In­vest­ment lessons from the Oroville Dam dis­as­ter

In­vestors, like gov­ern­ment of­fi­cials, are ad­vised not to ig­nore warn­ings from ex­perts, be they about cracks in dam walls or cracks in a cur­rency’s val­u­a­tion.

Finweek English Edition - - MARKET PLACE - Ed­i­to­rial@fin­ Schalk Louw is a port­fo­lio man­ager at PSG Wealth.

avery in­ter­est­ing story was un­fold­ing in Cal­i­for­nia in the US as I was writ­ing this ar­ti­cle. Among the many in­ter­est­ing sights in the US, you will find the Oroville Dam, which, at a height of 235m, is of­fi­cially the high­est dam in that coun­try. In 2013, how­ever, a crack in one of the dam’s main slip­ways was con­cern­ing enough to ex­perts that they warned of the pos­si­bil­ity of a to­tal dam col­lapse, which could po­ten­tially risk the lives of thou­sands of peo­ple.

Gov­ern­ment of­fi­cials saw the signs, but they were adamant that ev­ery­thing was un­der con­trol. What a great shock it was when it was an­nounced on 12 Fe­bru­ary that the dam may col­lapse at any mo­ment, forc­ing nearly 200 000 res­i­dents in sur­round­ing ar­eas to evac­u­ate im­me­di­ately. While res­i­dents have been able to re­turn, by 20 Fe­bru­ary, ev­ery­one was still wait­ing with bated breath to see what would hap­pen next, and this brings me to my mes­sage this week: don’t look for pos­si­ble so­lu­tions to po­si­tion your­self when the dam breaks, but rather learn a valu­able les­son from this story.

In an ar­ti­cle ti­tled No­body can pin down the rand (28 April 2016 edi­tion), af­ter the rand weak­ened to nearly R17 against the dol­lar, I pointed out at least three cracks in the val­u­a­tion of the rand and used these cracks to show why the rand was strongly un­der­val­ued at the time. Some of the points I made in­cluded that the rand’s fair value was cal­cu­lated mainly on its pur­chas­ing power par­ity (PPP), the ben­e­fits that a pos­si­ble re­cov­ery in the re­sources sec­tor might hold for the rand and a few tech­ni­cal as­pects as well.

Like with the Oroville Dam, these cracks were clearly vis­i­ble to all. In Septem­ber 2016, af­ter the rand strength­ened to around R14/$, I was asked to per­form a fol­low-up anal­y­sis on these val­u­a­tions and still these cracks showed us that the rand’s fair value re­mained be­tween R11.50 and R12/$. I also named three shares that could be con­sid­ered by in­vestors who wanted to ben­e­fit from a pos­si­ble fur­ther strength­en­ing in the rand at that stage ( There goes the rand, again, 16 Septem­ber edi­tion) and they were Capitec Bank, PSG Group and Tiger Brands. Since then, the lo­cal cur­rency has strength­ened to be­low R13/$, and the above­men­tioned shares have grown by 18%, 28% and 11% re­spec­tively, com­pared to the FTSE/JSE All Share In­dex’s (Alsi’s) growth of 1% over the same pe­riod. The rea­son for their per­for­mance can be at­trib­uted to the fact that huge lo­cally-based com­pa­nies have re­struc­tured their earn­ings in such a way that less than 40% of the Alsi is de­pen­dent on the rand. These three com­pa­nies, how­ever, still earn the largest com­po­nent of their in­come in rand, which made them stand out as a pos­si­ble so­lu­tion for a cracked dam at the time. Un­for­tu­nately, this is now his­tory, which means that in­vestors have to de­cide on the way for­ward and how to po­si­tion their per­sonal port­fo­lios fol­low­ing re­cent hap­pen­ings. I’m aware that there has al­ready been a rally in both the rand and shares that are strongly linked to the rand, but the fact re­mains that the rand still seems to be priced fairly cheaply, which means that if you are still in­vested in a strongly rand-hedged port­fo­lio, you run the risk of un­der­per­form­ing if the count­less an­a­lysts and econ­o­mists are cor­rect in their ex­pec­ta­tions of fur­ther strength­en­ing of the rand. When we take a look at all of the Alsi shares’ price cor­re­la­tion to the rand over the last 10 years, we will see that lo­cal banks and re­tail­ers in par­tic­u­lar held a strong cor­re­la­tion with the strength­en­ing of the rand. When we take an even closer look at these shares, we will see that three shares stood out as shares with the high­est cor­re­la­tion with the strength­en­ing of the rand over the past 10 years. Ac­cord­ing to an­a­lysts and con­sen­sus fore­casts com­piled by Bloomberg, these three shares will of­fer the most growth po­ten­tial over the next 12 months and could of­fer a valu­able ad­di­tion to per­sonal share port­fo­lios, namely FirstRand, Rem­gro and Wool­worths.

Don’t look for pos­si­ble so­lu­tions to po­si­tion your­self when the dam breaks, but rather learn a valu­able les­son from

Wa­ter mov­ing down the dam­aged spill­way at the Oroville Dam on 17 Fe­bru­ary in Oroville, Cal­i­for­nia.

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