Monday, 24 October 2011

The ghost of Africa past..

The notion that Africa will position itself as an economic superpower somewhere in the not-too-distant-future falls a yard or two short of reality. Where violent tribal enmities are a common thread and with her demographically segmented peoples, flawed long-term economic strategies and burgeoning poverty it's not difficult to be dismissive of Africa's prospects.

In a new development, the European legacies of the past, largely exploitative and still entrenched in Africa's beggared psyche, have been rekindled, unnoticed it seems, in the boardrooms of China. China's resource ambitions are unfettered and often environmentally disastrous and yet African governments smarting from Western betrayal, perceived or otherwise, have little option but to look to the East. China's propensity to lull the uninitiated by conjuring up poorly constructed, inferior quality infrastructure in return for what can only be described as economic exploitation, imperils Africa. 

In countries where retained power is often pillared on ethnic subjugation and even genocidal sacrifice, the elected officials and or self-styled political leaders continuously flout the best interests of her peoples. Under this guise Africa's leaders, lulled into a Ray-Ban-tinted sense of self-worth and where the rule of law is an ephemeral notion at best, seemingly lack the experience or courage to resist this trickery, exchanging precious non-renewable resources for cheap trinkets. 

In a leadership vacuum African Ubuntu (pride) has a fragility reminiscent of the distant past. South Africa is no different. 

Wednesday, 12 October 2011

Rand-hedge equity is an oxymoron

The ONLY way to hedge your equity portfolio against a declining rand and it's on the cards by the way, is to buy a currency hedge of some sort or by buying an equity collar. It is grossly incorrect to assume that a favourably weighted rand-hedge (companies with earnings positively impacted by a weaker rand vs the US dollar; usually) portfolio provides positive returns when the rand deteriorates against the cross.

Neither should you underestimate the impact on local equity prices by foreign funds or traders in a declining rand environment given their real losses in their own currencies on repatriation. PE-ratings fall dramatically regardless of the perceived 'increase' in earnings expressed in ZAR. It would be prudent to remember that share prices stagnate or fall when currencies become unstable.

There is NO predictable protection, absolute or otherwise, against a falling rand by weighting an equity portfolio in favour of companies with currency-enhanced earnings in a deteriorating rand environment. Given the JSE's reliance on and its index weighting in commodity stocks and the prevalence of foreign shareholders in these companies the opposite is usually true.