Month: June 2026

Foreign trade and the exchange value of the ZAR. Description and explanation

Trade with foreign partners plays a very important role in the SA economy. Exports add about 30% to the demand side of the economy and imports add about the same 30% to the total supply of goods and services. Such trade is almost all conducted in a foreign currency – mostly with the USD – at a rate of exchange that is highly variable and thus very hard to predict. For exporter or importers and those competing with imports knowing what their rand revenues or rand costs will be- that is how profitable their operations will be – is subject to much uncertainty. Such risks to business plans are a clear discouragement to foreign trade. The volatile exchange rate is a burden SA business has had to cope with as best they can- by partly hedging, expensively, their short term exposures to exchange rate movements .

In the chart below we show just how variable that USD/ZAR exchange rate has been- indicating that the volatility of the rate of exchange has not declined much, even as the ZAR has performed much better and inflation has receded since 2023. The oil price shock, as do all globally important events,  adds to ZAR volatility. The annual increase in the rand cost of a dollar change (USD/ZAR exchange rate) since 2000 has average by about 3.7% p.a. – with wide spreads about the average- the Standard Deviation about this average has been over 15% p.a. Measured on a six month or three-month basis volatility has also been highly pronounced as we show

The movement of the USD/ZAR exchange. % Move over 12, six and three months. Daily Data 2000-2026

Source; Bloomberg and Investec Wealth & Investment

The movement of the USD/ZAR exchange. % Move over 12, six and three months. Daily Data 2020-2026 and average annual move 2.38% p.a

Source; Bloomberg and Investec Wealth & Investment

The openness of the economy moreover makes the exchange rate a very important influence on the prices of goods and services in general as reflected in the CPI or PPI. Where the exchange rate goes prices follow in the same direction. Moreover, the exchange rate movements, wide as they are, have led rather than followed the direction of the inflation rate to help level the foreign trading field. What is gained for exporters with a weaker USD/ZAR exchange rate is taken away with more inflation of their local costs of production. And vice versa for importers who are hurt by a weaker exchange rate but assisted by the faster rate at which the costs of local competitors will be rising following rand weakness.

Though as we will show the foreign trading field has not been a consistently level one. The ZAR on average has weakened by more than the difference between SA and US Inflation. SA inflation between 1995 has averaged 5.7% p.a. while US inflation has averaged 2.6% pa, an average 3.16% p.a. slower while the annual move in the USD/ZAR has averaged 6.3% p.a. over the 30 years.

It has made the USD/ZAR a consistently competitive rate of exchange – encouraging presumably more profitable exports and discouraging more expensive imports of goods and services. That is the exchange rate Vs the US dollar has weakened by more than the difference in inflation rates between SA and the USA. In the chart below we show that had the exchange rate largely followed the difference in inflation rates since 1995 ( purchasing power equivalent (PPP) exchange rate) a USD would now cost less than nine dollars. We show also that the ZAR came close to PPP in 2010. The ratio of the USD/ZAR exchange rate to its PPP equivalent has nevertheless averaged well over one to one.

USD/ZAR exchange rate trends. The ZAR/USD exchange rate compared to its Purchasing Power (PPP) equivalent

Source; SA Reserve Bank and Investec Wealth & Investment

 Though unfortunately faster export led growth has not followed a very competitive exchange rate. Volumes of Exports and Imports have largely stagnated as we show. Largely for the same reasons that SA growth generally has remained highly subdued. The rising cost of electricity and the failures of Transnet have been headwinds slowing growth and exports. The failure to offer competitive returns for investing in SA mining is another reason why exports have not grown faster despite highly favourable metal prices in USD and more so in ZAR. But this is not the place to catalogue the reasons for the failure of the SA economy to grow faster. But export led growth remains a route out of stagnation if SA could get its act together.

The volatility of the ZAR is explained largely by forces that are beyond South African control. The forces that drive highly variable flows of mobile capital to and from the US and into emerging markets generally of which SA is an actively traded part have moved the ZAR. Global forces much more than SA specific risks explain much of what happens to the USD/ZAR and other exchange rates. And will continue to do so. We should continue to expect exchange rate volatility. Capital flows are far more important flows than trade on the forex markets. Yet the Reserve Bank could do a much better job of not reacting with higher interest rates to exchange rate volatility over which they have little influence.

The volume of SA exports and imports (constant 2015 prices)

Source; SA Reserve Bank and Investec Wealth & Investment

The major force driving the ZAR has been the rates of exchange at which Emerging Market (EM) Currencies as a group have exchanged for the USD. If we could predict the direction of a representative sample of EM currencies we would be able to predict the USD/ZAR exchange rate with a high degree of accuracy. But unfortunately, such a forecast,  essentially a forecast of where the USD will be going VS the other major currencies, is a very difficult task.

Nevertheless, the ratio of the USD/ZAR exchange to the basket of EM currencies can help explain much of the behaviour of the USD/ZAR exchange rate over the years as we show below. When the ZAR moves away from its EM foundations a movement back to equilibrium can be predicted with some confidence. There has been very little change in the EM/ZAR exchange rates over the past ten years as we show below. It is striking that in recent years with a degree of USD/ZAR strength the ratio ZAR/EM exchange rates is now close to one to one even as the USD now cost about 2.5 times its rand cost of 2000. SA specific risks have not been harmful as they have been in the past. Hopefully these risks will continue to be contained.

