South Africa in context
The impact on the South African economy will probably not be a dramatic as the knock on effect on our markets. South African exports to the UK last year amounted to R35bn, making it South Africa’s 7th largest destination for exports (Botswana and Namibia are bigger export destinations). No doubt some businesses will perhaps feel more pain than others, if exports to the UK were to take a temporary dip of say 20% while new trade agreements are negotiated, the impact on total exports would be a decline of just 0.6%. Regarding the market impact, this is not a shock on the scale of the global financial crisis. Financial institutions have been prepared for this event and are far better capitalised than they were in 2008 and 2011.
Companies listed in South Africa which have the highest exposure to the UK would include the property companies (Capco and Intu in particular). Outside of property the following companies are most exposed to the UK: Brait (72% of Net Asset Value), Investec earns 40% of its profits from the UK (of which half is from banking and the balance from wealth and asset management), Bidcorp’s exposure is 27% (and 19% to Europe), Truworths 27% of revenue, Spar (26% exposure to Ireland), Foschini earns 17% of its revenue from the UK (11% of profits) and Old Mutual (less than 12% of business). In the short term, these companies will convert their profits in pounds into fewer rands which may impact growth, however it is not clear how significant, if at all, the impact will be on South African companies over the long term.
As far as commodities go, gold and platinum will likely benefit from increased uncertainty and flight to safety. Other commodities may sell off in sympathy with concerns of slightly lower global growth but in our view the impact from Brexit on commodity prices will not be significant.
South African Funds
Sanlam Investment Management Value Fund, Unconstrained Equity portfolios
Our South African portfolios are well diversified with investments in good companies trading below our assessment of intrinsic value. Our investment in the companies mentioned above includes Investec, Old Mutual and Foschini which in total make up 11% of the portfolio. In the SIM Value Fund, the only direct exposure we have to the UK is Barclays Plc which is just over 2% of the fund. It is incredibly cheap and currently trades on a P/NAV of 0.44. We will continue to seek out potential opportunities both locally and globally that will arise from the increased volatility and will be extremely vigilant with respect to the increased risks which abound.
Nedgroup Investments Financial Fund
The fund has exposure to Investec (8.7%) and Old Mutual (10.4%). Roughly 40% of Investec’s profit is derived from the UK and less than 12% of Old Mutual’s. In addition the fund has a 20% investment in offshore financials through the Sanlam Global Financial Fund of which 5.7% was invested in the UK and 11% in Europe, adding an effective 1% UK exposure and 2% to Europe.
Sanlam Global Financial Fund
On Friday the fund had ±5.7% exposure to the UK in three investments in specialist financial companies (One Savings Bank, Arrow Global and the Novae Group). One Savings Bank finances multi-owner properties but its average loan-to-value was below 65%, but if the demand for London properties falls then its growth outlook changes.
The exposure to Europe was 11% mostly to insurers whose incomes are globally diversified.
We invested in these companies because of their superior management and growth outlook (in a low growth Europe). Needless to say the investments are all trading at very attractive valuations and have average dividend yields of more than 4%.
SIM Global Equity Income Fund
Exposure to UK listed companies for this dividend-focused fund is 39% (UK companies are much better dividend payers than US ones), but the revenue exposure to the UK is only 13%. Despite the bad Brexit news, most of the fund’s largest UK exposures have not fallen severely, due to their defensive nature and global footprint. Royal Dutch Shell (2.8% of the fund) has risen close to 10% this month in USD terms, BP is up about 5%, while Unilever is down a modest 1.2% at the time of writing. Other stable UK-listed businesses in the fund are British American Tobacco (-05% month to date) and GlaxoSmithKine (-3%).
The fund has some small exposures to more domestically focused businesses such as Taylor Wimpey, Sainsbury, Aberdeen Asset Management and Mitie that have seen weakness post the Brexit vote.
The fund aims to provide an attractive and growing dividend income in USD dollars along with capital growth. Given its limited exposure to the UK economy, we do not envisage a material impact on the dividend-paying ability of the fund in the longer term.
The companies in the fund are established businesses which have demonstrated their ability to survive and thrive through economic cycles.
Sanlam Global Best Ideas Fund
On a company revenue basis the fund has a 9% exposure to the UK, even while businesses owned by the fund that are listed in the UK comprises 18% of the fund value. The difference is in the UK-listed entities in the fund that have a global business footprint and thus very little exposure to the UK economy. These are the likes of Royal Dutch Shell (3.5% of the fund) , GlaxoSmithKline (2%), MicroFocus (2%) and AstraZeneca (1%).
What is, however, likely to cause some pain for the fund in the short term is exposure to largely domestic-focused entities such as Taylor Wimpey (1.5%), Legal & General Plc (2.6%) and Countrywide (1%). This latter group has been hit hard and we will be watching their valuations closely as it is always in difficult times like these that bargains are to be had.
SIM Global Emerging Markets Fund
While there has been an inevitable ripple effect onto emerging market as investors switch to “risk off”, the EM fund has no direct exposure to UK companies.