Jan 06

Understanding the Pattern of Currency Devaluation

It is very important to note that currency devaluation doesn’t happen in a linear pattern.  There are periods when the rand appreciates in value, but the longer-term trend is devaluation.  We must, therefore, ask ourselves where the rand will be in the next five-to-ten years? What about timing?


It is important to understand that investing is a life-long exercise and we must be mindful to not try and time the market.  Timing the market refers to buying in at the right time and then selling again at the right time so that we can then ‘buy back in’ at the optimal time.  This is impossible to do on a consistent basis and is a main reason for investor capital loss and disappointment. 

Examining global market average returns over the last 100 years, the market produced an average annual return of approximately 9%.  The average investor’s annual return over the same period was only approximately 5%.  The reason for this underperformance is because the average investor did not remain invested.  Rather, they tried to time the market by jumping in and out and changed strategies when short term returns didn’t look so great, just as we have seen during 2022. 

This is behavioural economics 101 and is the subject of many universities’ textbooks. Simply put, if the average investor had remained invested over the long term, they would have enjoyed the full returns provided by the market. 

Figure 2 indicates the annual performance of the S&P 500 index vs the FTSE JSE All-Share index, in USD, from 2017 to date.

This illustrates that it is imperative to look at the timing and duration of the performance period as short-term decisions should not be made that negatively impact the longer-term outcomes of your portfolio.

Figure 2. S&P 500 TR Index performance vs FSTE/JSE All-Share Index in USD.

Current Snapshot

Bearing in mind the above, we now take stock of the current situation. At the time of writing, rand dollar exchange rate is R17.34, which is ~9% weaker than a year ago.  The FTSE JSE All-Share index is down 0.5% year-to-date, while the S&P 500 index is down 13.1% (both in USD). However, both the local and offshore markets have seen a strong rebound in asset process since the September lows, refer to figure 3.

Figure 3. S&P 500 TR index vs FTSE JSE All-Share index year to date in USD.

Our local multi-asset portfolios have approximately 30% invested offshore, so the local currency movements, together with the relative underperformance of the offshore markets, may negatively affect the overall valuation of the portfolios.  However, we are cognisant that the rand is likely to devalue over the longer term and that offshore markets will also recover.

Many of our more financially conservative clients are invested in fixed income portfolios.  This is because it is the least volatile asset class, and more financially conservative clients who draw an income monthly require a less volatile portfolio.  This asset class derives its returns in the form of interest and like elsewhere in the world, South African interest rates are increasing to combat higher inflation.

This too is temporary and interest rates will start to decline again in due course. This illustrates the importance of understanding how the timing of the reporting period can influence how you feel about your investments.  We must be mindful of this and look through investment cycles before making decisions that could detract from the longer-term strategy decided upon. Figures 4 and 5 illustrate the need to look through investment cycles, rather than merely short-term performance.

Figure 4. S&P 500 TR index vs FTSE JSE All-Share index year 5- and 10-year returns.