JSE as a local investment, but also not

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 Graph 1 – Top five largest companies according to market capitalisation with largest offshore revenue versus largest rand revenue (Source: Datastream)

This is evident when comparing the average movement of the top five largest FTSE/JSE All Share (JSE) companies (based on market capitalization) that earn most of their revenue outside South Africa (commonly known as "rand-hedge shares"), with the top five largest (SA Inc) companies that primarily generate revenue in South Africa (in Rand). By comparing these two graphs with the rand to US Dollar (ZAR/USD) graph, it is evident that rand-hedge shares exhibit a significant positive correlation with ZAR/USD, whereas SA Inc stocks show an equally strong negative correlation with ZAR/USD.

Rand-hedge shares generally benefit from a weakening South African currency. It's important to note that very few rand-hedge shares provide complete protection against rand depreciation, and many demonstrate asymmetric exposure. This means that their share prices fluctuate in an asymmetrical manner in response to changes in the strength or weakness of the rand. This for example in May 2023 when, despite the JSE earning most of its revenue from offshore exposure, it still experienced an 11% decline in value in US dollar (USD) terms compared to the 1.7% decline in the MSCI Emerging Markets Index over the same period. The rand weakened by 7.4% against the USD.

Rand-hedge shares fall into two main categories. The first category includes companies that are registered and operate abroad but are also listed on the JSE. The second category comprises major South African exporting companies, such as most listed mining companies, whose revenues are denominated in foreign currencies. Examples of rand-hedge shares include Richemont (a luxury goods retailer traded on both the JSE and the Swiss exchange), British American Tobacco(a tobacco company traded on the JSE and London Stock Exchange), Anheuser Busch (the well-known Belgium-based brewer with its primary listing on Euronext Brussels and secondary listing on the JSE), and BHP Billiton, one of the world's leading commodity producing companies with its primary listing on the Australian Stock Exchange and secondary listing on the JSE.

Now, let's consider the percentage of revenue that the JSE earns outside South Africa's borders. According to the latest (2022/2023) annual financial statements of all companies currently listed on the JSE, adjusted for their current weight within the index, an investment in the JSE currently provides investors with 61% revenue exposure offshore, while only 39% is truly earned in South Africa in rand.

Pie Chart – FTSE/JSE All Share local versus offshore revenue exposure (Sources: Refinitiv Eikon and individual company financial statements)

What does this mean for investors?

Graph 2 – FTSE/JSE All Share Historic PE (Source: Datastream)

When we examine the historic price-to-earnings ratio (PE) of the JSE, it is difficult to argue that the JSE, with a multiple of 9 times, is not in the realm of extreme value territory. However, delving deeper into this data reveals even more intriguing insights. The average PE of the top ten largest rand-hedge shares (based on their weight within the JSE) is currently trading at a multiple of 17 times, while the top ten largest rand-earning companies are trading at a considerably lower multiple of 12 times PE. Given the challenges South Africa has faced in recent years, it is justified to consider these differences. While you should never lose sight of the importance of an overall balanced portfolio suited to your investment needs and objectives, it is worth considering what the impact would be if the rand continues its recent recovery, and how to focus your personal portfolio accordingly, or not.