We published an article in April 2022 which highlighted why we thought that the rand was overvalued and why we believed it was at risk of a significant rerating. At the time, we noted that the rand could come under significant pressure if market volatility increased or if the commodities cycle tapered off. Since then, the rand has shed 23.5% of its value against a rampant dollar.
Given that we saw the R14.50/$ level as an opportunity to externalise funds, some of our clients might wonder whether moving rands offshore at R18/$ is even worth contemplating. We believe that investors should consider two major factors in this decision: The rand’s vulnerability to domestic shocks and international market conditions, as well as the superior set of investment opportunities offshore.
Based on these factors, there is still a strong case to move funds offshore at current levels.
The rand: still trading at a slight premium
In April 2020, when the rand was at R18.70/$ and falling to its R19.34/$ lows, our currency model* indicated that fair value was R14.74/$ and hence we advised clients to wait for a recovery before externalizing their funds. However, our current fair value has moved to R18.04, so the rand is trading at slight premium to fair value in this instance, per the chart below.

Source: Dynasty Investment Committee
*Our rand currency model takes into consideration the dollar versus its trade-weighted basket of developed market currencies; emerging market currencies relative to the dollar; and SA-specific risks
South Africa-specific political risks remain an important factor. The ANC elective conference looms before the end of the year. While President Ramaphosa is widely expected to retain the presidency of the ANC and the republic, we can’t discount the risk of a different outcome. The rand is hostage to the ANC’s ongoing factional battles that are evidenced by policy paralysis and a lack of capacity to deliver —which won’t be settled by the elective conference.
The unstoppable dollar is on a tear
During times of market volatility, the US dollar is a perceived safe haven. That’s the case even when the US itself is the source of the uncertainty, as we saw during 9/11 and the Global Financial Crisis. It’s thus not surprising that the dollar has been rampant in 2022 – gaining 19.7% against its trade-weighted peers and 26% since May 2021, to reach levels of strength not seen in the last 20 years.
With the Fed still in a rate-tightening cycle, we probably have not yet seen the end of dollar strength. However, should we start to see some sense of normalcy creep into the markets in the coming months, investors may start to seek higher yield and reallocate funds from the dollar safe haven into opportunities elsewhere. It therefore follows that when a risk-on environment returns, we could see a partial recovery of the rand against the dollar.
Global equities offer a better investment opportunity
Let’s leave aside the possibility that the rand may stage a level of recovery against the dollar if the stars were to align. The chart below shows that the MSCI World index has fallen 23.3% in dollars since the start of 2022, while the ALSI is down 10% in rands. The rand has weakened by 12.80% over the same period. When both are compared in rands, as illustrated in the second chart which follows, the MSCI World is slightly lower than the ALSI – 13.3% versus 10% down, respectively.

MSCI World in USD versus the ALSI in ZAR for 2022. Source: Infront

MSCI World in ZAR versus the ALSI in ZAR for 2022. Source: Infront
What this means is that investors can switch from local equity to global equity at better levels than they would have been able to at the start of the year, despite the depreciation of the rand. Even when compared to a year ago—when the rand was at R15.17/$—the offshore markets are still around 6.6% lower relative to the local index than they were a year ago, as evidenced by the following chart.

MSCI World in ZAR versus the ALSI in ZAR over the last year. Source: Infront
Even for investors deploying rand cash into dollar-based investments, as opposed to switching out of local equity, the same thesis holds up. They can invest offshore at lower levels than they could at the beginning of the year or a year ago, despite the weakness of the rand, as we note that the MSCI World, when measured in rands, has fallen 12% since this time last year.
It’s the long-term view that matters

MSCI World in ZAR versus the ALSI in ZAR over the last ten years. Source: Infront
Ultimately, investment decisions are not about short-term currency and equity market movements. They are about maximising long-term gains. When we zoom out and look at market performance over the past decade, the comparison is stark. The MSCI has yielded a cumulative return of 402.6% (17.5% per annum in rand) while the ALSI gained only 143.9% (9.3% per annum in rand).
We believe that even though the South African market is on a lower multiple of earnings than its global counterparts, the offshore opportunity set is much more attractive. South Africa’s economic situation is not conducive to fostering high performance, with low employment, poor infrastructure (including Eskom), low service delivery, rising interest rates and high inflation all crimping growth.
In any event, about 80% of the value of locally-listed companies is in rand hedges, with investors generally choosing from a small pool of global businesses that happen to be listed in South Africa, as opposed to investing in the pure domestic market. If the choice is between locally-listed foreign companies or foreign-listed companies, we prefer to access a larger opportunity set directly offshore. It’s generally also more tax efficient and more comforting to know that the funds are physically offshore in hard currency.
In conclusion
While we acknowledge that transferring rand cash into offshore equity is not quite as attractive as it was in the middle of June – when the global markets were at similar levels and the rand was stronger – the combined level of the MSCI World and the rand/dollar is still equivalent to that of early April 2022, when the rand was at R14.68/$. Cheaper global equity markets and their undemanding forward P/E’s, present a compelling case to consider deploying funds, even at circa R18/$.