Currency Conundrums

Ian Enslin takes a look into the collapse of many emerging market currencies and the falls in commodity prices

The dominant investment theme of 2015 was the unrelenting collapse of many emerging market currencies, which have been undermined by falls in commodity prices.  Copper, iron ore and oil prices have fallen by approximately 30%, while soft commodity prices are also weaker for many goods.

In South Africa, these weak trends were exacerbated by clumsy political tactics, exemplified by President Zuma firing the finance minister after only 18-months in his post, apparently unbeknownst to his cabinet.  This inept management of his team highlighted the fragility of South Africa’s economy.  The currency fell sharply on the news, following a period of extensive weakness for the Rand over the previous twelve months.  Two days later the newly appointed finance minister was also replaced, by his predecessor but one.

In Brazil, widespread corruption at the top of the establishment has further eroded confidence in an already tired and fiscally stretched economy, forcing the currency lower.

We are still not tempted by low valuations within these commodity exporting economies as there is little sign that commodity production will be curtailed to help support prices.  Neither is there any indication that the world’s biggest consumer of these products, China, is likely to return to the level of imports of a few years ago.  Paradoxically, as emerging market commodity exporters price their output in US dollars their costs, however, remain in local currencies and their profitability remains solid in many cases.  So there is an incentive for some of these companies to maintain high levels of production, so long as the currency mismatch continues.  Amidst this backdrop, we think commodities remain on a losing streak for a while longer, while the associated currencies are unlikely to recover any time soon.

We remain focused on playing the long game; in the case of emerging markets our exposure to commodity exporting countries is very limited but we are aware of some opportunities elsewhere.  Commodity importing countries will be amongst the obvious beneficiaries, including much of Asia.

Whereas the risks and opportunities for investors are sometimes difficult to determine, the opportunity for our clients is surely apparent. With the South African Rand now 30% lower than at the start of 2015, and the Brazilian real 40% lower, those wanting to support the England cricket team in South Africa, or travel to Rio for the Olympics, will be the beneficiaries.

Ian Enslin (11.01.16)

Risk Warnings

The views and opinions expressed are the views of Waverton Investment Management Limited and are subject to change based on market and other conditions.  The information provided does not constitute investment advice and it should not be relied on as such.  All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

Changes in rates of exchange may have an adverse effect on the value, price or income of an investment.

Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise.  Capital security is not guaranteed