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Rand Awareness - The worlds of business and economics have a way of working themselves out

17/12/2015

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

South African president Jacob Zuma’s newfound zeal for getting through finance ministers – somewhat reminiscent of the enthusiasm with which a child might address their stocking on Christmas morning – along with the dismal outlook for commodity prices, has seen a further weakening of the rand. At one point last Friday, £1 would have bought you 24 rand – the nadir, thus far, of a trend that has seen the currency drop from a rate of 10 to the pound since 2010. 

This has all sorts of macroeconomic implications upon which we would not dream of suggesting we were qualified to comment. What we would highlight, here on The Value Perspective, however, is that this is another example of how things have a way of working themselves out in the interconnected worlds of finance, business and economics. 

Over the last few years, investors could have been forgiven for wondering how South Africa’s platinum producers or indeed – as one look at the share price of the likes of Anglo-American will show you – any of the country’s mining industries could ever again be competitive with some of the apparently very low-cost mining operations in, say, Australia and Canada. 

Such a view would, however, have ignored the effects of factors such as currency. One way that South African miners will make progress towards making sensible returns again is if the South African currency, frankly, gets hit. Other parts of the economy may not feel the same way of course but, for businesses that sell their products in US dollars while having most of their costs in rand, this represents a significant boost. 

A flailing currency is by no means the whole cure for what ails South Africa’s miners but it will help – as we flagged up only a few months back when, writing on the parlous state of the platinum sector in Good call, we noted: “No doubt the world will adjust – for example, a weakening rand against the dollar should serve to make an industry that is largely based in southern Africa more competitive.” 

To be clear, we do not mention that to suggest we have any prowess as currency forecasters, here on The Value Perspective, but rather once more to underscore the importance of investors remembering the future is uncertain and tough to predict and, no matter how entrenched things might feel, there is always the possibility they will change materially going forward – for better or for worse.

Author

Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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