From Gary Booysen on the top floor,

Dear Money Morning Reader,

Looking at the broader investment environment, it’s clear the rally we’ve seen since the beginning of March has helped markets shake off the blues. The Dow Jones, for example, has run up 47.32%. And the FTSE 100 – the index which our local JSE follows the closest – has climbed 43.79% over the same period. It’s been a phenomenal run and I believe a full recovery should be on the cards by the end of the year.

Here in South Africa, our strong banking system meant the affects of the global recession were less severe than they were elsewhere. Another feather in our cap has been the way in which Tito Mboweni and his team have tackled the recession. By cutting interest rates 5% since December last year, we’ve seen our inflation rate fall to just above our target of between 3% and 6%. This has helped aid our market’s recovery. And, with inflation this far down, there’s room for one more cut. I believe the Monetary Policy Committee might shave a further 50 basis points off interest rates before the year is up.

But there is a worry. And when I attended a private gathering with Mboweni earlier this month, I realised I’m not the only one who’s concerned. Right now, the rand is super charged. We’ve seen our currency bounce back from a high of R11.84/$ to a low of just R7.28/$ last month. According to the real effective exchange rate (or the REER), the current rand value is too high. It’s sitting at 107. For a developing economy like ours, the REER should come in well below 100. A sustained REER higher than this (like we have right now) ultimately harms export industries and that’s what’s happening at the moment.

Will lower rates be enough to put the value of the rand under a bit of (much needed) pressure? Probably not considering the ineffective attempts by the Reserve Bank to control exchange rates in the past. But since the failed MTN/Bharti deal sent the rand tumbling 1.25% in less than a week, I expect the currency will rebalance to a more sustainable level by the end of the month. If you have money to spare, now’s the time to invest some of your funds offshore.

Turning to sectors that’ll benefit from this, you’d be silly to ignore the virtues of shares that were unfairly run down alongside the rest of the market dregs in last year’s crash. And that’s why I’d consider adding the following two shares to your portfolio:

1. 1time holdings (JSE:1TM)

With oil down $68.14 from its all time high of $146.06 and passenger numbers up 12% from one year, 1time is capitalising on the stabilisation of local consumer spending. In the past six months, the group performed particularly well. Revenue is up 35% to R613.8m – turning an operating loss of R5.4m into a profit of R65m. The share’s currently trading at a 24% discount to its 2007 high of R1.09.

2. Massmart (JSE:MSM)

Because the group represents several industries, including building, hardware, food and clothing, wholesale retailer Massmart serves as a proxy for what’s happening in the retail economy. With rate cuts starting to show stabilising affects on consumer spending, the group’s run up 37.62% since March and is currently trading at levels close to where it was before the financial meltdown. The group also recently got the nod from the Competition Tribunal to acquire Finro, a Port Elizabeth-based grocer. This means Massmart’s on track for further growth.

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Turning to the market...

The JSE all share index closed down 1.74% yesterday. The gold mining index lost 1.86%. Resources fell 2.58%. Banks and financials slid 1.53% and 1.44% respectively. Industrials decreased 0.99% and the platinum mining index collapsed 1.8%.

London's FTSE100 slumped 0.07%. The Dow Jones traded 1.21% lower and the Nasdaq slipped 2.67%.

Tokyo's Nikkei lost 1.83%. Hong Kong's Hang Seng gained 0.89%.

Brent crude is currently trading at $75.97 per barrel.

Spot gold's trading at $1,034.73 and platinum was last quoted at $1,318.50.

And here's how the rand is performing against the major currencies:
R/$7.80
R/₤12.82
R/€11.50