Avior Research
Business Consulting in Cape Town
www.avior.co.za
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2nd Floor. Cape Town. Western Cape. 8001Are you the owner or manager of this company?
What you should know about Avior Research
There is structure, some of it obvious, some of it requiring more digging, giving us a better probability of getting the levels right where the Rand may be residing over time. Even if we cannot pin it down in the very short-term. That has its own rules about what flies and what doesn’t. It allows a sketch to be made of the main forces that drives the Rand over time. The first reality that defines the Rand is our inflation differential with other countries. The second reality is that no currency is necessarily at all times at its fair value, meaning the level at which its balance of payments can be sustained in a stable manner, exports matching imports. Yet, few currencies ever find themselves for long anchored at their fair value, under- and overshooting being the order of the day, as many forces impact on the currency, with capital (investment) flows as their main conduit. Yet there is no law that defines how far a currency may under- or overshoot. On future occasions, things can turn out even worse (or better), a matter of very specific circumstances. The only relevant observation is that the bigger the undershoot, the greater the export advantage & import-penalty, inviting shifts in investment and trade, making for a shift in current account balances, impacting capital flows and thus influencing the level of the Rand, naturally correcting under- and overshoots, given enough time. Often other processes are faster to correct for the currency under- or overshoot. Thirdly, the onset of the Chinese-driven commodity supercycle also driving our key commodity prices higher. Fourthly, favourable global liquidity conditions setting in motion large capital inflows to many Emerging Markets (EMs) looking for higher returns. Fifthly, the onset of faster domestic SA growth (boom conditions) making us more attractive to foreign capital inflows. The global growth cycle, commodity cycle, capital flow cycle, any windfall conditions and our internal political cycle. Global growth this decade has been slowing down, but may be stabilizing, in some parts already recovering (America, Europe), in others bottoming out (China?). The bigger game changers for SA, with the biggest risk (of happening or not), concerns windfalls and any change in the political cycle. Either there awaits worse or reform of some kind is to be expected, in turn impacting business confidence and contribution positively. More weakness for longer, a wider Rand undershoot by all means, but a turning point before decade end as our big game changers at some point start to reverse, after which a gradual narrowing of the Rand undershoot relative to fair value is feasible (which itself will keep rising at 50 cents yearly because of the inflation differential). The Financial Times carrying an article this weekend asking whether this year is the moment to (slowly) re-enter bombed out EM valuations. This decade outcome as sketched would not rate as the end of the world. Instead, a difficult decade, laid low by many coinciding forces, giving us yet another deep Rand undershoot (of which so many in recent decades), after which (partial?) recovery into the 2020s, certainly in real terms inflation-adjusted (and, who knows, at some point another overshoot, in the nature of these big cyclical things). For never say never in this game, as the historic record suggests (but much also hinging on us making our own luck, alternatively digging our own grave ever deeper).
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