Does the JSE protect you?

South African (ZA) investors often claim that they don’t need exposure to direct foreign securities, because an investment on the JSE (Johannesburg Securities Exchange) provides a sufficient Rand hedge. Perceived wisdom is that foreign revenues of these large companies protect their shareholders from South African Rand (ZAR) devaluation. We find it rather alarming that this notion is not interrogated more thoroughly. This could be a combination of implicitly trusting an advisor and/ or the unfamiliarity with the subject matter. This article aims to unpack this idea.

An investor needs to distinguish between revenue and earnings. Companies do not distribute revenue as dividends to its shareholders – only after tax earnings. A company with foreign revenue might also have underlying expenses or costs in the foreign currency. Thus, only if a company has a foreign currency profit, can it potentially qualify as a so-called “Rand hedge”. About 60% of the JSE Top 40 earnings (the 40 largest companies on the exchange) come from foreign currency. It does provide some Rand protection, but it is concentrated around certain industries and geographies.

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