By Peet Serfontein Chantal Marx
Managing currency fluctuations is an essential skill for retail investors looking to safeguard and potentially enhance their investment returns. By understanding the factors that drive currency values, assessing their portfolio's exposure to currency risk, and employing both basic and advanced strategies to manage that risk, investors can navigate changing currency values more effectively. Regular education, leveraging technology, and seeking professional advice when needed can also play crucial roles in a successful currency risk management strategy. With careful planning and execution, retail investors can achieve their financial objectives while minimising the impact of currency fluctuations on their investments.
Currency values are subject to constant change, driven by a complex interplay of factors. The foundation of currency fluctuations lies in the basic economic principles of supply and demand. However, these principles are influenced by a myriad of factors, including but not limited to:
The impact of currency fluctuations on investments
The interplay between currency movements and investment returns can significantly influence an investor's portfolio in several ways.
Direct Impacts
The most immediate and apparent effect of currency fluctuations is observed in the conversion rates when purchasing or liquidating foreign assets. If the investor's home currency strengthens against the currency of the investment, the value of returns diminishes when these are converted back to the home currency. Conversely, a depreciation of the home currency relative to the investment currency can result in enhanced returns upon conversion. This direct impact underscores the importance of monitoring currency trends and at times timing transactions to mitigate adverse effects or capitalise on favourable movements.
Indirect Consequences
Currency fluctuations may also have an impact on underlying instruments performance. For example, a company that has operations in jurisdictions outside of the country could have those operations domestic currency returns vary because of currency fluctuations. A company may also hedge its currency exposure - this could have either a positive or negative impact on earnings depending on the outcome.
Beyond this, the broader economic repercussions of fluctuating currency values play a critical role in shaping investment outcomes. A currency's strength or weakness can significantly influence a nation's economic landscape, thereby affecting the performance of investments within that country.
Rand considerations
Rand investors need to be cognisant of the impact that rand volatility can have not only on their offshore investments, but their domestic exposure as well. Typically, investors will want to add to offshore or rand hedge exposure when the local currency is strong and consider bringing money back to rands or switching to SA Inc exposure when the rand is weak.
It is important to remember, however, that the rand tends to weaken relative to major developed market currencies over time. To understand this phenomenon, it is important to look at some of the basic drivers of exchange rates over time. For ease of reference, we stick to the rand against the US dollar, but the same principles apply to almost any currency pair.
These factors will likely continue to drive a weakening of the rand against the US dollar over time. However, the rand occasionally moves too far in one direction or the other (due to factors like market sentiment and political risk), which could result in major short-term deviations from its expected trajectory.
Offshore investment - does the rand really matter?
The rand does not matter much if you have money offshore and you plan to keep the money offshore for a very long time, or if you plan to use the money overseas. It is also not a major factor if you have money offshore and you have a longer-term investment horizon. You should continue benefiting from the diversification offshore investing offers and, given that the rand will continue weakening over time and will probably reach this level again in the future, bringing the money back during times of weakness may not be worthwhile. The rand only really matters when you are considering taking new money offshore or bringing money back into rands. The same is true when investing in companies locally with major developed market exposure.
Practical tips for retail investors
By focusing on these core areas, retail investors can significantly improve their proficiency in managing currency risks, ultimately leading to more informed investment decisions and the potential for better financial outcomes in the currency markets.
