How Should Offshore Investors Handle a Sturdier Rand?
The rand has not only strengthened in recent months against major currencies, but it appears to be showing greater stability or, put another way, lower volatility. What are the implications for investors with offshore investments, particularly those whose primary motive for investing offshore has been to hedge against rand weakness?
Against the US dollar, the rand has strengthened from around R18.70 to the dollar at the beginning of 2025 to about R17 in December. At the end of 2024 it was trading at about R23.50 to the British pound and, after spiking at about R25 in April, has come down to around R22.60. Against the euro the rand has weakened slightly, from about R19.50 at the beginning of the year to about R19.80 in December, but has shown a strong downward trend since August.
What may be more interesting is that it is showing signs of lower volatility. Bloomberg reported on December 4 that a gauge of expected volatility of the rand versus the dollar was at its lowest level since the turn of the century – one-month implied volatility fell to 7.9%, the lowest since February 2000. Average realised one-month volatility over the past five years has been 13.1%.
Economists and investment analysts attribute the stronger, more stable rand to a slowly improving economy, increasing fiscal discipline by the government, moderating inflation accompanied by lower interest rates, and the worldwide boom in commodity prices. We have seen a rise in GDP growth (2.1% year-on-year to the end of the third quarter), the SA Reserve Bank lowering its inflation target to 3% and cutting interest rates further, an upgrade of our credit rating by S&P Global (Moody’s has yet to follow suit), and our removal from the FATF grey list.
In his regular economic report “Market Matters”, Izak Odendaal, chief investment strategist at Symmetry, says one reason the rand has been so volatile in recent years is because South Africa simultaneously ran large current-account and fiscal deficits, earning us a place in the “Fragile Five” club around 2014. “This ‘twin deficit’, which must partly be funded by capital inflows, has now stabilised, with South Africa running a surplus on the primary (non-interest) fiscal balance and the trade balance (meaning that exports exceed imports),” he says.
Another reason the rand may be stabilising is a narrowing of the inflation differential – the difference between the average rate of inflation in South Africa and that of developed countries such as the US. Despite odd periods of strength, over the long term the rand has steadily fallen against the US dollar because of the difference in inflation rates. With inflation remaining sticky at around 3% in the US, while steadying at a lower rate of 3-4% here, this difference has largely vanished.
If your primary reason to invest offshore was to hedge against rand weakness, you may be worried that a levelling-out of the long-term downward trend of the rand may be detrimental to your investments, especially if you intend repatriating them here in the long run. Conversely, you may see this as an opportunity to invest more money offshore before the trend resumes.
However, many investment experts are of the view that the primary reason to invest offshore should be to diversify your portfolio, not to hedge against a weak rand. South Africa represents only a small fraction of the global economy, and offshore investments provide access to a broader range of industries and companies than are represented on the JSE.
Galileo Capital co-founder Warren Ingram says any rebalancing of your portfolio should be with your longer-term financial objectives in mind. “I prefer not to anticipate currency movements, because the rand can move quickly in a short time. But the rand may remain strong relative to the US dollar for an extended period as South Africa’s inflation moderates and emerging markets regain favour with global investors.
“For investors with a significant offshore allocation, it is important to rebalance your asset allocation (including your global exposure) regularly. I prefer to rebalance annually, as this will limit the impact of a big currency move,” Ingram says.
