Diversify investments to hedge against rand’s rocky ride
July 08, 2013
By Humphrey Borkum, Chairman of JSE Limited
When I first joined the JSE in 1968 the rand was worth $1,40. It remained at
this level until March 1982 when sanctions due to apartheid started to erode its
value. By February 1985 it was trading at over R2 per dollar and some of my
banking colleagues may recall that in July that year all foreign exchange
trading was suspended for a few days to try to stop this devaluation.
Zimbabwe’s controversial land reform programme that was started in 2000
followed by the 11 September 2001 terrorist attacks in the US helped propel the
rand to its weakest historical level of R13,85 to the dollar in December 2001.
This sudden depreciation led Kevin Wakeford, then Chief Executive of the South
African Chamber of Business, to persuade President Mbeki to set up a Commission
on the Depreciation of the Rand which in turn led to a dramatic recovery. By the
end of 2002 the currency was trading at under R9 to the dollar again and by the
end of 2004 was trading around R5,70. The average exchange rate in 2012 was
R8,20 to the dollar.
A host of local and international movements and
events affect the rand’s value. This year the strength of the dollar, the
movement of money out of emerging markets, the size of our current account
deficit and our mining woes probably contributed to the rand losing 11% in May
and breaching the R10 mark on May 30. One of the primary reasons for volatility
of the rand is that it is one of the few emerging market currencies that can be
bought or sold in reasonable quantities.
World stock markets have also
been skittish and the JSE All Share Index (Alsi ) has been moving up and down
between 38 000 and 42 000 for some time now. As stock markets are usually
looking ahead by six months to a year just a hint from Ben Bernanke, Chairman of
the Federal Reserve, that the Fed might ease up on quantitative easing sometime
in the future was enough to set markets gyrating. To handle this volatility I
would suggest that retail investors should, where possible, diversify across
asset classes and also include shares or unit trusts that have some offshore
investments. These funds can then be used to hedge the rand’s depreciation
against the major currencies.
The volatility of the rand has always been
of concern to businessmen when trying to estimate costs, manage risk and
formulate medium and long term plans. In 2001 there was nothing the JSE could do
to help them but early 2007 saw a significant change in the South African
In his budget speech in February of that year Finance
Minister Trevor Manuel announced that market participants would be allowed to
trade in currencies on the Johannesburg Stock Exchange. This meant that retail
investors, asset managers, life funds and corporates (with exchange control
approval) would be able to cover their currency risk on a regulated platform. In
2008 the Minister further relaxed exchange control requirements and allowed
corporate entities to trade currency futures without requiring exchange control
This dispensation represented a major step forward for local
currency markets and further aligned South Africa with international standards.
From this time on importing and exporting companies now had an alternative venue
for hedging currency exposure.
Our electronic trading platform offers an
efficient and transparent vehicle to view the movement of exchange rates and to
hedge against currency risk. The market offers contracts in dollar/rand,
euro/rand, stirling/rand and also between the rand and the Australian/Canadian
dollar, the Japanese yen, the Chinese Yuan and the Swiss franc.
present our currency market is buoyant. In 2012 we traded R126 billion in
currency futures which was an increase of 26% over the previous year (R99
billion). Similarly the R32 billion currency options traded in 2012 was a 100%
increase over 2011. However by the end of May this year we had already traded a
combined value of R135 billion with May recording the highest single monthly
turnover in the exchange’s history (R41 billion). If market volatility continues
at the present rate it’s possible we could substantially outperform 2012 in
terms of volume.
Moreover to remain competitive and to attract further
over-the-counter (OTC) business onto the exchange we decided to reduce fees for
both the currency and interest rate (bond) markets effective on July 1.
Here I must elaborate. Currency futures and options are derivative
products. Derivatives can best be explained as instruments which enable
investors to hedge against movements in price of underlying investments. These
underlying investments are usually bonds, equities, commodities or currencies.
Futures and options are basically a way of allowing investors to cover their
risks against unexpected developments – for example sudden falls or rises of
currencies, commodities or maize prices. On a well regulated exchange
derivatives are able to enhance the functionality of the overall financial
In my experience lay investors usually understand the workings
of shares, unit trusts and mortgage bonds. However the world of derivatives
tends to remain a place of strange alchemy to them. In this regard the JSE has
taken a range of initiatives to demystify the stock exchange to the man in the
A recent innovation is the introduction of the ‘JSE Virtual
Trader’ - a simulated trading platform that is hosted on the JSE website. This
platform enables any potential investor to experience real-time trading in any
of the JSE listed products across all of our asset classes. The virtual trader
will assist even experienced traders to put complex trading strategies to the
Through a registration process on the JSE website applicants are
given a user name and password for access to the virtual trader. The initial
access will be limited to 30 days although the JSE has the ability to extend or
minimise this access as necessary. Each user is given a certain rand value in
virtual cash for trading. There is no charge for this service.
Collusion in Construction Industry
As seven of the
15 construction companies that were fined by the Competition Commission for
collusion are listed on the JSE it would be remiss of me not to comment on this
matter. My initial reaction is that no matter what the laws are or however
strong the corporate governance , there is simply no way of preventing
dishonesty and/or collusion if the intention to behave unethically is there.
The obvious remedy for this is to make the punishment so severe that
people will think twice before breaking the rules. However in the case of the
construction industry I think that the wrong people have been punished. The
parties bearing the brunt of the huge fines that have been levied against their
companies are today’s stakeholders. There is no doubt that the vast majority of
the directors and shareholders who were in place when these actions unfolded
have long since moved on and a new body of stakeholders have to bear the
consequences. This is clearly unfair but I am at a loss as to what better
remedial actions should have taken place.
A further thought is that in a
society where the everyday bribing of a traffic cop has become the norm, one
should not really be surprised at corruption on the scale that took place in the
This article first appeared in Business Report