Don’t sell your SA Inc shares just yet

Fernando Durrell, Head of Absolute Return at Sanlam Investments Active Manager, says offshore shares are not always a safer alternative than ‘SA Inc’ shares.

Since South Africa’s national election on 29 May 2024, government restructuring has caused rand volatility, prompting some investors to consider selling ‘SA Inc shares’ for rand hedges.  However, data from historical risk-off periods suggests that offshore exposed shares do not always offer a safer alternative. Now may be the time to double down on diversifying your portfolio across currencies and asset classes.

Having recently reviewed historical instances of major risk-off events and rand blow-outs, we analysed the performance of SA Inc versus non-SA Inc shares. In periods of dramatic rand weakening spells, the common belief is that companies with offshore earnings, in hard currency terms, will outperform shares restricted to South Africa that have rand-based revenue and costs. Surprisingly, this isn’t always the case.

Did rand-based shares always ‘suffer’ the most during rand blow-out events?

Considering the maximum drawdowns for major risk-off events over the past 20 years, we’ve defined risk-off events as periods when equities experience sharp drawdowns, which are frequently associated with episodes where the rand blows out. This can be due to a global or South Africa-specific event. The maximum drawdown is the percentage difference between the highest and lowest points over a defined period, giving a measure of how much an instrument can fall.

The usual expectation is that non-SA Inc shares, referred to as rand hedges or rand leverages, which are firms with offshore earnings and/or costs, will fall less during risk-off events than rand plays and rand neutrals, which are SA Inc-type shares. The reality is a bit different.

Here’s how shares performed during rand blow-out periods:

• 1998: Asian financial crisis: SA Inc shares fell more than non-SA Inc shares;
• 2000: Dotcom bubble ‘burst’: Non-SA Inc shares fell more;
• 2008: Global financial crisis: Non-SA Inc shares fell more than SA Inc shares;
• 2013: Taper tantrum (surge in US Treasury yields): Non-SA Inc shares fell more;
• Covid-19: SA Inc shares fell more;
• 2022: Interest rate rise: Non-SA Inc shares fell more.

The take-away:

It is a bad idea to make a knee-jerk decision to sell SA Inc shares during times of heightened volatility. History suggests a diversified portfolio is best, with both local and offshore exposure, as it is virtually impossible to forecast which group of shares will perform best during the next risk-off event. It is also not related to the relative valuations of the various groups of shares.

The data reveals that it’s not always the case that when the rand weakens in a risk-off event, firms with hard currency earnings and/or costs will automatically benefit from the currency translation effect. Diversification across equities and asset classes remains essential to bring about resilience during times of turmoil.

Fixed income (bonds) can bolster a portfolio, as bonds performed best, in comparison to both SA Inc and non-SA Inc shares, during the analysed risk-off periods.

Every investor needs to consider their individual risk and return requirements when constructing a portfolio, but the historical data makes clear that having exposure to both rand hedges and rand plays is a robust strategy.

During periods of increased rand and market volatility, we recommend that investors stay the course and keep focused on their long-term objectives and goals. As ever, portfolio diversification is key to resilience.

Disclaimer

Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI”), Satrix Managers (RF) (Pty) Ltd, Graviton Wealth Management (Pty) Ltd (“GWM”), Graviton Financial Partners (Pty) Ltd (“GFP”), Satrix Investments (Pty) Ltd, Amplify Investment Partners (Pty) Ltd (“Amplify”), Sanlam Africa Real Estate Advisor Pty Ltd (“SAREA”), Simeka Wealth (Pty) Ltd and Absa Alternative Asset Management (Pty) Ltd (“AAM”); and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF) (Pty) Ltd (“SCI”), Satrix Managers (RF) (Pty) Ltd (“Satrix”) and Absa Fund Managers (RF) (Pty) Ltd. Sanlam is a full member of ASISA. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments/collective investment units/unit trusts may go down as well as up.

The information in this article does not constitute financial advice.  While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.