I was very interested in your analysis of the prospects for emerging markets and their currencies. As my wife and I have retired to South Africa and have lived here for 9 years, your comments on the Rand were of great interest. While I would agree with you that some steadying is now due from an oversold condition, The downtrend will resume before too long. The reason I say this is for two reasons, overall governance is deteriorating rapidly and one of the prime policies of government here is in the view of many a disaster. I refer to BEE [Black economic empowerment]. Apart from being open to all kinds of fraud and corruption, it has the effect of propelling totally incompetent people into influential and powerful positions. One has only to look at the recent history regarding Eskom and South African Airways to see what I mean. I look at the history of Singapore run for 40 years by Lee Kuan Yew, who from the outset when faced with ethnic tensions between the indigenous Malays and the Chinese steadfastly refused to countenance race over merit. Race religion and language were ignored, and this resulted in an extremely prosperous economy. Finally, I looked the other day at a chart of the Rand against another BRIC currency, the Rupee. That chart speaks volumes.

Eoin Treacy's view

Thank you for this thoughtful email and I agree Singapore did just about everything right on its path to development. It offers an example for anyone who might be looking of how a commitment to good governance and meritocracy pays off over the medium to long term. However that also depends on the willingness of the ruling class to eschew instant gratification for longer term enrichment. Unfortunately, the types of people that get into power in underdeveloped countries are not generally those with the most egalitarian of temperaments. 

I agree black empowerment represents a significant threat to the ability of large South African companies, particularly utilise, to thrive in future. It could take decades for a world class black managerial class to emerge and even then the ability of the best people to get the job they are best suited to is far from sure. Despite the fact South African governance leaves a lot to be desired we should also consider that it is a democracy and therefore has the potential to create unexpected groundswells of support for reform. Modi in India, Widodo in Indonesia and potentially Macri in Argentina over the weekend are all examples of how previously terrible governance can get turned around. 

The US Dollar remains in a reasonably consistent uptrend against the Rand and would need to break the progression of lower rally highs to confirm a change to the status quo. This is what foreign institutional investors are waiting for. When they have some confidence the currency has stabilised they will be much more inclined to participate in the stock market.  

More generally, a substantial number of emerging market currencies accelerated lower before finding support in September. The extent to which they can hold their respective lows during the first significant pullback will be key to identifying whether enough bad news has been priced in to support a return to demand dominance.