By Wendy Myers, Head of Securities at PSG Wealth

South African investors recently woke up to something we haven’t seen in years: a genuinely strong currency. After trading below R16, the rand’s strength has been supported by booming commodities, a softer US dollar and a general uplift in sentiment around South Africa.

So, what’s the right move? Should you rush money offshore; rotate into domestic shares; or just ignore the noise entirely?

Before getting tactical, let’s take a step back. It’s important to understand that the rand is a highly liquid emerging market currency. It is very sensitive to global risk sentiment, commodity price fluctuations and domestic political instability. As a result, the rand tends to be a “risk-on / risk-off” currency – a concept that is worth understanding in the context of investing.

In a risk-on environment, investors typically move capital from developed markets into emerging markets in search of higher returns. That strengthens emerging market asset prices and currencies, and the rand is often a beneficiary. In a risk-off environment, the reverse is true. Investors retreat to perceived safety in developed markets, and the rand weakens.

So, when precious metals and other resource prices surge – as they have recently – that supports export revenues and has a positive impact on the currency. We’ve also had more certainty around Eskom and a stronger fiscal performance. Add to that the recent dollar weakness, partly driven by shifts in US policy direction, which has provided a further tailwind to rand strength.

Back to the original question, what does this mean for local investors? Generally, there is an inverse relationship between the rand and the JSE. This is because a large portion of the Top 40 consists of companies that earn their revenue in dollars. When the rand strengthens, the rand-denominated value of those foreign earnings declines, putting pressure on share prices. As such, we’re seeing rand hedge stocks like globally diversified companies and resource counters underperforming.

On the other hand, domestically orientated shares – local retailers, banks and property companies – tend to benefit. A stronger rand lowers inflation, reduces input costs and supports lower interest rates. This explains why banks have had such an incredibly run as of late.

Yet recent years have reminded us that correlations are helpful but never guaranteed. We have at times seen both the rand and the JSE strengthen together, largely due to surging commodity prices. Markets always have a way of surprising us.

All this considered, is it a good time to use rand strength to move money offshore? Offshore diversification should be a strategic decision, not a tactical reaction to currency moves. That said, a stronger rand does make offshore investing cheaper in pure currency terms.

However, investors must understand that currency cuts both ways. Often when the dollar weakens, US equity prices have already adjusted. A weak dollar can boost multinational earnings, support export competitiveness and encourage international investment into the US. Commodity prices, typically priced in dollars, also tend to rise when the dollar weakens. This means South African investors entering offshore markets during a period of rand strength may find that underlying asset prices have already run.

That does not negate the case for global diversification. Personally, I would use this period of rand strength to build a more resilient portfolio with both local and offshore exposure, correcting any structural underweights. Europe, in particular, presents interesting opportunities, and recent volatility in US markets may create attractive entry levels.

In terms of the JSE, identify companies that benefit from a stronger rand. Retailers and manufacturers are obvious candidates. At the same time, recognise that rand hedge stocks under pressure today may represent attractive long-term entry points if their underlying businesses remain sound.

Consider gold carefully. It is volatile and not for the faint-hearted, but it can act as a hedge against future currency weakness and geopolitical uncertainty.

Above all, take a long-term view. Investing is never about perfectly timing entry levels. As investors, we are emotional. We want to buy at the bottom and sell at the top. In reality, success lies in owning quality companies that generate strong, regular cash flows and dividends, and staying invested through cycles.

Warren Buffet said it best: “Look at market fluctuations as your friend rather than your enemy and profit from folly rather than participate in it.”