The Rand has been an underachiever in the past and is still considered undervalued because its value in foreign exchange is less than it should be, based on economic conditions. However, there are multiple influences, including the growth of the economy, the demand from investors, the effects of risk, and more.
Looking at Burgernomics, the results concur with this where according to the Big Mac Index, the South African Rand is still undervalued.
According to this index, South Africa has one of the most undervalued currencies in the world, where at July 2017, it was undervalued by 57.3%.
The Drama of the South African Rand
It has long been noted that the value of the Rand is in part affected by emotion. With the typical South African living in constant uncertainty, it is hardly surprising that the Rand carries with it some referred emotional baggage.
As South Africans, we are invested in the Rand, whether we like it or not. We are bound to what happens to the Rand.
What effects do the political instability and economic imbalances have on the Rand?
From research, it is clear, that as humans, our preference to avoid losses is stronger than our desire to obtain gains. Investors are likely to make poor investment decisions when driven by emotion rather than valuation and fundamentals. And the Rand is probably the most emotional trade of all.
Will Zuma be the catalyst that swings the tide?
The upcoming no confidence motion in The National Assembly will send the rand soaring if President Jacob Zuma is given his marching orders. As a nation being rid of that albatross is guaranteed to put spring in everyone's step and this note of positive optimism will be reflected in the value of the Rand.
So where does this leave the Future of the South African Rand?
Recent data suggests that we could be at the start of an economic turnaround, especially if Zuma is sent packing. Higher resilience is expected from the Rand. Some of the factors that could contribute to this are better trade balance as an emerging market and some reduction in political uncertainty.
What does this mean for Investors?
The Rand has shown to be quite rebellious, and leading indicators for the South African economy are showing signs that the rand is in fact about to change direction, ending a trend that has seen it lose more than 50% of its value against the greenback over the past five years. There is strong evidence that the over-riding message for global investors is to have a diversified portfolio.