Daily Equity Report
Seed Weekly - Local Stock Market ? Rand Hedges
The JSE All Share Index (ALSI) and Top 40 Index both traded at new highs into mid-April. This is despite being dragged down by the Resource sector. The ALSI is up a further 5,8% to the end of March and over a one year period the financial and industrial index is up 25,3%, having gained over 10% for the current year to date.
Many investors struggle to understand the disconnect between the local economy, which by most accounts remains very sluggish, and the local stock market, which continues to trade higher and higher.
At face value there is indeed good reason to be cautious of current valuations. Countering this, however, is the fact that global interest rates remain extremely low; resulting in the ongoing attraction of South Africa’s higher yielding property, bond, and listed equity market to foreign shareholders.
For most emerging markets, foreign capital flows are hugely important, but there is always the risk that as these flows subside or indeed reverse, that there is pressure on both local prices and the currency.
South Africa is one of those countries that needs foreign capital because of its large trade and fiscal deficits that require funding in order to balance the books. While foreign inflows have been welcomed, there is a growing risk that as developed world interest rates are normalised, foreign flows into emerging markets will come under pressure. In such a scenario there is typically rapid currency depreciation and one hedge against this is the offshore asset base and revenue streams in many locally listed companies.
Looking at the 10 largest constituents of the Top 40, that make up 65% of the index, an estimated 78% of their income and asset exposure is foreign (rand hedged). A brief summary of these companies and their estimated foreign exposure is as follows:
• Naspers is listed locally with at least 90% of its value derived from its Chinese and Russian IT businesses.
• SABMiller is a beer and beverage company with its primary listing in London. It operates in 75 countries with around 70 000 employees. Over the last 20 years it has diversified extensively away from its South Africa origins, which now represent sales of approximately 17%.
• Billiton is one of the world’s largest diversified resource companies, focusing on petroleum, copper, iron ore and coal. It is domiciled in Australia and London.
• Richemont is one of the world’s largest luxury goods companies with brands such as Cartier, Dunhill, and Mont Blanc. Its primary listing is in Switzerland. With no exact figures it is estimated that only 3% of its business is in South Africa.
• MTN is large telecommunication company. Its origins are in South Africa, but it has expanded into Nigeria and Iran. A third of its margin is from South Africa.
• Anglo American is a diversified mining group with a primary listing in London and operations around the world. It continues to have a relatively high asset base in South Africa through its Kumba and Anglo Platinum stakes, but all products are dollar priced. For purposes of this exercises we estimated 40% South African exposure.
• Sasol is an energy and chemical business with operations in South Africa and in over 30 other countries. Key drivers of profitability are the oil price and the rand exchange rate. For purposes of this exercise it is estimated that 50% of its profitability is foreign.
• Standard Bank is one of South Africa’s 4 main banking groups. It is 20% owned by Chinese Bank, the ICBC, and has a growing presence in Africa which contributes approximately 27% to headline earnings.
• British American Tobacco is an international tobacco company listed in London with a number of brands across 200 countries. An estimated 7% of its sales are in South Africa.
• Old Mutual is a life insurance and investment business that relocated its head office to London some 15 years ago. It has operations in Europe and the US, but still has substantial business in South Africa and is a major shareholder in listed Nedbank and therefore has approximately 65% of its business generated in South Africa.
On these estimates, the top 10 shares listed in the JSE Top 40 Index have a weighted 78% rand hedge element to them. This is an important consideration if one is pessimistic about the prospects for the local currency against developed world currencies. It is also a factor to be taken into account when considering the price levels of the local stock market.
Ian de Lange
Tue, 14 Apr 2015- 11:12
021 914 4966