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The FTSE/JSE All Share Index had a lacklustre start to the year and over a 12-month period its performance clocked in just over 5%, or less than the national inflation rate.
The all-share gauge returned just over 4% to investors on 20 June since the start of the year, according to data compiled from Bloomberg.
Over a 12-month period, the return came in at 5.2% against the index’s long-term annualised average of about 12%. Consumer price inflation for May was 6.1% from a year earlier, according to Stats SA.
The All Share Index is dominated by multinational companies earning substantial revenue from abroad. With the local economy shrinking by 1.2% during the first three months of the year, companies deriving most of their sales from SA are facing tough times.
Stocks such as Naspers*, British American Tobacco, SABMiller or Anheuser-Busch InBev, Steinhoff, Sasol and Standard Bank have all ventured outside of SA to limit the risk posed by a single market.
Many other mid-level players have followed suit, with property companies taking this approach to limit their revenue exposure to SA and expand into offshore destinations.
Some of SA’s largest equity fund managers have rewarded this approach over the last couple of years and have substantial holdings in these multinationals, which diversified their operations.
Of the 13 equity funds included in the analysis, all of them hold British American Tobacco among their top 10 stock holdings at the end of May. The share delivered a 39.9% return to investors in rand terms over the past ?12 months.
Naspers is another favourite, with 11 of the funds holding the share. The stock returned 18% over the past 12 months. The company holds a 34% stake in Chinese mobile gaming giant Tencent Holdings Ltd.
Tied for third place for choice among the managers, were Steinhoff International and Sasol. Steinhoff has driven an aggressive international acquisition strategy over the last few years, venturing into the European retail market. It has also acquired SA’s second-largest clothing retailer, Pepkor, and has returned 21% to investors over the past 12 months.
Sasol, beset by project cost overruns at its Louisiana chemicals plant in the US, and hit by the slump in international oil prices, remains a favourite rand hedge even as the stock declined by 1% over the past 12 months.
With many of the funds looking to financial stocks for future returns, Old Mutual is the favourite to be held among their top 10 holdings. The company, which appointed Bruce Hemphill as CEO last year, plans to split the business and there are talks that it plans to sell its stake in Nedbank.
The stock returned 6.5% to investors and is trading at a historic price-to-earnings ratio (P/E) of 13.8, or rather investors are willing to pay R13.80 for every R1 profit the company is generating.
FirstRand, owner of First National Bank, is the second-most preferred financial stock, featuring seven times among the 13 funds’ top 10 holdings. The stock lost investors 9.3% over the past 12 months and trades at 11.4 times earnings. Its gross dividend yield is 5.1%.
Standard Bank, the largest bank on the continent by assets, appears six times on the top 10 holdings of the fund managers. The stock lost investors 15.2% over the past 12 months and its dividend yield is 5.4%.
Bank stocks were especially hard hit when President Jacob Zuma ?sacked finance minister Nhlanhla Nene in December. The looming sovereign credit rating downgrade bodes higher interest rates and dearer borrowing costs for banks, placing their profitability under strain.
* finweek is a publication of Media24, a subsidiary of Naspers.
This is an excerpt of an article that originally appeared in the 30 June 2016 edition of finweek. Buy and download the magazine here.
