42 finweek 24 October 2019 http://www.fin24.com/finweek
the Fed started increasing interest rates.
“Capital flows into emerging markets started to turn
only between the fifth and sixth interest rate hikes in the
US,” Els says. Higher US interest rates lure investment
flows to its capital markets, which leads to an appreciation
of the US dollar. This dynamic kicked in belatedly, because
the world economy grew robustly in 2016 and 2017, he
explains. The clouds, coincidentally, started gathering
shortly after Donald Trump became president of the US.
Els says that interest rates in the US may have been
increased more than was justified because of the country’s
economic growth rate. Furthermore, Trump implemented
significant fiscal stimulus by cutting corporate taxes in
the US shortly after reaching the White House. He also
expanded infrastructure investment, which boosted
economic output to a pace faster than the world average,
which in turn led to a stronger US dollar, explains Els. This
turned the investment climate against emerging markets
as money flowed back into the US.
SA has liquid financial markets that, like other major
emerging markets, are vulnerable to negative sentiment
that may impact emerging markets, explains Koranteng.
“During the US interest rate hiking cycle, investors may
go back to investing in the US dollar, negatively affecting
emerging markets such as SA, and by definition its largest
and most liquid stocks,” he says.
Emerging markets, including SA, perform well when
there is global economic growth, explains Els. “This
is especially the case when world economic growth
outpaces US economic growth,” he says. The key
determinant of boosting investable emerging market
assets is the US dollar. “A weak US dollar is positive for
emerging markets,” Els says.
Stocks rattled by the higher interest rates included
Anheuser-Busch InBev (AB InBev) and British
American Tobacco (BAT). Both companies have
significant exposure to emerging-market consumers
and rely on those economies to perform well in order to
yield high returns to investors. AB InBev (previously listed
as SABMiller) fell 27.57% over the past five years. BAT
dropped 15.5% over the same period.
Of wars and exits
By the end of 2017, investors started pricing in a
riskier world economy as the likelihoods of Trump’s
implementation of trade tariffs against Chinese imports
and the UK’s disorderly exit from the EU rose sharply.
These uncertainties saw investors flee to safe dollar-
denominated assets, which led to a strengthening of the
currency, explains Els.
It is a challenge to determine with “high conviction”
how and when the US-China trade war will dissipate,
as there are unpredictable political factors at play, says
Koranteng.
The trade war between the world’s two largest
economies affects a significant portion of their bilateral
trade. The US imposed levies on more than $360bn of
Chinese imports ( just larger than SA’s GDP) and China
retaliated with tariffs on $110bn of US goods.
Global economic growth is linked to the current
geopolitical risks of the US-China trade spat and a messy
UK exit from the EU, says Hannes van den Berg, fund
manager at Investec Asset Management.
“Geopolitics is affecting the capital expenditure
decisions of companies,” says Van den Berg. “Companies
are holding back on expansion.”
The implication of a global decrease in capital
expenditure for some of the Top 40 Index’s constituents is
lower demand for resources, such as copper, he explains.
Lower expenditure by corporates in emerging markets
would necessarily lead to slower economic growth and
dampened consumer demand. In such an environment,
sales of luxury goods and beer, for instance, would be
negatively affected, he says.
Richemont, which owns luxury brands such as
Cartier, Van Cleef & Arpels and Montblanc, saw its share
price increase by just 17.3% over the past five years. The
company’s Asia-Pacific region is responsible for 38% of its
€13.989bn in sales.
Rand-hedge stocks usually do well when the rand
tanks, due to the companies’ offshore sales generation- but these delivered mixed results since 2014.
Although the rand weakened by 35.9% over the last
five years – from R11.12 per dollar to R15.02 at the time
of writing – some of the large rand hedges didn’t keep up.
BAT, Steinhoff, Capital & Counties, MTN, SABMiller/AB
InBev and Sasol cost investors dearly (see table).
Bidvest, on the other hand, which spun off its food
business into BidCorp, saw share price growth of
more than 90%. Mondi’s price appreciated by 69% over
the past five years.
“Rand hedges play a valuable role during times of rand
weakness due to their economic exposure to different
currencies and economies, but they do not all perform in a
similar positive manner,” says Absa’s Koranteng.
Bad choices
Some of the big players, which aren’t traditional rand
hedges, ventured overseas in what Van den Berg
describes as an effort to de-risk their business.
“South African companies have struggled to compete
globally,” he says. “Labour and property costs abroad arecover story investment
Hannes van den Berg
Fund manager at Investec
Asset ManagementThe implication of a
global decrease in
capital expenditure
for some of the Top40
Index’s constituents,
is lower demand for
resources, such as
copper.