JSE Offshore Exposure Revealed
14 August 2018 | SA Views | Dwaine van Vuuren

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Emerging market (EM) contagion is back with a vengeance, as Turkey pops and the USD/ZAR topped out at R15.45/$, the worst 1-day decline in a decade. The Rand is now down 25% since the late February lows of R11.64/$ The Turkey contagion to other EM’s has broadened, and some are concerned that the EM rout could worsen, resembling the crisis of 1997/98.

The Rand moves in cycles, like interest rates, and we are very definitely in a depreciating cycle, even if we see a 10% rebound from yesterdays oversold positions. I am pretty confident we will see R16.00 levels again before the cycle reverses direction. I don’t pay much attention to "the Rand is grossly undervalued according to fair value" arguments. They probably are very true, but sentiment drives the Rand and most emerging market currencies, not fair valuations. And with currencies, over/under valuation can persist far longer than your incorrect positions can stay solvent.

On this topic here is something that brought a smile to my face when the Rand was crashing:


Just remember, in the long term, there is a 6-8% per annum depreciation of the Rand “baked into” the currency versus the Dollar, merely because of our inflation differentials with the U.S. So, a mix of Rand hedges in any portfolio is always a good idea, not only when the Rand is going through a crisis like now.

There are 4 ways an SA investor can protect (or hedge) against Rand deterioration:

  1. Invest in Gold
  2. Invest in JSE Rand-hedges
  3. Invest in Cryptocurrencies
  4. Invest in international shares and/or ETF’s (either locally or offshore)

A healthy mix of the above is probably required to reduce the overall risks of your hedging strategy and each probably deserves an article on its own, but today we want to focus on investing in JSE Rand Hedges.

Now it will probably amaze you to hear that over 57% of the JSE TOP-40’s earnings are "offshore" - or originating outside of South Africa. This is why on most occasions when the Rand depreciates you can sometimes see the JSE responding positively, since those Rand hedge shares just got a free earnings boost without having to lift a finger! Theoretically then, just investing in the JSE TOP-40 through a simple local Exchange Traded Fund (ETF) should provide some Rand hedge capabilities.

We show the largest 18 offshore earners from the JSE TOP-40 (J200) in the table below, together with their free-float weightings in the SA TOP40 index:


It’s interesting to note that the shares making the biggest impact to the local equity market offshore earnings contributions are NPN (11.68%), BIL (10.12%), CFR (9.25%) and AGL (4.4%). The offshore earnings from these 4 counters alone add up to 35% of total JSE earnings! It stands to reason that the higher the earnings % offshore, the better the hedge, but of course timing your entry into these counters is important as well.

Is there a correlation between the performance of a share price and its offshore earnings exposure? The chart below shows how various SA TOP-40 shares have moved in price since 27 March 2018 versus their offshore earnings exposure. During this period the Rand depreciated some 22%, and the J200 appreciated some 5%:


Note how SOL (+35%), SAP (+33%), BIL (+32%) and MNP (+23%) all managed to appreciate faster than the local currency depreciated.

The relationship between offshore earnings and share price appreciation is loosely there (at a 36% correlation), but more importantly for the period under review:

  1. Not a single share with more than 70% offshore earnings posted negative gains, whilst 76% of those counters with less than 70% offshore earnings, fell in price!
  2. Shares with more than 70% offshore earnings averaged 14% gains whilst the remainder averaged 8% losses!
  3. Exactly 72% of those shares with more than 70% offshore earnings managed to beat the TOP40 benchmark, whilst only 10% of the rest of the TOP40 managed to beat the index.

Worst performers MRP (-24%), TFG (-25%), TRU (-27%), SLM (-19%) and WHL (-18%) all depreciated more or less in line with the local currency over the review period.

To cater for the huge interest in Rand hedges by clients trying to protect against the Rand depreciation, we now show the offshore earnings component of around 160 shares on the JSE in the QuickShare pages. Click here for the generic Quickshare link.


My entire crew will be at the next Johannesburg (Sandton) investing/trading seminar on Saturday 1st September. About 70% of the seats are booked out. Unfortunately, the 18th August session in Cape Town was booked out 2 weeks ago, so we have put on another session for Cape Town on Saturday 29th September. You can book your seats over here.


Dwaine van Vuuren
Retail-side Research
RecessionAlert, Sharenet Analytics

Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research (now Sharenet Analytics) into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.

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