Time for the SA Inc shares

A few months ago, facing dismal domestic economic prospects and a volatile rand, SA investors flocked to rand hedge stocks. But recent political developments have sparked renewed enthusiasm for “SA Inc” shares. This should never be an either/or decision.

In October, you’d have been hard pressed to find any optimism around SA’s economic outlook. Some investment managers and commentators recommended investors relocate most of their funds offshore, where possible.

We’re now faced with a different picture. Cyril Ramaphosa’s rise to power resulted in the rand strengthening over 10% against the US dollar from December 1 until January 31. Most companies with a significant SA revenue stream rerated notably in that time.

Although SA’s financial position is still dire and question marks around economic growth remain, there’s an important investment lesson here.

While a doom-and-gloom scenario seemed highly probable, it wasn’t the only potential outcome. Investment portfolios should always be balanced to consider different possible outcomes.

Therefore, the question should never be: “Should I invest in rand hedge stocks (companies generating most revenue outside SA; benefit from rand depreciation) or SA Inc shares (revenue earned mainly locally)?”

Instead ask: “Where should the emphasis of my portfolio lie?” The answer boils down to two crucial factors: What’s the general direction of the rand against other major currencies? What’s the valuation comparison between SA Inc and rand hedge stocks? Economists have a poor record in trying to forecast the rand’s movement – it’s difficult to get it right. Our view of the rand is based on a long-term theory of purchasing power parity (PPP). It assumes the exchange rate will change based on the difference between the inflation rates in two countries.

Van der Merwe is Sanlam Private Wealth director of investments.