Rand Hedges

10 May 2021 By PDSNET

One of the complicating factors for a South African investor is the volatility of the rand. Many of our leading shares derive a large percentage, or even all, their income from their interests overseas – which means that their earnings are directly impacted by the strength or weakness of the rand. So, it becomes essential that you formulate a view on the rand and where you think it might be going.

For example, you may have noticed the fall in the price of Prosus shares since February this year. That fall does not indicate any deterioration in the prospects for its major investment, Tencent, or the company itself, but rather it reflects a shift in perceptions of the future of the rand, especially among institutional fund managers.

At its peak of R1937.76 on 19th February 2021, Prosus was trading on a Price:Earnings multiple (P:E) of 69.62 – which meant that investors buying its shares at that price would need to wait almost 70 years at that level of Prosus earnings for the cumulative earnings to add up to the price they were being asked to pay for the share. Consider the chart:

Prosus: February 2020 - 7th May 2021. Chart by ShareFriend Pro.


Here you can see that Prosus was in a steady upward trend between April 2020 and February 2021. Then the share began to fall. Its earnings prospects had not really changed significantly – it was just on a very high multiple and highly sensitive to perceptions of the rand.

A P:E of 70 is a very tall ask. To give you an idea, on that day, 19th February 2021, the JSE Overall index was trading on an average P:E of 26.32 and even the S&P500 was on an average multiple of about 40. When a share is on a very high multiple, it becomes much more vulnerable. The slightest piece of bad news can send the share tumbling – because all the good news is already discounted into the share’s price. In the case of Prosus, one significant negative factor over the past three months has been the improving prospects for the rand.

And why is the rand getting stronger? We have long said that the rand was underpriced against first-world currencies. This year, as the recovery of the economy from COVID-19 has been happening on the back of rising commodity prices, the rand has been aided by a general perception that President Ramaphosa is steadily strengthening his grip on the ANC and that corruption is receding.

The rand has been the best performing of the emerging market currencies and looks set to continue in that roll. The following chart is one that you should be very familiar with from our various articles and Confidential Reports:

South African rand/US dollar: March 2018 - 7 May 2021. Chart by ShareFriend Pro.


Here you can see the rand against the US dollar going back to March 2018. It shows the support at R15.30 temporarily broken by the COVID-19 aberration, then the period of uncertainty in the lead-up to the US election and finally the relief rally which came with Biden’s win. Resistance at R14.40 was broken when the rand strengthened to R14.16 on 15th April 2021. This has been followed by a correction back to the R14.40 level (where previous technical resistance became support) and then a decisive strengthening to R14.03 on Friday 7th May 2021.

This continued pattern of rand strength is surely based, at least to some extent, on the successful suspension of Ace Magashule (and many other corrupt ANC officials) from office last week. The Ramaphosa camp is seen as becoming steadily more assertive in its battle with the Zuma/Magashule camp.

Another major factor must also be the new record high on Wall Street which saw the S&P end the week at 4232.6. US investors are becoming more “risk-on” and so emerging market currencies, and especially the rand, are benefiting.

Good news as this is, it is bad news for the holders of rand hedge shares like Prosus. As a private investor, your perception of the future of the rand must always be a major component of your analysis.


All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.

Share this article:


Fundamental Context

The assessment of shares is divided into fundamental analysis and technical analysis. The fundamentalist is trying to answer this question, “How good will this company be as a payer of dividends in the future ?” This requires an in-depth study of everything about the company starting with its most recent financials.

Market Action

In general, we encourage investors to take a medium to long-term view of the market and not to get involved in “trading” or intra-day buying and selling, especially in highly geared derivative instruments.

However, watching the intra-day progress of the S&P500 index and other indicators

Market Update

The S&P500 has virtually completed its seventh “mini-correction” on Friday the 4th of June 2021, since the V-bottom of the pandemic in March 2020. It exceeded its previous all-time high closing level of 4232.6, reaching an intra-day high of 4233.45. That it would probably go to a new record high was indicated by its record intra-day high

The Confidential Report - June 2021


In the previous Confidential Report on 5th May 2021, when the S&P500 index was at 4167, we suggested that it was probably due for a correction. Over the last month we have watched as a correction unfolded in that index. However, it turned out to be only a mini-correction of just 4% - and as we pointed out in our article, 


Almost nine months ago we suggested that you take an interest in two shares – Massmart and Blue Label. We suggested that they would benefit from any sort of recovery in the South African economy. At the time, investors were running scared because of the fall-out from the pandemic and the resulting lockdowns. We quoted that famous saying by Warren Buffett –


Since the V-bottom of COVID-19 in March last year, the S&P500 index has risen an amazing 86,6% without any major correction. There have been 7 “mini-corrections” of varying sizes, including the current one (which is not yet over), but in each case the market has quickly bounced back and resumed its inexorable upward trend. Consider the chart:

The Confidential Report - May 2021

The US economy grew at an annualized rate of 6,4% in the first quarter of 2021 – which was much faster than expected. Gross Domestic Product (GDP) was $19,1 trillion – which can be compared to the $19,3 trillion of the December quarter of 2019 - before the pandemic took hold. This shows that the economy is now virtually back to pre-COVID-19 levels. The

Top of the Market Signs

In last week’s article, 12-Year Bull Trend, we pointed out that the bull trend was rising exponentially and ultimately that could only end with an exponential collapse. We said that the exact timing of that collapse was very difficult to assess.

You may also recall our article of 23rd January

12 Year Bull Trend

On 6th March 2009, just over 12 years ago, the S&P500 index made an intra-day cycle low at 666.79. It was the end of a 17-month bear trend which had seen the S&P fall by 57,4%. The world was in the teeth of the sub-prime crisis and negativity abounded. Investors were terrified.  The response to the crisis was massive and world-wide.