JOHANNESBURG - It was another extraordinarily bad week for local investor sentiment, and JSE shares with strong overseas exposure could provide some financial shelter to investors from the growing pace of value destruction in South Africa.
Arguably, the worst news was the 0.6percent contraction in GDP for the third quarter, which confirmed what many other financial indicators were showing. But the extent of the decline still managed to surprise even the most negative of economists.
It comes at a time when the government should be introducing urgently needed structural reforms, before the February Budget to at least get the economy back on track to grow sustainably again. And to avoid further credit rating downgrades, particularly by Moody’s credit rating agency after the February Budget, the last of three to not put the country into junk status.
Sadly, those changes are taking place too slowly. Further downgrades, some even deeper into junk status, seem likely.
SAA going into business rescue, per se was not bad news - no businesses survive a business rescue by continuing to trading the way they have, and there will be opportunities for private airlines and associated jobs.
The bad news was that it indicated to us all just how much the government’s fiscal ability to effect change is constrained. The other bad news was SAA plans to burn another R4billion of taxpayer-funded debt during the business rescue process,
Also making an ominous appearance this week was load shedding, even though it was not entirely unexpected, given Eskom’s massive financial and operational challenges.
Load shedding is not good for business. This formed the basis of a successful legal challenge by broiler group, Astral Foods last week.
It interdicted Eskom from trying to switch off the power to payment-defaulting West Rand Municipality, as this would have been catastrophic for Astral’s operations there.
Power cuts, quite simply, undermine business confidence and erode value in the economy.
The weak economy undoubtedly has fuelled the exodus of foreigners from the stock and bond market this year. JSE statistics show foreign investors off-loaded R141bn of South African stocks and bonds this year, the biggest sell-off in at least a decade. So, if you can’t beat them, join them.
The problem with investing offshore for South Africans through most formal collective investment schemes is that the investment funds that are subject to Regulation 28 constraints, which limit the percentage of how much a fund may invest offshore of its total assets, are already largely maxed out.
But this shouldn’t stop individuals from trying to diversify their investments offshore, given the likelihood of a structurally weak rand.
One company on the JSE to consider with good offshore income streams is Vukile Property Fund. Last week, it reported a 3.5percent rise in dividends, its 16th year of dividend growth, along with a solid operating performance, with assets split almost evenly between defensively positioned shopping centres in South Africa and well traded centres in Spain, one of Europe’s fastest growing economies.
The share price was trading 1.78percent higher at R21.19 on Friday, and unsurprisingly, it had risen more than 10percent since the previous week. Its price earnings ratio is around 15.8, above the JSE average for November of around 13.5.
In that week, another company offering offshore opportunities in rands is Sirius Real Estate, which owns properties primarily aimed at the light industrial sector in Germany.
Germany enjoys strong GDP growth and some 99percent of its companies are small and medium enterprises, the core customers of Sirius. Sirius lifted its interim dividend 8.6 percent to 1.77 (R28.58) per share in the six months to September, and expects further improvement.
Its share price was trading 1.42percent higher at R15.67 on Friday, after having risen by more than 13percent since mid-November. Sirius’s price earnings ratio of 26.6 is higher than the average of real estate companies in Germany of around 24. These are two JSE shares most middle-income people could consider investing at least some of their savings in for the purposes of hedging against the rand.
Another JSE company with almost zero local operations is international food service group Bidcorp, which was trading 0.62percent higher at R332.42 on Friday, off a price earnings ratio of 24.81, quite a high ratio for the JSE, but not far off global averages.
Nepi Rockcastle, which has properties focused on central and eastern Europe, was trading 1.65percent higher at R127.47 on the JSE on Friday, off a price earnings ratio of around 23.5 again at quite a high price-earnings ratio for the JSE. The biggest rand hedges on the JSE that institutional investors tend to favour because of earnings quality and stock liquidity are Naspers, Richemont, BAT, AB InBev, BHP Billiton and Glencore.