To offshore or not to offshore?

• Global, South Africa
• Dollar, Offshore, Offshore investing, Rand, S&P 500
• April 9, 2020

To offshore or not to offshore? That is the question on everyone’s lips. With the Rand behaving like a yo-yo, it’s a reasonable question.

I’m just not sure the answer is as obvious as everyone thinks it is.

I can’t suggest what you should do with your money, as I’m not your financial advisor and I don’t know your personal circumstances. You should speak to someone who is and who does. However, I can share what I do with my money to help you understand how I think.

A lot of people panicked and sent money offshore when the Rand traded above R19.

I did not.

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Buy low, sell high, remember?

You can take practically any price chart of any share, currency or whatever other instrument you choose.

You’ll notice a few things about the chart:

• • Long-term upward or downward trend
  • Large occasional spikes and drops
  • A number of small upward and downward moves within that broader trend

The long-term trend is primarily the focus of investors with a multi-year view. These are your typical asset managers, pension funds etc.

The spikes and drops will mark step-changes in the valuation of the instrument. For example, a company reporting an unexpected improvement in margins might see a substantial spike in the share price. Conversely, a country that has been downgraded may see a sudden drop in the value of the currency. This applies across all types of instruments.

The thing to remember is that the big moves are always driven by specific events. There are investors who focus on identifying these opportunities and positioning themselves for it. For example, there are a number of companies currently on the JSE that look like interesting buyout targets. Taking a position in these companies means you are waiting for the big day when another company makes an offer for your shares, which is almost always at a premium to the traded price.

Within the long-term trend, there are daily ups and downs. If the long-term trend is up, there will be more ups than there are downs. This shows the volatility in the instrument i.e. how much and how often the value changes.

Traders who actively trade the market on a daily basis are focused almost exclusively on these small moves. They hardly ever care about the long-term trend, focusing instead on little clues that help them predict what the next 0.5% move might be.

These traders inevitably keep the instrument in a fairly tightly traded range i.e. trading between a ceiling and a floor.

The correct technical terms are “support levels” (floors) and “resistance levels” (ceilings).

What does that have to do with the Rand?

To break out of a traded range of support and resistance levels, something big needs to happen.

Consider this ZAR:USD chart:

The Rand has several examples of everything mentioned earlier.

There are negative market shocks (Global Financial Crisis 2008 – 2009; Nenegate December 2015; Covid-19 March 2020), positive market surprises (ok just one – Ramaphosa winning the ANC elective conference) and a clearly observable long-term trend.

You may also notice that the Rand recovered after the previous two shocks, returning to the levels it traded at before the shock.

There is a recent trading range of approximately R13.20 – R15.20, followed by the blowout due to COVID-19.

You can also see all the volatility along the way of smaller upward and downward moves. Successful traders make a fortune by correctly predicting these short-term moves, rather than caring about the long-term prospects of the company, currency or government.

This is the key difference between trading and investing.

Selling the Rand at R19/US$? No thanks.

In the markets, it takes something significant to push any financial instrument to an all-time low. Buyers are waiting to pounce on the dips, so the news has to be so bad that the currency / stock / government bond runs out of buyers at those levels.

This is the “support” level we talked about earlier.

Previous support levels were smashed by COVID-19 concerns, accompanied by the fastest equities sell-off in history. This is as extreme an economic event as the world has ever seen.

Another way of looking at it is that in the face of apocalypse, the Rand got into the R19s and went no further.

If I switched into USD at these rates, I would literally be selling the Rand at its all-time low. Sure, it could get worse. Sure, we could turn into Zimbabwe. No, this isn’t likely, at least not in the immediate future.

Markets have a nasty habit of overreacting to news, leading to sharp moves and subsequent corrections. I believed this was the case again, so I held onto my Rands.

What gave me comfort to do this?

1. Likelihood of getting better vs. getting worse

Simply, I believe that the Rand moving from R19 to R17 is far more likely than a move from R19 to R21. It’s the same percentage change, just in opposite directions. The changes don’t carry the same probability under my analysis, based on moving back to an established trading range vs. breaking into new all-time lows.

I wasn’t rushing to take money out at R19 and I’ve been proven right thus far, with the Rand dipping back below R18 after just a few days.

2. I don’t want to rot away earning no interest with my newly minted Dollars

I really don’t see the point of just stashing the money away in an overseas money market account. I’m not a pensioner and I’m not that risk averse. You also may be aware that interest rates overseas are practically zero and in some countries negative.

This leads me to…

3. Potential double-whammy of Trump being wrong

Take a look at this chart of the Satrix S&P 500 ETF, priced in ZAR and conveniently also in purple on my Easy Equities trading account:

The S&P500, in ZAR terms, is close to an all-time high. I live in South Africa and spend in South Africa, so I need my money to come back to South Africa at some point even if I want some USD exposure along the way.

Therefore, I care most about how this thing looks in ZAR. This is very different to a wealthy South African looking to hedge exposure, which is why I’m sharing the way I think rather than suggesting what you should do in your personal circumstances.

If the US economy falls over, it’s going to be hideously ugly for anyone who bought the S&P 500 at R19/US$.

Firstly, the USD suddenly wouldn’t be the safe haven asset everyone thinks it is, so we might even see the Rand come back to the R16s.

Secondly, the S&P500 would probably lose another 10% at least and very possibly a lot more.

The combined net impact is that this chart would absolutely nosedive, taking anyone with it who decided to take USD exposure in a ZAR-quoted instrument.

I do want to improve the risk profile of my portfolio by taking a position in global stocks. The Satrix S&P500 ETF (or similar) is an easy, low-cost way to do it, without me having to pick specific companies overseas that I simply don’t know enough about.

However, I’ll wait.

Trump might be right, in which case everyone is better off anyway. He might be wrong, in which case I’ll wait for the correction before I dive in, ready to take advantage of the next up-cycle on the S&P500.

In the meantime, I’ll keep strategically buying on the JSE. Right now, for me, it feels like the right approach.

Good luck with your investment decisions at the moment. Remember, everyone’s circumstances are different.