South Africa is in a dark place right now. I am not going to go into it, but with Zuma’s cabinet reshuffle, our Government’s integrity (and the resulting economic consequences) are at risk.
But does that mean you should sell all the shares you hold on the JSE?
No. Not even close. I’m not going to tell you that everything will be alright. While I hope so, I do not know so. An investment strategy that relies on ‘hope’ is akin to gambling, so I would rather implore you to try to be logical about things.
What is happening on the JSE is that–generally speaking–all correlations are reverting to 1.0x. What I mean by this is that investors are selling portfolios and not shares. That means that, while some stocks like banks, property and retailers should be selling off like crazy on our spiking domestic risk, other stocks should not be selling off. In fact, some of these other stocks should be running on the weaker ZAR (all things considered equal).
Here is a list of some ideas to consider:
Datatec (DTC) is a global ICT value-added distribution business. It has extremely minimal exposure to South Africa. Furthermore, Datatec exports USD-priced technology into UK, Europe and Emerging Markets, which means that it loves a weak USD (makes their products cheaper and their non-USD profits worth more in USD conversions).
Thus, Datatec should be running wild on the back of a weaker ZAR (while the rest of EM currencies are strengthening) against the USD and the potential for reflationary growth coming out the States (if Trump gets his way).
Yet the stock is flat-to-down…?
Pan Africa Resources (PAN) is a domestic gold stock with options on platinum and coal. The leverage implicit in these companies makes them incredibly ZAR sensitive as their cost-base is in ZAR, but their revenues are in USD.
Just my little model in PAN has seen its fair value rise by c.50% from USD0.20 per share to over USD0.30 per share in the last couple of days.
Yet, the stock is flat…?
Following on from Pan Africa, this includes Wescoal (black-owned coal miner) and many of the other resources stocks. Ironically, the currency drop has made their fundamentals more attractive, despite the labour and geographic risk attached to their operations.
Tongaat Hulett (TON) is another Rand Hedge that has fallen in the last couple of days. Simon Brown has plenty to say about Tongaat, and you can listen to it here. In fact, try find some of Simon’s back issue podcasts where he discusses Tongaat in more detail. It is a wildly nice little company with quite unique assets.
Tongaat has a couple of things that make it attractive:
- Politics doesn’t affect the rain falling or the Sun shining, and the drought is breaking.
- The drought-breaking means that the sugar harvest volumes will rise dramatically and the maize volumes will too (especially in 2018!).
- While the increased sugar volume benefits are obvious (more revenue, lower per unit cost as fixed costs are spread over more tonnage), the maize harvest is more subtle. More maize being harvested in South Africa leads to a lower inland maize price. This then leads to lower input costs into Tongaat’s Starch processing operations and greater volumes ultimately (once hedges are out of the way) leads to a higher margin and bottom line for the Group.
- And, finally, the most obvious: a weaker ZAR means higher ZAR-based sugar price and greater profits for Tongaat.
There are other things, like Tongaat’s land portfolio and its other African operations that are nice about the stock, but all in all, the drought is breaking and Tongaat’s ZAR-based sugar price is attractive at these levels.
So why is Tongaat Hulett’s share price falling?
And, my answer in all three cases is: because correlations are reverting to 1.0x.
Now, in all three of these cases, you could easy argue about geopolitical risk and illiquidity discounts widening. Sure. And these would be valid arguments.
But, like I said, people are panicking and selling portfolios and not shares. This means that there are many peripheral positions just being dumped in the market (at “any” price) as parts of larger (basket) trades and therein can lie some nice opportunity.
Happy hunting, and good luck.