In December, the Reserve Bank reported that for the Quarter to September 2015, the Net Investment Position had turned positive for the first time since 1956!
This meant that for the first time, South Africans owned more assets offshore than foreigners owned in South Africa.
Included in this data was that:
- For the first time since 2008, foreign investment had decreased versus the previous quarter.
- Investment offshore by residents had increased sharply by 4.6% during this same period.
The result was a change from a net foreign liability position of R131bn to a net foreign asset position of R113bn – a net outflow of R244 billion for the quarter!
Which being interpreted means:
Of course, this was the same quarter that saw the Rand make new record price highs (value lows) against the Dollar.
But it was before Fitch’s downgrade …and before Nenegate!
Based on feedback from forex brokers involved in the business, December and January saw record outflows compared with previous months, as blind panic set in with the Rand’s collapse to almost R18 against the Dollar, R20 against the Euro and R26 against the Pound in early January.
(...the next quarter’s report will no doubt reflect this?)
(...the next quarter’s report will no doubt reflect this?)
Importantly, what does this mean for the Rand and local and foreign investment behaviour going forward?
AND...is there any hope for a turnaround?
A look at history will often give us a picture for the future, the undeniable fact being that history does repeat itself, as us humans have this fascinating tendency to make the same decisions and take the same actions in similar circumstances.
(The problem tends to be learning from history...)
Let us take a look at some recent history:
Click to enlargeThe chart shows the last 10 years of investment behaviour (foreign assets owned by SA residents less SA assets owned by foreigners) plotted against the Dollar/Rand exchange rate over this same period.
As they say, a picture is worth a thousand words!
- As can be seen, when the Rand was strong back in 2007 and again in 2011 (blocked in green), the majority of investors (both South Africans and foreigners) were motivated to rather invest in South African assets than hold investments offshore …
...and in so doing, they chose the worst time possible to do so, as the Rand bottomed out and weakened steadily thereafter for several years.
- And when the Rand was extremely weak, as in 2008 (blocked in red), this prompted the same investor herd to panic and convert their South African assets to foreign-held investments…
...again choosing exactly the wrong time to do so, as the Rand peaked and then strengthened steadily for the next few years.
Looking back at behaviour like this, it is easy to see one’s disastrous decisions
– and it seems so foolish and irrational to have made them in hindsight.
The reason for this is that when you look back at these past events, you are able to analyse them rationally and objectively. And all seems clear.
But you are not emotionally involved in that moment – and that is the problem!
In financial markets especially, we all tend to make decisions emotionally – and then rationalize them with logic thereafter.
As can be seen from history, your emotions will cause you to make the WRONG decisions at market peaks and at market bottoms. Every time!
And so, when we got to the latter half of 2015, and the market was panicking, what was default reaction?
A fearful, emotionally-charged lemming-like rush for the door – just as the majority did back in 2008 and 2001.
While the minority – the successful investors – were following Warren Buffet’s advice,
In other words, DON'T do what everyone tends to do at market extremes. And similarly, DON'T do what your own emotions are screaming at you to do.
In fact, do just the opposite!
(NOT easy when your emotions are tending to make you look for every reason as to why this time is different from the time before.
And almost EVERYONE you speak to feels the same way!)
And almost EVERYONE you speak to feels the same way!)
That is why having an objective view of where the market is likely to head is ESSENTIAL at such a time, enabling you to make a rational, educated, objective decisions.
That is, if you keep the ENEMY – YOUR EMOTIONS – locked out of the process.
A difficult thing to do (those emotions will always want to take over), but essential to your successful foreign exchange and investing decisions.
So, where to from here?
Contrary to all mainstream expectations (but in line with our forecasts), the Rand has already strengthened 15% at the time of writing – a real surprise to the majority who expected over R20 by this time.
And further Rand strengthening is expected in the months ahead based on our Elliott Wave pattern-matching analysis.
And when the strengthening cycle is mature and the Rand is ready to start weakening again, we will know for sure we are at that point when the majority have decided that "the Rand is finally onto a good thing ... a certain one-way bet ... and this time is different from before!
And in their infinite wisdom they convert their hard currency holdings back to Rand.
Yes, it is indeed difficult for us irrationally predictable human beings to learn from the past.
But it is not impossible (especially with an objective forecast ;-))
As always, I would love to hear your comments and feedback - please leave a comment below.
To your success~
James Paynter
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2 replies to "Volatile Rand – and Predictably Irrational Investor Behaviour"
James,
Good to note that peak to trough takes about 2½ to 3 years. Given our expected calendar of events, that puts the trough at about the time of the next national elections.
On this basis we can expect a steadily improving mood about our nation during the next couple of years. So that might mean things steadying around the ANC and Gordhan's faction 'winning'.
Followed by some over-confidence at the next national elections and rash economic moves thereafter...
Best wishes,
Wietze Post
I have to admit that I hang on your every word. I have followed your predictions for a number of years now and am amazed by your accuracy and insight.