SA companies in London keep a wary eye on host’s EU to and fro
THE vote for Britain to either exit or stay in the EU, which will be decided in just over a week, holds the potential to change the playing field for dual-listed South African companies with head offices in London.
But the extent to which these companies have to prepare for a possible secession of the UK is still unclear.
Most analysts and the companies concerned appear to be banking on a “no” vote — that, when voters actually reach the ballot boxes, they will elect to preserve the status quo.
London-based Berenberg chief economist Holger Schmieding said he saw a 30% risk of an exit, “slightly above the 25% risk that seems to be priced in, judging by discussions with clients and the odds at bookmakers”.
Schmieding said a Brexit “yes” vote would likely mean a brief UK recession later in 2016 followed by a permanent lowergrowth trend of around 1.8% GDP growth.
“The EU would restrain Britain’s growth machine, its dynamic services sector, by partly restricting access of UKbased service providers to the common market.”
The EU, for its part, might experience slightly slowed investment and growth later in the year, but beyond that a Brexit would be unlikely to have much impact on the continent, where averaged economic growth would likely continue to remain modest at 1.6%, he said.
The main risk, Schmieding said, appeared to be political, with a Brexit “yes” vote holding potential for leadership changes in the UK and even a possible secession of Scotland and Northern Ireland from the UK, and the risk of a domino effect threatening the viability of the EU.
Several of South Africa’s largest institutional investors have significant stakes in duallisted companies such as Mondi, Anglo American, Investec plc, Old Mutual, Mediclinic, SABMiller and British American Tobacco.
The Public Investment Corporation, which holds significant stakes in the dual-listed companies affected, declined to comment on its strategic view for dealing with either outcome.
Investec Asset Management equity analyst John Thompson agreed with Schmieding that a Brexit would precipitate a “DIY recession for the UK, and potentially for Europe as well”.
“Then a few risk-off scenarios come into play. There have been and may continue to be exaggerations of volatility in the market not unlike the Greece situation in 2010 and 2011.”
This, he said, would require investors to seek investment in equities with bond-like qualities offering high-quality cash flows along with earnings stability, to get through volatility of perhaps a year or longer.
South African dual-listed companies have tended to place mostly symbolic offices in the UK for the sake of raising capital at lower cost, with Mediclinic’s recent reverse listing into its Al Noor acquisition on the London Stock Exchange being a case in point.
Thompson said most South African dual-listed industrial companies would get away largely unscathed even if the vote did swing to “yes”.
“They’re all quite geographically diversified in terms of revenue streams and the poundbased risk is limited, although some do have a certain amount of pound-based debt.
“Perhaps Bidcorp, the new spinoff from Bidvest, with around 30% of its profit contribution emanating from the UK, would be most exposed to foreign-exchange risk.”
The rest would tend to have low single-digit exposure to what may be a worst-case scenario of a 25% downward swing in UK-listed equity values, he said.
The pound’s weakening and outflows from the UK in international funds over the past six to eight weeks told a story of balancing risk, although market uncertainties do create real investment opportunities, Thompson said.
Allan Gray portfolio manager Duncan Artus said that in terms of Old Mutual and Investec, if both were “expensive” currently, he’d be more worried.
“Maybe there would be some short-term uncertainty and business volumes dropping, but I can’t see how their business of values would be affected in the medium term.”
Ironically, Artus said, a year ago investors had been wary of both companies because of their South African business.
“The UK already has its own currency, so it wouldn’t be as hard to leave the EU. UK longdated bonds are still at all-timelow rates, so interest rates aren’t spiking from uncertainty.
“Besides, being part of the EU didn’t benefit Lloyd’s, RBS or Barclays.
“It’s hard to say what a leave vote would mean, except that other countries in the EU may look to follow suit.”
Looking at the UK’s FTSE 100 index of its top blue-chip companies, Artus said that most are geographically diversified and the impact on the exchange could be minimal.
“Smart investors may simply be lining up a list of companies they want to buy and could take advantage if and when the pound weakens.”
Analysing European fund flow data, Tal Nieburg, MD of Morningstar South Africa, said investors seemed to be largely ignoring the vote, but at the same time were seeking bargains in safer assets in sterling.
“There is no clear indicator that investors have lost confidence in sterling assets at this stage.”
A Brexit ’yes’ vote would likely mean a brief UK recession followed by lower growth