In this article, we aim to provide rand-hedge techniques that can come in handy during the next few months. This will be a stressful and risky time for South Africa with the elections creeping closer, the possibility of further credit downgrades, and President Jacob Zuma who started the excitement with a cabinet reshuffle on Tuesday 16 October.
In the article SA TOP40 Offshore Exposure Revealed, four trading strategies based on one’s expectations of the direction of future rand movements were provided. An updated version of the dynamic table used to identify these strategies can be seen below. We have calculated that 62.61% of the Top40 index earnings are offshore (up from 62% in 2017Q1), and the remaining 37.39% local.
Given the rand’s overall strengthening since 2016, we constructed an index containing the top 10 weighted local shares (index weight X proportion local earnings) within the Top40 Index (Local Index) as well as an index excluding those shares (Top40 Ex Local). The indices were chosen based on the expectation that companies with a higher proportion of local earnings will perform better when the rand appreciates. The Local Index contains shares such as SLM, SHP and OML.
The table and graph below show the results. Over the 1-year and 2-year period with a strengthening rand, the Local Index was the top-performing index, and given the rand weakness over the past few months, the Local Index was the worst performer of the three indexes.
With current local political risk, a high possibility of a US interest rate hike in December, and the risk of another credit downgrade, the odds of the rand weakening further as we move closer to December are high. The results of Bloomberg consensus support these odds, indicating that the TOP 40 Ex Local Index is expected to deliver the best performance over the next 6 to 12 months as compared to the Local and the complete Top 40 Index.
The strategies are based on the 1-year returns of the shares so that we can see how the shares performed in a period with a slight overall stronger rand, but weakening over the shorter time periods. Should you believe that the rand will weaken further, it would be best to invest in shares with a higher proportion of earnings offshore which have performed well over the past year (Such as BIL, AGL and GFI) and short/divest the shares with a high proportion of local earnings which have performed poorly over the past year. Alternative strategies, depending on your call on the rand, can be identified using the dynamic table.
It is important to remember that the return of a share is still directly related to the performance of its issuing company, but knowing the earnings split of the Top 40 Index can be helpful when you make a correct call on the direction of the rand.
|Anglo American PLC||4.57%||53.97%||93.00%||4.25%|
|Anglogold Ashanti Ltd||0.86%||-31.56%||74.00%||0.64%|
|Aspen Pharmacare Holdings Ltd||1.76%||5.19%||97.87%||1.72%|
|Barclays Africa Group Ltd||1.52%||9.24%||27.79%||0.42%|
|BHP Billiton PLC||8.35%||25.91%||100.00%||8.35%|
|Bidvest Group Ltd||0.96%||13.34%||48.50%||0.47%|
|British American Tobacco PLC||4.28%||4.96%||96.54%||4.13%|
|Capitec Bank Holdings Ltd||0.76%||45.50%||0.00%||0.00%|
|Compagnie Financiere Richemont||10.55%||30.35%||91.70%||9.68%|
|Firstrand Ltd *||2.80%||27.46%||1.00%||0.03%|
|Fortress Income Fund Ltd. (A) *||0.33%||17.38%||85.07%||0.28%|
|Fortress Income Fund Ltd. (B) *||0.49%||33.98%||85.07%||0.41%|
|Gold Fields Ltd||0.80%||20.66%||87.00%||0.70%|
|Growthpoint Properties Ltd||1.12%||12.08%||27.47%||0.31%|
|Intu Properties Plc||0.62%||-14.02%||100.00%||0.62%|
|Life Healthcare Group Holdings Ltd||0.54%||-17.87%||7.20%||0.04%|
|Mediclinic International PLC||0.73%||-25.12%||71.51%||0.52%|
|Mr Price Group Ltd||0.73%||27.89%||6.60%||0.05%|
|MTN Group Ltd||3.77%||20.34%||72.00%||2.71%|
|Naspers Ltd Class N||20.92%||42.18%||52.60%||11.01%|
|Nedbank Group Ltd||0.72%||7.47%||6.70%||0.05%|
|NEPI Rockcastle PLC||0.97%||25.14%||100.00%||0.97%|
|Old Mutual PLC *||2.85%||9.55%||51.70%||1.47%|
|Redefine Properties Ltd||0.91%||7.74%||13.20%||0.12%|
|Reinet Investments SCA DR *||0.70%||11.10%||97.02%||0.68%|
|RMB Holdings Ltd||0.71%||23.59%||0.00%||0.00%|
|Shoprite Holdings Ltd||1.55%||18.76%||19.40%||0.30%|
|Standard Bank Group Ltd||3.36%||32.59%||30.30%||1.02%|
|Steinhoff International Holdings N.V.||2.62%||-16.30%||68.00%||1.78%|
|Tiger Brands Ltd||1.03%||6.07%||17.00%||0.18%|
|Vodacom Group Ltd||1.61%||11.82%||20.70%||0.33%|
|Woolworths Holdings Ltd||0.96%||-14.94%||39.50%||0.38%|
*Results obtained from firms’ most recent financial statements.
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.