Following a period of nervous anticipation of leadership transition, we finally saw Jacob Zuma step down as the President of South Africa. The immediate benefit is increased business confidence, a plus for the South African economy, and is reflected in the stronger local currency. The rand appreciated against the dollar to R/$11.60, a level last seen three years ago. The important question is, how to position your portfolio amidst the economic and political optimism?
In a previous article, we had a look at exactly what proportion of revenue of the companies comprising the JSE Top40 Index is generated offshore. An updated version of the dynamic table can be found below. This table contains the index weights of each Top40 Index constituent as well as the proportion of its revenue generated offshore. The ‘Weighted Offshore’ column provides an indication of each constituent’s contribution to the overall offshore exposure of the JSE Top40 Index. Based on the most recent financial statements of these constituents, approximately 56.81% of the Top40 Index revenue is generated offshore.
We also provided four trading strategies that could be used in conjunction with the dynamic table depending on your view on the local currency (appreciate/depreciate).
In this article, we used regression analysis and a market-equilibrium formula to determine the fair value of the USD/ZAR which could assist in making your call on the rand when using the above trading techniques. The outcomes of these two valuations lead to the same result and shows that rand strength could be overdone and should move back toward its fair value within the next year.
Based on the interest rate parity between the rand and the dollar, the rand should be trading at R12.23 and may move to that level within the next year. The interest rate parity formula projects the one-year forward USD/ZAR exchange rate by making use of the interest rates of the two countries and the current USDZAR exchange rate (11.63 R/$ was used here). If this does not hold, an arbitrage opportunity exists.
A simple linear regression of the USDZAR over the past two years shows that the rand is due for some depreciation. For 80% of the past two years, the rand has been trading within one standard deviation of its regression line, and I expect it could be moving back into that range. The current one standard deviation range is R11.80 and R13 .21 with a mean value of R12.51.
Source: IRESS Market Data
It is important to note that we cannot purely focus on the fundamentals and ignore the macro-economic factors that South Africa faces at this moment. With President Cyril Ramaphosa delivering the 2018 SONA, it became more of a reality that we are moving out of the Zuma era. The new President of South Africa made a clear stance in his speech on his plans to end corruption within the private and public sector. This could restore business confidence and welcome foreign investments which would both boost our economy leading to a stronger rand. The implementation of free higher education from this year on was also discussed, and the particulars of the financing of this project will be communicated during the 2018/2019 Budget Speech. Should the financing of free higher education be well structured without further harming the fiscal deficit, this project could also be seen as rand-positive as it is an investment in the future of our economy. The Budget Speech will be observed closely by ratings agencies and a positive view could keep our bonds in global indexes and, also, be rand positive.
With all this in mind, we have some tools to help us make a call on the rand. Let us assume for now that the rand will depreciate over the next year. It would then be best to invest in shares with a large proportion of their earnings offshore and have performed poorly over the past 4 months (Bearing in mind the aftermath of the Resilient Stable). These shares would include BID, BIL, RNI and MND. When the dynamic table is ranked by ‘Proportion Offshore’, it can be seen that the shares with the lowest proportion of its earnings offshore performed the best over the past four months with a 13.8% stronger rand against the dollar. If you think the rand will appreciate further, you should invest in these shares, which include RMB, FSR and MRP.
|Name||4 Month Return as at 16 Feb ’18||Top40 Weight||Prop Local||Prop Offs||Weighted Offshore|
|Naspers Ltd Class N*||-2.44%||23.29%||47.45%||52.55%||12.24%|
|BHP Billiton PLC*||-2.07%||8.70%||0.00%||100.00%||8.70%|
|Cie Financiere Richemont SA DR||-18.60%||8.79%||8.30%||91.70%||8.06%|
|Anglo American PLC||3.52%||4.52%||6.90%||93.10%||4.21%|
|MTN Group Ltd||1.24%||3.68%||31.30%||68.70%||2.53%|
|British American Tobacco PLC*||-20.96%||2.81%||12.65%||87.35%||2.45%|
|Old Mutual PLC||10.84%||3.12%||50.20%||49.80%||1.55%|
|Bid Corp Ltd*||-16.06%||1.39%||0.00%||100.00%||1.39%|
|Standard Bank Group Ltd*||32.81%||4.44%||69.70%||30.30%||1.35%|
|Aspen Pharmacare Holdings Ltd*||-11.99%||1.53%||15.60%||84.40%||1.29%|
|Anglogold Ashanti Ltd||-3.60%||0.81%||23.40%||76.60%||0.62%|
|NEPI Rockcastle PLC||-43.92%||0.61%||0.00%||100.00%||0.61%|
|Gold Fields Ltd||-12.33%||0.64%||11.10%||88.90%||0.56%|
|Gold Fields Ltd||-12.33%||0.64%||11.10%||88.90%||0.56%|
|Reinet Investments SCA||-21.20%||0.56%||2.98%||97.02%||0.54%|
|Barclays Africa Group Ltd||44.62%||2.15%||76.10%||23.90%||0.51%|
|Intu Properties PLC*||-16.45%||0.49%||0.00%||100.00%||0.49%|
|Woolworths Holdings Ltd||18.58%||1.03%||60.50%||39.50%||0.41%|
|Mediclinic International PLC||-13.98%||0.57%||28.40%||71.60%||0.41%|
|Vodacom Group Ltd||10.70%||1.60%||79.30%||20.70%||0.33%|
|Growthpoint Properties Ltd*||17.98%||1.32%||77.00%||23.00%||0.30%|
|Fortress REIT Ltd Class A||-6.14%||0.30%||15.40%||84.60%||0.25%|
|Fortress REIT Ltd Class B||-55.87%||0.22%||15.40%||84.60%||0.19%|
|Tiger Brands Ltd||18.78%||1.19%||86.60%||13.40%||0.16%|
|Life Healthcare Group Holdings Ltd||10.97%||0.63%||76.40%||23.60%||0.15%|
|Redefine Properties Ltd||9.34%||0.94%||86.80%||13.20%||0.12%|
|Nedbank Group Ltd*||39.03%||1.00%||90.60%||9.40%||0.09%|
|Mr Price Group Ltd*||61.63%||1.11%||93.40%||6.60%||0.07%|
|Bidvest Group Ltd||44.81%||1.33%||98.14%||1.86%||0.02%|
|Resilient REIT Ltd*||-46.97%||0.40%||97.00%||3.00%||0.01%|
|Capitec Bank Holdings Ltd*||-12.94%||0.70%||100.00%||0.00%||0.00%|
|Rmb Holdings Ltd*||31.33%||0.89%||100.00%||0.00%||0.00%|
Steinhoff was excluded from this analysis
*Obtained from most recent financial statements
Once again, the return of a share is still directly linked to the company’s performance (or markets’ perception thereof), but you can get a currency kicker depending on where they earn their revenues, and if you are lucky to call the rand direction correctly.
We have now provided you with the fundamentals and economics to assist you in making a call on the rand. From here on you can rank the dynamic table accordingly, and contact our dealing desk to get your portfolio up and running in time to enjoy the potential benefits.
Joani van Wyk
Joani van Wyk joined the asset management team in January 2017, responsible for quantitative research of equities across all industries. Joani completed her degree in Mathematical Science in 2015, as well as an Honours degree in Financial Risk Management in 2016, both at the University of Stellenbosch. She is currently a CFA candidate.