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.