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

Financial Mail - Investors Monthly - - Feature -

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.

Pic­ture: iS­TOCK

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