How to hedge against the rand
Dual-listed shares have done most of the heavy lifting on the JSE this year, helped by the rand’s precipitous fall. And with the SA economy staggering along, they may still offer value for investors who are looking to protect themselves against further c
f Naspers has a good day on the JSE, chances are the market will be up. The same goes for British American Tobacco, SABMiller and Richemont.
These companies are among a handful of dual-listed shares that have the power to move the market due to their sheer size.
They are also rand-hedge stocks, so with the rand’s decline of more than 10% this year, they have been particularly attractive to investors looking for foreign currency exposure.
They haven’t all fared well though; China’s devaluation of its currency earlier this month brought Richemont sharply lower on concern this could make its shiny baubles more expensive for locals, who may still be reeling from the Shanghai stock market’s steep fall last month.
Though Richemont could face further headwinds from China, it ranks at the top of JustOneLap director and founder Simon Brown’s rand-hedge buying list. He’d be adding it to his portfolio at around R100 — a level it reached just a couple of weeks ago. “Chinese investors who have been affected by the recent meltdown on the Shanghai market won’t be rushing out to buy fancy watches at the moment, so Richemont may struggle with China,” says Brown. “Over the longer term I expect them to continue to do well.”
Wayne McCurrie, head of Momentum Wealth, says while the dual-listed rand hedge stocks have done most of the heavy lifting on the JSE over the past year, they’ve had to because of the huge pounding resource stocks have taken. While two years ago investors would have included mining stocks such as BHP Billiton and Anglo American in their rand hedge portfolios, Brown says the end of the commodities supercycle has led to a significant market underperformance.
“They stand out because they have outperformed, but if you look at the really big ones, SABMiller has come off its record high, as have Naspers and Richemont. British American Tobacco is still at a record,” McCurrie says.
“It’s really the fall-off in resources that has accentuated their performance.”
While other JSE-listed shares have done well too, including retailers and banks, the sheer size of some of the large dual-listed shares skews their ability to move the market. There are also very good fundamental reasons why they are outperforming locally focused counters, not least the weak rand, as well as their exposure to the improving economy in the US and a recovering Europe.
“Going forward, I don’t think the investment case changes,” says McCurrie.
“At some stage, resources hopefully will make some sort of comeback, but irrespective of when the US raises rates, interest rates will remain relatively low for some time, which does support equities.”
The JSE’s valuation — which is well above its long-term valuation — is also skewed by the inclusion of the likes of Naspers, due to its high weighting in the overall market, while the collapse in earnings from resources companies has also pushed up their price:earnings ratios.
Brown agrees that rand hedges are likely to continue to outperform SA Inc. shares, as the global economy is growing faster on aggregate than the SA economy, which will make it difficult for companies with a local focus to grow earnings at a decent clip.
The weakening rand just adds to the investment case, he says.
“Our economy is really struggling, and international fund managers searching for yield are finding it on other exchanges like the Dax in Frankfurt and London’s FTSE,” says Brown. “When US rates start rising, they’ll find it there too.