"The flip side of the coin is that the currency is not over sold, rather it is correctly valued and all the central bank is doing is wasting money and delaying the inevitable. South Africa learnt the hard way, when we intervened in the currency market and ran out of reserves because we were standing in front of huge head funds that had fundamentals on their side. I found a piece on the IMF website on the reasons learned by the SARB, The Rand Crises of 1998 and 2001: What Have We Learned?."
To market, to market to buy a fat pig. The big news from yesterday was the Russian Ruble which hit a record low against the dollar. Due to the sliding Ruble, from lower oil prices and sanctions, the Russian central bank hiked rates by 6.5% to a painful 17%! The result? The Ruble weakened further! As a reaction ordinary Russians are buying as many dollars as they can get their hands on, if they can't get dollars they are buying physical things like electronics which go up in price as the currency slides, Apple Curbs Russian Sales as McDonald's to Renault Raise Prices. For Apple, they sold less than 1% of their iPhones in Russia last year, so closing off the official selling route is not a disaster. I am sure that you will be able to buy an iPhone on the black market, so it isn't a case of closing Russia out totally.
Another big concern for the Russians would be the billions that their central bank is spending on trying to stabilise the currency, Russia Seen Spending Further $70 Billion to Fight Ruble Rout. From a Russian point of view, they feel that the currency is over sold, so spending the money now to stabilise the currency is justifiable because the currency will revert to its "real" value over the long run. A stable currency is vital to an economy because volatility creates uncertainty which then leads to lower investment. For example what Apple have just done, stopped selling the iPhone.
The flip side of the coin is that the currency is not over sold, rather it is correctly valued and all the central bank is doing is wasting money and delaying the inevitable. South Africa learnt the hard way, when we intervened in the currency market and ran out of reserves because we were standing in front of huge head funds that had fundamentals on their side. I found a piece on the IMF website on the reasons learned by the SARB, The Rand Crises of 1998 and 2001: What Have We Learned?. In 1998 we had the Asian banking crisis which resulted in a drop in commodity prices and a risk aversion to emerging markets. The result was a weakening Rand because we were getting less foreign currency from our commodity exports and at the same time, people were selling Rands as they moved their cash to the safe haven of dollars. "Between end-April and end-August in 1998, the rand depreciated by 28 percent in nominal terms against the U.S. dollar. This was accompanied by increases of around 700 basis points in short-term interest rates and longterm bond yields, while sovereign U.S. dollar-denominated bond spreads increased by about 400 basis points. At the same time share prices fell by 40 percent and output contracted during the third quarter of 1998 (quarteron-quarter)." OUCH!
The conclusion from the report was that doing nothing worked out better over the long term. "These differences in macroeconomic developments during the two currency depreciations can in part be explained by the different economic policy responses. In 1998, the South African Reserve Bank's (SARB) intervention policy - both via official reserves and short-term interest rates - exacerbated the crisis and deepened its macroeconomic impact. In 2001, however, the authorities abstained from intervention and the crisis receded faster, without severe macroeconomic consequences.” My two observations are that the Russians over the long run are probably shooting themselves in the foot. The second observation is that, why is the SARB raising interest rates based on what our currency is doing? Raising interest rates is a long term policy move, currency swings are short term in nature. Long term GDP growth ultimately determines where your currency will be down the road and raising interest rates hurts growth big time!
Company corner snippets
Coal of Africa gave an update in two SENS announcements this morning about how their turn around strategy is going, Capital Raising Update and Mooiplaats Disposal. The share price is down 96% over 5 years, so it hasn't been pretty for investors and will be an uphill battle for management, even more so now considering commodity prices.
Purple Group are adding to their investment in East Africa, Category 2 Transaction Announcement. Purple Group are a small company having a market cap of under R 300 million, they own GT247.com which is the main sponsor of Paul's show Hot Stoxx.
Advtech have received Approval From The Competition Commission For The Centurus Acquisition. They have been on an acquisition spree recently to try catch up to Curro. The market has given a premium to both stocks, Advtech is up 59% for the year and is trading on a PE of 64. Curro is flat for the year and still trades at the lofty price of 167 times earnings. Education is a great sector to be in because a stumbling government are your competition and you have the growth in population numbers.
Things we are reading, we think that you should read them too
Having a look at the investment trends of private companies, healthcare seems to be at the top of the list for most companies - Google's Investment Arm Spent A Ton Of Money On Healthcare This Year. Technology is making healthcare more and more effective and efficient, add to that an ageing and growing middle class, healthcare seems to be where the big growth will come from.
Google's investment in Uber is something that I was reminded of when I read the above article - As Google Ventures Invests $250 Million In Uber, What's Next? Driverless Cars On Demand?. Google invested $ 257.8 million in August last year, which valued Uber at $3.76 billion. Earlier this month Uber broke the $50 billion mark in its valuation, making Googles investment of a quarter billion now worth around $3.4 billion, not a bad return for a year!
More on Uber - Washington DC is making a taxi app to take on Uber. I think that this is the best way to combat the "threat" of Uber. Capitalism hinges on less regulation and more competition. By trying to regulate Uber out of existence you are creating a skewed environment and just delaying the inevitable.
New years resolutions are almost on the cards - How to Save Money & Increase Your Happiness. Becoming wealthy is probably more about managing your expenses than the income side - "This all-in cost includes gas, maintenance, plate fees and insurance costs. Because of these costs, the average household spends almost 20% of income on driving expenses. For low-income families it can be as high as 40% of income."
Home again, home again, jiggety-jog. Things have been ugly on the markets over the last month. Currently the TOP 40 is flat for the year and the All Share is only up 2%. The Rand has dropped to the R11.75 level! The silver lining is that our exporters, the commodity companies, are getting some reprieve from the lower commodity prices. The reasons for the weakness will be a combination of factors but mostly because investors are steering their capital towards developed markets. Market and Rand weakness is not great news but it reminds you how important it is to be diversified amongst sectors and currencies. After having read how bad things were in 1998, the current weakness is a walk in the park. Remember that from next week the office number will just go to voice mail, but the team is reachable on our cells and we will all be monitoring our emails.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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