concerns. The nerds of NASDAQ added less than two points to end the day better, albeit just a little.
There is of course the big Fed meeting starting today with a conclusion tomorrow. I always think that Mr. Market places far too much emphasis on these meetings, as if without the Fed (or with the Fed) we are finished or saved. Businesses adapt to the rules and regulations, no matter how tough or easy the operating environment is. The most famous investor amongst us, Warren Buffett always said that it didn’t matter whether or not the Fed raised rates by 50 basis points next week (once upon a time when we were at ZIRP), he would continue to buy the same stocks. Indeed, if you are only looking at the Fed for reasons to buy or sell, then I think that you are doing it all wrong. An opinion, remembering that this is an option piece.
Remember the other day that I suggested that whilst politics had something to do with the weakening of the currency, it was just as much as related to politics as to a weaker Dollar? There were some who rightfully felt that recent political actions taken by the president in sacking the finance minister and replacing him with an unknown, only for us to end up with the prior guy, was all to blame.
I think that the event itself had a big impact, however if you take a five year graph of the relative performance of the US Dollar to several big emerging market currencies, you kind of get the same pattern, which is why I say that it is part of the same ocean current that developing markets are currently fighting. Check it out below, courtesy of Google Finance. For comparisons sake, ZAR = South African Rand, INR = Indian Rupee, RUB = Russian Rouble, BRL = Brazilian Real, MYR = Malaysian Ringgit, INR = Indonesian Rupiah.
What is noticeable is that the three worst performers are commodity producing countries and equally compounded by political problems of their own, Russia, we know and Brazil, did you see the pictures of the protests from the weekend? 1 million people reportedly took to the streets, to protest against the president, Dilma Rousseff, demanding her resignation -> More than a million Brazilians protest against ‘horror’ government.
Whilst Vladimir Putin seems to have the support back home, Rousseff does not. So perhaps all three commodity producers are experiencing political machinations that go hand in hand with an economic downturn. The other three Asian countries that have seen their currencies weaken as a result of a stronger Dollar and perhaps lower domestic demand, perhaps have an added benefit that sizeable consumer populations benefit from lower soft and hard commodity prices, hence not as weak.
Notice how also at the end of the graph, all the commodity producers see a little pick up to the right in their respective levels to the US Dollar. I think that my point about the weaker local currency relative to the Dollar is not an isolated story, rather that of a far bigger theme, the US economy being in far better shape than most people continue to expect.
Not quite the shape that can allow for a gradual rise in interest rates, the Federal Open Market Committee (FOMC) decision is tomorrow, expectations are for no change in policy for now. Perhaps a slight adjustment as far as the wording is concerned, that is about all. The WSJ fires a warning shot in this very general piece, again underscoring my point that the flows are often “general” -> Emerging-Market Currency Rally Is Too Good to Last.
So what can one do to protect oneself? I suspect a multitude of things you can do, one is to commit to a longer dated plan to save in an offshore environment, send funds periodically overseas and make sure that you stick to the plan, regardless of the levels at the time. Dollar cost averaging is what they call it. If the high road scenario leads to a stronger currency, then you continue to benefit over time, if the low road scenario leads to a weaker currency, then the plan is in place, i.e. it is set in motion.
What is more important is not that the export of Rands has taken place but rather the quality of the investments that you buy. So owning/ holding Dollars in itself is not the solution, continue to buy the quality, own it! Secondly, to own stocks in a local environment that benefit from offshore earnings. Almost all of the stocks that we own for clients have a large portion of their earnings from abroad. As much as 70 percent of our portfolios benefit from a weaker currency, and in some cases many big stocks listed here have had a weaker Rand mask worse performances in their primary markets. That must always be the mantra, quality first.
Linkfest, lap it up
The economist does a biannual report on cost of living in different cities – Worldwide Cost of Living Report 2016. (You can sign up for free to download it). London is the most expensive for a box of cigarettes and Seoul is the most expensive for a bottle of wine. Then lastly the cheapest city to live in is Lusaka.
Here is a fun map showing where Tweets are occurring globally in real time – The one million tweet map. Interesting to see the number of Tweets coming out of South America.
I was surprised to see how many Nuclear power stations there are globally. Then the next surprise was how many power stations are still under construction – Nuclear Energy on the Rise Despite Fukushima Disaster
You will find more statistics at Statista
Home again, home again, jiggety-jog. Stocks across Asia are lower, US futures are lower, we may see some caution (caution) ahead of the Fed announcement yesterday. Time to hit the snooze button and wake up later tomorrow, OK? If action is what you want, that is. I am not too sure if we ever want action here in our jobs.
Sent to you by Sasha and Michael on behalf of team Vestact.
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