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Which stocks have been the best rand hedges?

Offering a silver lining to a weaker currency.

CAPE TOWN – Over the last year the rand has fallen from around R10.60 to the US dollar to its current levels of around R12.90. It has been an almost uninterrupted slide during which the local currency has shed nearly 18% of its value.

As South Africans we may tend to focus on the negatives in this – how it is a reflection of our lacklustre growth, the impact of the slowdown in China on our exports, and our twin deficits. It’s a messy situation for the currency and one that there is currently no easy way out of.

Morgan Stanley, which famously included the South African rand in the ‘Fragile Five’ in August 2013, has once again highlighted the risks it faces by making it part of a newly-constituted ‘Troubled Ten‘.

For local investors, however, it’s not all bad news. A falling rand always has a silver lining.

For a start, anyone who has a well-diversified portfolio should have substantial exposure to offshore assets. Most of those will be denominated in US Dollars, which means that in rand terms the value of those investments will be getting a healthy boost.

But even for investors that only hold shares on the JSE, it can be argued that a good part of our market actually favours a weaker local currency. This is because many companies listed on the bourse have operations outside of South Africa and so earn revenues in other currencies. Commodities are also generally priced in US dollars, so for the many listed resource counters on the JSE, a weaker local currency means higher revenues in rand terms.

This is why a number of local stocks are referred to as ‘rand hedges’. There is an inverse correlation between their performance and the value of the local currency, because as the rand goes down, their earnings in rand terms will go up.

However, not all rand hedge stocks are created equal. Certainly in the current market, certain stocks that one would ordinarily think of as rand hedges have not benefitted from the depreciation in the local currency at all.

The stocks in this category are the local resource counters, most notably the platinum miners and gold producers like Sibanye Gold and Harmony Gold that have operations primarily within South Africa’s borders. In an environment where commodity prices are under pressure and there are serious questions about the local industry, they have not been helped by rand weakness.

Sasol too would usually act as a rand hedge. However, the collapse in the oil price has meant that it has not benefitted from the weaker local currency either.

The exception in the commodity space has been Mondi, which has had a roaring year.

The below table shows the performances of these stocks over the last twelve months:

1 Year share price movements

Anglo American Platinum

-41.04%

Impala Platinum

-59.66%

Lonmin

-81.80%

Sibanye Gold

-45.73%

Harmony Gold

-60.14%

Sasol

-35.13%

Mondi Plc

73.97%

Sappi

-2.79%

Source: ProfileData

Given that resource rand hedges have clearly not been the place to have one’s money over the last year, investors would have had to consider their other options. An increasingly prominent one of those is rand hedge property counters.

There are now a handful of listed property stocks on the JSE that derive their income exclusively from overseas. As the below table illustrates, these have generally been a good place to have been invested in over the last twelve months.

1 Year share price movements

Intu

14.59%

Capital & Counties

58.96%

New Europe Property Investments

36.17%

Redefine International

17.77%

Rockcastle

52.13%

Source: ProfileData

The stocks that have gained most prominence as rand hedges over the last few years are however the big, multinational industrial counters. For most of the period between 2010 and 2014 they dominated the market.

Over the last year some have been less prominent, but for the most part they have still stayed ahead of the All Share Index. The main exception is MTN, which has suffered because of its heavy exposure to Nigeria and Iran where the depressed oil price has impacted not only those economies but also the naira and the rial and therefore the company has actually felt a negative currency impact.

1 Year share price movements

Naspers

25.28%

SABMiller

13.17%

British American Tobacco

18.57%

MTN

-19.21%

Richemont

-0.22%

Steinhoff

46.75%

Aspen

15.72%

Source: ProfileData

Over and above the usual considerations shown above, there are also other stocks on the JSE that may be overlooked for the rand hedge qualities, but which do offer some protection against a weaker currency due to the increasing importance of their intentional operations or exports. These are companies that are earning a growing percentage of their revenues in other currencies.

The below table lists some stocks one might consider:

1 Year share price movements

Discovery

36.93%

Distell

25.66%

Mediclinic

11.81%

Datatec

33.53%

Source: ProfileData

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