Are South African shares really local investments?
01 Feb 2018
A great thing about having access to a world-class exchange like the JSE, with a mix of large global business and well-managed local companies, is that as investors we have a much broader opportunity set than one would think. When you see South African equity as an asset class, this only reflects that the underlying shares are listed in South Africa; your true exposure to offshore markets and opportunities could be a lot bigger than you think.
There are two ways to invest your money overseas:
- Direct offshore: The investor changes their rands into foreign exchange and typically buys into an offshore collective investment scheme (unit trust investment) holding offshore assets.
- Asset swap funds: The investor invests rands into a South African unit trust, and the unit trust company uses its asset swap capacity to invest in offshore assets.
Both of these avenues allow the investor to gain exposure to international companies like Microsoft, Nestle, Apple, Coca-Cola, etc.
Advantages of foreign exposure
One reason that you as an investor may want to do this is that you are well protected from a weakening exchange rate (in fact, when the exchange rate weakens, your investment – measured in rands – will go up in value).
Offshore exposure in local shares
An often-overlooked way for investors to get foreign exposure and protection from a weakening rand is through investing in locally listed companies on the JSE that derive the bulk of their earnings offshore.
Estimates from RMB Morgan Stanley show us that the JSE’s Top 40 shares have 72% of their earnings exposed to foreign currencies. If we extrapolate this to the broader market the figure drops to 65%. In general, the large shares on the JSE tend to have more offshore earnings exposure while the smaller companies on the exchange have more of their earnings derived in South Africa.
These types of businesses that earn a large portion of their earnings overseas are collectively known as ‘rand hedge shares’. Rand hedge shares generally go up when the rand weakens as there is an anticipation that those businesses’ foreign earnings will be worth more when translated into rands at a weaker exchange rate.
Two types of rand hedge shares listed on the JSE
- Large global businesses such as British American Tobacco and Richemont who sell their products on a global basis and have operations throughout the world. The bulk of their profits is generated outside of South Africa in foreign currencies.
- Companies that have operations in South Africa but export their products into international markets and receive dollar prices or they sell locally but their product prices are benchmarked to international dollar prices. Good examples of these are resource companies such as Anglo American Platinum and Sasol.
In either case, these shares offer investors protection from a weakening local currency. The reality is you may already have significant exposure to these rand hedge shares through the shares held in your local unit trusts and retirement funds.
The influence of currency
Given the political instability and lack of growth locally, many investment managers have tended to have a maximum exposure (25%) to offshore assets in their retirement investment structures (RAs and pension funds). They have also combined this with a large exposure to the Top 40 rand hedge shares.
If you need help making sense of offshore investments, unit trust investments, the South African money market or even index investments, chat to a financial planner.