SA investors should not abandon the JSE in favour of offshore markets as the local bourse continues to offer attractive opportunities provided one makes the right stock picks.
That is the view of Siboniso Nxumalo, Old Mutual Investment Group’s (OMIG) chief investment officer, who says the rand’s record lows against the dollar make it risky to take one’s money offshore.
Despite the idiosyncratic rand risk, Nxumalo says the JSE still offers attractive investment opportunities as fewer than half the companies listed on the bourse earn their revenue from the local economy.
“You have to be careful when you start taking money out of the country and the rand is at these levels,” Nxumalo said at an OMIG media briefing on Wednesday. “In terms of SA, obviously we have reduced our equity exposure — it is cheap and it is cheap for a reason … the risks are everywhere. But what we are not saying is, abandon SA. In SA you have to be selective.”
While the rand has crashed to almost R20/$ in the wake of SA’s open support for Russia and President Vladimir Putin that has prompted the US to accuse Pretoria of supplying Moscow with weapons, the JSE all-share index has held up reasonably well. Though the local bourse has sold off from its February levels of above 80,000 index points it is still up 2.76% year to date despite worsening load-shedding and a series of rate hikes that have threatened to tip the domestic economy into recession.
Nxumalo says the resilience of local companies — and by extension the JSE — is due to them having diversified their revenue streams away from the local economy. While so-called SA Inc stocks, a term used to describe listed companies whose revenue relies heavily on the domestic economy, still account for almost half the earnings of JSE-listed companies, many earn their revenue offshore.
Already global
Using the capped shareholder weighted all share index (Swix), a gauge that caps company weightings of the local bourse at 10% to reduce concentration risk, Nxumalo says only about 48.6% of the earnings of JSE-listed companies come from SA.
“Most of the JSE is not representative of the SA economy, it is representative of the global economy,” he says. “When you are investing in the JSE you are not necessarily investing in the SA economy because a large part of the JSE is not the SA economy. More than half of what you get in the all-share [index] is already global.”
Yet, OMIG has reduced its exposure to SA assets in its balanced fund from about 74% at end-March 2022 to 68.7% at the end of the first quarter of 2023, while raising its offshore exposure to 31.3% from 26% over the same time. But when one digs down into the offshore exposure it is largely due to an increased allocation to global bonds and cash.
OMIG’s exposure to global equities has actually dropped from 23.8% at end-March 2022 to 21.1% at the corresponding date in 2023. Over that same time its allocation to offshore bonds has climbed from 1.1% to 5.1% while its hard currency allocation has risen from 1.1% to 5.1%.
OMIG’s SA equity exposure has also dropped from 47% at end-March 2022 to 40% at the end of quarter one 2023. Its SA bond exposure has also climbed from 16.1% last year to 21.1% at end-March 2023 despite panic selling by foreigners that has been accelerated by SA’s open defiance of international condemnation of Russia.
Rand hedges
“SA bonds are yielding 12% — that is fantastic, it is a good return,” said Nxumalo. “We are acknowledging that there is risk. We are not saying run away from SA. Select your assets, there is money to be made here.”
When asked to be more specific on what local shares offer good return prospects, Nxumalo recommends global defensive rand hedges such as luxury goods play Richemont, which he expects will benefit from a consumer-led economic recovery in China. On the downside he does not favour stocks that rely on discretionary expenditure from under-pressure SA consumers such as clothing retailers or Capitec.
Instead he likes recession-proof stalwarts of alcohol and tobacco, based on the axiom that even when times are tough people still smoke and drink. That makes British American Tobacco (BAT), AB InBev, which bought out SABMiller in 2016, two of his favoured picks based on their historic ability to outperform the market during economic downturns.
He also names Glencore due to the diversified resources from which it earns its revenue, and favours Investec among local lenders thanks to its exposure to the UK market. ICT and electronics group Reunert is another OMIG favourite as evidenced by its 33% jump in interim profit due to record sales of renewable power products stemming from SA’s electricity crisis.
“Being cautious on SA doesn’t necessarily mean you take your assets and invest them offshore,” said Nxumalo. “In the midst of all of this there is always somebody who is making money. You just have to be selective and understand where you are buying.”
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