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Take a look at NEW RAND Consider dirt-cheap OFFS But beware the snake pit what? D HEDGES SHORE PROPERTY CURRENCIES
THE SHARE PRICES of old-generation rand hedges fared so badly over the past six months they in fact offered a negative hedge to investors who tried to protect themselves against South Africa’s sharply falling currency. The 35% fall in the price of NewRand, the Absa exchange-traded fund (ETF) specially created as a hedge against a weaker rand, over the past few months underlines the inability of so-called rand hedges to do what they’re supposed to.
Luckily, a new generation of rand hedges is coming to the fore. The inward listing of British American Tobacco from Richemont and Remgro is a welcome addition to the current short list of new-generation rand hedges. Unfortunately, due to SA’s outdated exchange control and other measures, the share isn’t freely available to institutional investors. Other new-generation hedges – such as SABMiller, MTN, Naspers, Richemont and Liberty International, to mention just a few of the big ones – offer any investor enough to be excited about.
The need for assets to protect the investor against the endless fall in the rand’s value started in the Seventies. The former Bretton Woods agreement, which regulated the system of fixed exchange rates worldwide, had collapsed and was replaced by a new concept of floating exchange rates. Suddenly, exchange rates were permitted to find their own value, and weaknesses in overvalued currencies soon became apparent. The rand was one of those.
Rather than opening the exchange rate market and abolishing exchange control, which was only about a decade old at the time, the SA Reserve Bank and Government increasingly tried to apply a policy of intervention and increasing regulation.
Their misplaced belief that this would ensure a stable exchange rate for the rand had the opposite result. SA’s economy was shocked from time to time by large overnight devaluations, which had to be announced every time by a very embarrassed Minister of Finance. Those devaluations, along with our strict exchange control regulations – which entirely prohibited any investment overseas – led to a demand for products to protect the investor, mainly ordinary listed shares. The old existing shares were repackaged and a new category called rand hedges – which involved several specialised advisers – was formed.
The first simple qualification for a rand hedge was an industry that earned its income in a strong currency while its operating costs were in a weak currency. Gold shares at the time were a classic example. Their income was in US dollars and there was the further benefit that the gold price tended to rise every time the dollar weakened. Gold was the perfect strong currency in which income was earned.
On the other hand, the mines’ costs were largely in the weaker rand. The combination of sales in a strong currency and purchases (operating costs) in a weak one theoretically offered the ideal hedge against a weak rand. Exchange control didn’t bother investors, because they could invest in gold shares.
However, over many decades the experience proved very unsatisfactory. The gold mines had a nearly uncontrollable ability to squander the benefit of a higher gold price, even in US dollars, which was further increased by the falling rand. Production costs in the weaker rand usually rose sharply and the sporadic benefits
of official devaluations were quickly wiped out. The mines were also only too ready to allow the value of the ore mined to fall, while capital investments speedily eroded the higher cash flow.
One of the shortcomings of Absa’s NewRand portfolio is precisely that it still relies too much on this outdated hedging model.
Until a few months ago there was no need for SA investors to be at all concerned about hedging against a weaker rand. The first problem was a rand which in any case had been able to stand on its own legs for nearly five years and which had strengthened against the US dollar and even more against the then so-called hard currencies, such as the euro. Along with that, exchange control was eased significantly and especially individuals – who can now invest R2m overseas – had less and less need of rand hedges. The institutional investors also developed several products that specifically met the need of rand hedging.
However, the share prices of platinum mines in SA, which took over a few years ago from the gold mines as the leading earners of hard money, have over the past few months very painfully pointed out the weaknesses of the old generation of rand hedges. In fact, it was the more than 50% fall in the platinum price, in strong and weak currencies, that contributed to the rand’s current fall.
Suddenly, platinum shares – the primary hedge against everything bad in SA and in favour of everything good in the developed world – had feet of clay. Not only did platinum share prices fall by up to 60% but the current low following the prosperity of the past five years shows the customary inefficient cost control that the gold mines had problems with has now also spread to this sector. The sparkle of platinum shares has dimmed faster over the past three months than even the sparkle of gold did.
At current prices, platinum shares may be a good investment. Not because they’re a hedge against a weaker rand but rather because the international platinum price, whether in US dollars, euros or yen, will rise again.
The same goes for the two resources giants – Anglo American and BHP Billiton. Until a few months ago both were considered excellent hedges against the weak rand and SA’s political uncertainty. And they were also hedges, so many people thought, against the US sub-prime credit crisis, which has now become a worldwide worry. But then the tide turned. The prices of commodities fell so sharply the fall in the share prices of both resources giants even exceeded the fall in the prices of bank shares on Wall Street. What a hedge!
There’s no doubt BHP Billiton and Anglo are two excellent companies with excellent assets worldwide. They’re fantastic shares for any investor who wants to benefit from the future boom in resources and anything to do with mining. However, in their own right both are no longer hedges against a weaker rand.
Previously, Finweek chose Sasol as the ideal hedge share for SA investors. After all, over the past 30 years, since its listing in 1979, Sasol’s share price has risen from R3 to more than R500 not too long ago. Now its share price has halved – just when SA investors needed a hedge.
Sasol is an excellent company. It can in the future convert lots of gas into liquid