Return of the rand hedges

MONEYWEB, David Carte, 18 September 2006

Go for earners of hard currencies that are listed offshore

The rand has fallen some 25% from its January highs, leading to a huge movement of investment funds into rand hedges on the JSE. Arthur Buchner of Nedbank Securities told Moneyweb Radio listeners on Thursday that rand hedges already constitute 55% of the JSE’s market capitalisation. He said the fall of the rand was already giving investors protection.

Morgan Stanley figures show that SA shares are up 8% in rand terms since the beginning of the year. Meanwhile, in dollar terms, they are down 8%. That shows the protection afforded to local investors by the softer currency. Buchner advises investors to buy dual-listed shares with significant hard currency income.

He recommended Anglo American, BHP Billiton and Liberty International as the best examples of this type of investment. Buchner said even though it did not have a dual listing, MTN had become a rand hedge in the wake of its acquisition of Investcom.

Being listed in London, Old Mutual fits the bill but only 50% of its earnings are not in rands. Like Old Mutual, SABMiller is listed in London but it is still heavily rand dependent for its profits. When Miller starts to produce profits, this will change.

Sasol is dual listed in Johannesburg and New York but by far the bulk of its earnings come from SA and the bulk of its assets are also here. This might change if investments in Qatar, Nigeria, China and the US come to fruition. Because Sasol’s factory gate synfuel prices are based on the dollar price of petroleum prices offshore it is a natural rand hedge.

DiData falls outside the top 40 stocks on the JSE but is listed in London. Most of its profits are still earned in SA.

Even SA based exporting and import-replacing companies are rand hedges. Exporters receive more rands for the goods and services they sell offshore. Companies in competition with imports find their products and services more competitive as the rand shrinks.

Buchner warned that commodity price trends could offset rand gains in mining companies and commodity exporters. Importers are most negatively affected, as they pay more rands for the same imports. Sometimes they can pass on the extra costs, but, in the motor industry for instance, competition makes it difficult to pass on additional costs. On these grounds, motor and retailing shares are experiencing heavy weather.

This story first appeared in Moneyweb Business in the Citizen.

Posted in Market commentary

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