Hedge your risk

South African investors are facing serious challenges in terms of investment choices that can deliver sustainable returns above inflation into what appears to be a very uncertain future for the country. South Africa faces three major challenges: a visionless political leadership whose purpose appears to be survival rather than the creation of prosperity; a crippling energy deficit; and the deterioration in our trade account, fiscal deficits and geopolitical posture, which have all exposed the rand exchange rate to further vulnerabilities. This is likely to drive inflation higher and keep interest rates elevated.

I would break a R5m investment into three components: 40% local bonds, 40% individual South African stocks and 20% in passive offshore equity.

South African bonds (R2m: 40%)

The South African government bond yield curve has steepened towards 12% beyond the 10-year tenure. I believe that at 9.7% the five-year yield offers a nice trade-off between tenure to maturity and yield.

South African equities (R2m: 40%) Naspers: 7.5% (of total portfolio)

Prosus/Naspers are still simplifying their business footprint. Prosus is reportedly selling PayU’s non-Indian operations. Consolidating its Indian business (and maybe one or two more regions) would boost group profitability and returns to reach breakeven in the first half of 2025. Prosus and Naspers are trading 27% (excluding cross-holdings: 38%) and 16% below our estimated NAVs, respectively. Naspers offers diversification away from the South African macro into more Asian growth.

Impala Platinum: 5%

Implats has improved to be a business with low costs, good finances, and improved margins, and its product mix is a safe investment. The Canadian business, though small, could be a swing factor in production numbers as load-shedding hits local output. We believe operating recovery is yet to come at its Rustenburg lease area and a positive outcome in Zimbabwe is not fully priced in. Platinum group metal prices should stabilise now as the less power the mines get, especially the smelters, the more supply/demand would move into a deficit at a time when sanctions are being implemented against Russia. Should Implats be successful in buying Royal Bafokeng Platinum, meaningful synergies would be realised at mining and refining levels.

Gold Fields: 5%

There is good reason to rank Gold Fields as the top gold mining counter on the

JSE. It has the lowest all-in sustaining cost, the highest proportion of production in low-risk mining locations, a strong balance sheet and an attractive dividend policy. Management has a cautious M&A policy following the failed Yamana bid, thus reducing execution risk. It also has favourable near-term prospects in the form of added production from the commissioning of Salares Norte in Chile.

Shoprite: 5%

Shoprite continues to be an innovator, having gained market share through distinct strategies: township market penetration through Usave; and upper LSMs through FreshX and Sixty60. It launched its standalone clothing business in March. At a time when the economy is struggling, it has taken some market share as other players are more focused on defending rather than innovating.

Spar: 5%

We think Spar’s share price has dislodged from the fundamentals and has potential for value unlock through the sale of some underperforming European assets. The exit of some European assets would degear the balance sheet and allow the fundamentals to be fairly considered by the market: Spar is a highly cash-generative business, with the best free cash flow outlook in the South African food/fast-moving consumer goods retail sector; and Spar has superior capital returns in the South African business.

TFG: 2.5%

In January and February, TFG was unable to do business for about 120,000 hours (9.4 times as many as in the same period the previous year due to load-shedding). Still, the company expects to have 80% of its shop base equipped with backup power in the next few months. TFG’s earnings are somewhat better protected than its local apparel competitors due to its more diversified business strategy (across geographies, product categories and customer segments). Jet’s value offering, which benefits from downtrading in weaker conditions, has the potential to both boost and defend earnings.

British American Tobacco: 5%

BAT is another business that has diversified away from the evident pain in South Africa. BAT’s user base continues to grow globally, driven largely by growth in its next-generation products portfolio, particularly in US vaping, which could offset weakness in the US cigarette market and a potential flavour ban on its combustibles portfolio (US menthol).

Capitec: 5%

Capitec recently put out decent numbers, but the market seems to have expected better. While the lending environment is deteriorating in the South African banking industry, I think Capitec has a selfhelp story if it could apply its excess cash towards its business banking franchise. While historical earnings growth and high net interest margins are likely to be diluted by the current economic environment, these should be offset somewhat by loan book growth and a conservative 90-day write-off period.

Passive: Coreshares Total World Stock Feeder ETF: (R1m: 20%)

The Coreshares Total World Stock Feeder exchange traded fund tracks the FTSE global all cap index, which covers developed and emerging markets.

Mnguni is chief investment officer of Benguela