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. 

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