Finweek English Edition - - FRONT PAGE - By Petri Redel­inghuys

on 23 June, Bri­tons will head to the polls to vote on whether or not they want to re­main in the EU. There is much opin­ion out there on which way the vote will swing (see side­bars) and I for one cer­tainly do not want to spec­u­late on what the out­come of the ref­er­en­dum will be, even though for now it seems that most people are back­ing an “exit” vote. I do, how­ever, want to look at what the po­ten­tial im­pact would be on a se­lected num­ber of shares listed on the both the JSE and the Lon­don Stock Ex­change (LSE) in both the sce­nar­ios of an “exit” vote and a “re­main” vote.

First, though, we need to look at the po­ten­tial im­pact ei­ther out­come could have on Bri­tain and the EU be­fore we delve into spe­cific com­pa­nies. Should the Bri­tish pub­lic vote to leave the EU, it is largely ex­pected that Bri­tain’s GDP will fall and that it would im­pact the labour mar­ket rather neg­a­tively, as well as lead to a weak­en­ing pound. It can also be ex­pected that the euro will weaken some­what as fears around the rest of the union break­ing apart is likely to put pres­sure on its mem­bers’ economies. On the op­po­site end of the spec­trum, should the Bri­tish pub­lic de­cide to re­main in the EU, we could see a re­ver­sal of the cur­rent pound and euro weak­ness.

At this stage a Brexit poses a rather large risk to not only Euro­pean fi­nan­cial mar­kets, but also to global fi­nan­cial mar­kets. So much so that US Fed­eral

Re­serve chair Janet Yellen re­cently com­mented that it is one of the key risks to the global econ­omy. There­fore de­vel­op­ments in this arena need to be watched care­fully and re­acted to ap­pro­pri­ately. The risk is that Brexit takes place and the fall­out is felt by world mar­kets at large. Cap­i­tal & Coun­ties (Capco) is a Real Es­tate In­vest­ment Trust (REIT) that is in­vested in three ma­jor, and rather ex­cit­ing, prop­er­ties in and around Lon­don. The share is listed on both the LSE as well as the JSE. The lo­cal list­ing has per­formed very well in re­cent years – it’s up 250% over the past five years – as the rand con­tin­u­ously lost ground against the pound, and the value of the un­der­ly­ing prop­erty port­fo­lio keeps grow­ing along with rev­enues gen­er­ated from rental in­come. This has been an ex­cit­ing share to own and in­vestors have done well. Since the be­gin­ning of the year though, the share has been un­der a sub­stan­tial amount of pres­sure (it cur­rently trades nearly 30% down from its December lev­els of above R100), likely with some help of the fears sur­round­ing the loom­ing pos­si­ble Brexit.

It is rea­son­able to ex­pect that, should Brexit go

ahead, the share will come un­der even more pres­sure and head down to test a sup­port level around the R56 mark. This will likely be fu­elled by fall­ing prop­erty prices in the UK, as well as a sig­nif­i­cant weak­en­ing in the pound. Thus the age-old dou­ble-whammy of fall­ing net as­set value (NAV) and the in­verse of a rand-hedge ef­fect. It is likely that should Brexit hap­pen, Capco will suf­fer badly.

In the event that Brexit does not take place, it should be rea­son­able to ex­pect that the pound will once again strengthen and that the rand-hedge ef­fect will con­tinue to bode well for Capco share­hold­ers. I would imag­ine that should Brexit not take place, Capco could trade back up to its 2015 highs of around R95 to R100 a share. This is one of the heavy­weights listed on the JSE. The com­pany holds a lot of clout in our index due to its large mar­ket cap­i­tal­i­sa­tion and thus heavy weight­ing in our All Share and Top40 Index. It is also listed on the LSE and has an Amer­i­can De­pos­i­tory Re­ceipt listed on the New York Stock Ex­change (NYSE). As its name sug­gests, Bri­tish Amer­i­can To­bacco (BAT) is in the cig­a­rette busi­ness.

Again, this share – and in­vestors who own it – has en­joyed the ef­fects of the weak­en­ing rand for some time. (It has re­turned nearly 47% to share­hold­ers over the past 12 months.) Should hard times be­fall the UK econ­omy, people will keep smok­ing so there should re­ally be no need to worry about rev­enue losses. Although, in the event of Brexit tak­ing place, the rand­hedge ef­fect will be re­versed and BAT could, on our lo­cal ex­change, find it­self scram­bling for sup­port lev­els at around R810 a share. Not only will this make in­vestors rather un­happy, but will put the Top40 Index un­der pres­sure (BAT’s weight­ing in the index is 4.5%.)

If Brexit does not take place, it would be rea­son­able to ex­pect that the share

con­tin­ues its slow grind higher and higher as it has been do­ing for the past sev­eral years.

Now we are look­ing at one of the true dual-listed heavy­weights on the JSE. SABMiller holds a near 15% weight­ing on our Top40 Index, so we can ex­pect that what­ever hap­pens to SABMiller will have a big im­pact on the rest of our lo­cal mar­ket. SABMiller is also listed on the LSE and again, en­joys all the ben­e­fits of be­ing a rand-hedge stock. Let’s as­sume that the AB InBev/SABMiller merger deal goes through and that the deal takes place at £42 a share (which at the time of writ­ing equalled roughly R909 a share). That means that given the weak­en­ing we have seen in the pound over the last few weeks caused by talks and fears of Brexit, it is al­ready over­val­ued on the JSE (it closed at R935.57 a share on 7 June).

Should Brexit hap­pen, and the pound dras­ti­cally weaken, this £42 buy­out for lo­cal share­hold­ers be­comes less and less at­trac­tive. The share will have to re-rate and will likely trade down to the R680 a share level where it was trad­ing be­fore the AB InBev/SABMiller merger ne­go­ti­a­tions started. Again, this would have a large im­pact on the JSE’s All Share Index.

Should Brexit not take place though, the pound could strengthen and the £42 price tag could once again of­fer some ad­di­tional value for lo­cal share­hold­ers.

As it stands now, it is any­one’s guess as to what is go­ing to hap­pen with re­gard to Brexit. We sim­ply do not know. All we have to go by is the past, and in the past, Bri­tons voted to keep the UK in the eu­ro­zone. Ei­ther way, in­vestors should prob­a­bly pre­pare for volatil­ity and ad­just their port­fo­lios in such a way that they are at the very least hedged for ei­ther even­tu­al­ity.

SABMiller holds a near 15% weight­ing on our Top40 Index, so we can ex­pect what­ever hap­pens to SABMiller will have a mam­moth im­pact on the rest of our lo­cal mar­ket.

Leopold Scholtz His­to­rian and in­de­pen­dent po­lit­i­cal com­men­ta­tor

Janet Yellen Chair of the US Fed­eral Re­serve

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