Rand hedge stocks retain their worth

RAND hedge stocks such as mobile phone operator MTN [JSE:MTN], media giant Naspers [JSE:NPN], global brewer SABMiller [JSE:SAB] and consumer goods giant British American Tobacco [JSE:BTI] (BAT) remain attractively valued compared to pure domestic businesses.

This is the view of Quinton Ivan, the head of research at Coronation Fund Managers, who says global equities like these are discounting the worldwide economic downturn.

"This justifies a holding close to the 25% offshore limit in our domestic balanced funds," says Ivan, adding these equities comprise about 73% of Coronation's equity portfolio.

He says markets remain extremely challenging and expects this volatility to continue, exacerbated by political brinkmanship and policy paralysis, especially in Europe.

Increased risk aversion during the second quarter resulted in a reversal of the strong gains enjoyed by equities at the start of the year.

"Europe remains the protagonist dominating global news. Steps to achieving a resolution of the eurozone crisis were dealt a blow when the electorate of France and Greece voted against the German-enforced austerity measures, thereby increasing the likelihood of a disorderly breakup," says Ivan.

"This followed the dissolution of the ruling Dutch government on the same austerity issue.

"In Greece the pro-bailout parties, New Democracy and Pasok, secured sufficient votes to form a coalition government, slightly reducing the risk of a Greek exit.”

Investor confidence was further shaken when Spain was unable to escape the contagion of uncertainty, which saw Spanish bond yields rise to unsustainable levels. This culminated in a €100bn bailout package for Spanish banks.

Nearly three years into the eurozone crisis the economies of Ireland, Portugal, Greece and Spain have been bailed out and Europe is still nowhere near implementing the necessary structural reforms required for the continent to survive.

"The risk of a disorderly breakup of the eurozone is no longer a tail risk and market volatility will be with us for the foreseeable future,” says Ivan.

The All Share [JSE:J203] Index returned 1% for the second quarter. Financials were once again the best performer with a 4.6% return.

Industrials returned 2.6% and resources lagged with a minus -3.6% return. Resource stocks remained under pressure given concerns over the slowdown in China, a large consumer of commodities.

"Although most commodity prices remain high, we believe that resources currently offer value, with selected resource shares trading at less than 10 times our assessment of normal earnings," says Ivan.

"While we continue to buy resource, the sustainability of Chinese demand remains the great imponderable and we do not have sufficient conviction to justify higher exposure at current prices.

"Our preferred resource holdings continue to be Sasol, the diversified miners (specifically Anglo American) and Mondi."

Coronation remains underweight on gold shares as these stocks are overvalued based on the assessment of normal earnings.

The fund managers also remain concerned over declining grades, impact of safety stoppages on production and enormous cost pressures faced by these businesses (labour, electricity and water).

Banks returned 2.7% in the second quarter, underperforming other financials.

"We have long espoused the attractiveness of South African commercial banks in previous commentary. Year-to-date, banks have returned 18.8%, comfortably outperforming the market and we have taken profits," Ivan says.

"In an environment where markets oscillate wildly, depending on the news of the day, we remain committed to our investment philosophy of 'cutting out the noise' and investing for the long term."

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