The Impact of the Rand on the Value of the Johannesburg Stock Exchange

Abstract

The relationship between the foreign exchange value of the rand and the Johannesburg Stock Exchange (JSE) was put to a particularly interesting test over the period 2000 to 2003 when the rand first collapsed and then recovered. In this paper, we look at the effects of the nominal and real exchange rate changes on the nominal and real value of the overall JSE market and then in more detail at particular counters that exhibit common characteristics with respect to the rand exchange rate. These we define as either: rand hedge stocks, that is, those companies with mostly US dollar revenues and US dollar costs; rand leverage stocks, that is, those companies with predominantly US dollar revenues and rand costs; or randplays, that is, those companies that earn almost all of their profits by generating rand revenues and incurring rand costs. We report on the impact of the rand on the value of the largest 40 stocks on the JSE and classify these stocks according to the criteria mentioned above. In addition, we explain how rand plays can be expected to lose rand value as the rand weakens, despite higher inflation and an increase in the rand value of the JSE All Share index. We also note that, counter-intuitively, the foreign currency value of Richemont, a pure rand hedge company, can be influenced by the foreign exchange value of the rand, a phenomenon we attribute to an investor constituency that includes a large SA component.

Notes

1. In the study, we use monthly data from Bloomberg Financial Markets, I-Net Bridge, and the South African Reserve Bank.

2. he trade-weighted rand is calculated by the South African Reserve Bank; see, for instance, Quarterly Bulletin (June 2003), S105. The formula for the real exchange rate is: real R/$ = (1/ZAR_t) *(SACPI/USCPI_t). where ZAR_t is the nominal or market exchange rate, and SACPI_t and USCPI_t represent the South African and U.S. consumer price indices with a common base (e.g. January 1995=100).

3. ee the Myburgh Commission of Enquiry into the collapse of the rand in 2001. (The commission’s report is available at http://www.polity.org.za/html/govdocs/reports/). We have ascribed the rand’s collapse to a panic demand for foreign exchange from wealthy individuals with newly found access to hard-currency assets made available through the asset swap mechanism. Effectively the only limits imposed on these demands for US dollars were the rands individuals could muster for the purpose. We describe this panic demand for US dollars as one of the unintended effects of partial exchange control reform (see Kantor and Marchetti (2003).

4. For an explanation of the real rand exchange rate see ( MacDonald and Ricci, 2003 ) For an overview of alternative exchange rate regimes for emerging markets see (Calvo and Mishkin, 2003) also (Ho and McCauley, 2003)

5. All the companies classified as rand hedges are listed on the JSE but have their primary listing on other exchanges and are legally domiciled in the United Kingdom or Switzerland while two of the rand leverage companies, Anglo American and BHP Billiton, have dual listings (Johannesburg and London stock exchanges) and are foreign-registered companies.