The USD and the basket of EM currencies – exchange rates with the ZAR. 2000=1

Source; SA Reserve Bank and Investec Wealth & Investment

The EM/ZAR exchange rate. 2000=1 (ZAR weakness indicated by higher numbers > 1)

Source; SA Reserve Bank and Investec Wealth & Investment

Date: 06/01/26   Time: 14:39   
Sample: 1/03/2000 6/01/2026 
 GZARGZAR6MGZAR3M
 Mean 3.699710 2.420598 1.157351
 Median 5.277807 1.517241 0.744312
 Maximum 57.26489 55.22295 56.45716
 Minimum-44.21883-28.47029-24.67861
 Std. Dev. 15.33566 11.29241 7.748092
 Skewness-0.378492 0.581650 0.932699
 Kurtosis 3.192620 4.130874 6.475632
    
 Jarque-Bera 175.1832 755.7540 4467.587
 Probability 0.000000 0.000000 0.000000
    
 Sum 25494.70 16680.34 7975.303
 Sum Sq. Dev. 1620407. 878603.3 413626.9
    
 Observations 6891 6891 6891

The Risks in Index Tracking – some thoughts and evidence

Brian Kantor and Carig Evans

27th May 2026

Investors who over the past year (since May 2025) have invested in a portfolio of shares that passively replicate the S&P 500 Index or the JSE All Share Index have every reason to be pleased. The value of their US portfolio, with dividends reinvested in the S&P Index will have grown by 27% over the past twelve months. This year, despite the Middle East war and despite significantly higher US bond yields, the Index has returned nearly 11%. It has gained further momentum, after the war began. Up about 9% up since February. US 10 year Treasury Bonds yielded 4.17% p.a. in early January. They now offer 4.5% p.a.

Investors replicating the JSE All Share Index have gained even more – up 24% in ZAR and 37% in USD since May 2025. But the war has damaged the JSE down nearly 11% in USD since February 2026.

Share Market Indexes S&P 500 and JSE All Share Indexes (2025.05=100) Month End Data

But Investors in the S&P 500 and the JSE should also be highly cognisant of the risks they are running holding shares strictly in proportion to their market value represented in an Index. The S&P 500 Index, while storming ahead, has become ever more concentrated and dependent on the performance of a very few stocks. The S&P Index has become significantly less diversified and thus more exposed to the risk of a draw down. The top ten counters, included in the Index, by market value, now account for 38% of the Index. A top ten share that has probably never been higher. In 2019 a different top ten contributed a mere 16% to the Index.

Source; Bloomberg and Investec Wealth & Investment

Source; Bloomberg and Investec Wealth & Investment

Source; Bloomberg and Investec Wealth & Investment

The JSE has on average over the years has been more highly concentrated than the S&P 500. Since 2019 the top ten companies by market value included in the All Share Index have accounted for about 50% of the Index and this average has not varied much over recent years. Though in recent years the Index has come to be dominated by Resource Companies buoyed by much improved prices for precious and other metals.

Of the 49% share of the ALSI accounted for by the top ten, Resource companies account for nearly 20% of the Index. With gold mining companies Anglogold and Goldfields making up 13% of the Index between them. Clearly these concentration risks are risks that the average risk averse active fund manager would be reluctant to take. It is not safety first to hold 8% of a portfolio in a chip producer or 13% in two gold mining companies.

Source; Bloomberg and Investec Wealth & Investment

The JSE provides at least one conspicuous example of how blind index tracking can hurt. After an extraordinary run – a ten bagger and more -Naspers came to dominate the JSE All Share Index with its extraordinary growth in market value. In 2020 Naspers and its associated company Prosus accounted for over 25% of the JSE All Share Index. That share is now down to 9.6% but still enough to make Naspers the largest company on the JSE with a near 8% share. However, after it peaked at 25% in early 2020 Naspers and Prosus significantly underformed the Index to fall away in relative size on the JSE Holding 25% of a share portfolio in Naspers and Prosus in 2020 proved to be a very bad idea that presumably most risk conscious active investors had hopefully not subscribed to. But a danger Index trackers could not avoid.

JSE Vs Naspers Vs Prosus. Total Returns (2019=100)

Source; Bloomberg and Investec Wealth & Investment

Much of the underperformance of Naspers and more so of Prosus came in 2021 and 2022. These two counters are currently again lagging well behind the Index.

Differences in Total Returns JSE- Naspers and Prosus. 2019=0

Source; Bloomberg and Investec Wealth & Investment

Undiversified portfolios are risky by nature. Nature demands that higher expected returns come with increased risks of failure.  Stocks that come to dominate an Index may also be more volatile day to day than the average stock adding market risk and one time market leaders can become laggards that will drag down the value of an Index tracking portfolio.

Financial history tells and warns us so. Passive Index tracking is clearly not without risks. It all depends on the Index tracked and the less diversified they are or become, the more risky they are. Some Indices will be more concentrated than others. The Korean Kospi – also now running strongly – is dominated by two only chip producers. Nokia used to account for 90% of the Helsinki Index. Gold mining companies at one point, when the gold price took off in the seventies, accounted for 60% of the JSE.

Active investing is not only about realising market beating returns. It is as much about managing risks of the ultimate shareholder in a sensible way. But the risk averse investor would almost inevitably underperform the Indices when they are running hard led by a few counters as has been the case recently in New York and Johannesburg.  Be they Nvidia on the S&P or Goldfields on the JSE driving the Index consistently higher.

When the race has been run and the outcomes are known future conscious risks, the before race odds, become irrelevant. And too few appreciate risk avoiding strategies when the risks, with good luck or perhaps judgment have proved to be over-estimated. It takes a market draw down to appreciate risk avoidance and appropriate diversification strategies. Not to be wished for but to be planned for.