Month: July 2016

Saying farewell to holding companies and hello to low voting shares

Written with the fond memory of the late great Dr. Jos Gerson – a colleague and warm friend who was the complete expert on Corporate Ownership and Control in South Africa. He is missed – especially at a time like this.

For a taste of the earlier work on these issues see on the blog under Research this publication

Shareholders as agents and principals: The case for South Africa’s corporate governance system Journal of Applied Corporate Finance, 1995 8(1)

 

Saying farewell to holding companies and hello to low voting shares – lessons from the Pick n Pay Holding Company unbundling.

One of the last of the once numerous pure holding companies listed on the JSE, Pick n Pay Holdings Limited (PWK), is no longer with us – to the palpable delight of its shareholders. PWK is a pure holding company because its only asset was a 52.69% shareholding in the operating company, supermarket chain Pick n Pay (PIK), from which it received dividends and paid out almost all of them (after limited expenses) to its own set of shareholders. PWK incurred no debt and acquired no other assets.

Its sole purpose was an important one – at least to its majority shareholder, the Ackerman family, who held over 50% of the shares in PIK and therefore continued to control its destiny with a minority stake in the operating company of 26% (51% of 52% = 26% roughly). These arrangements, sometimes unkindly described as pyramid schemes, enabled founding families of successful listed enterprises in SA (and elsewhere) to attract capital from sources outside the family, without giving up a proportionate degree of voting rights. Family control would be loosened should more than 50% of the listed operating company be publicly owned. But this constraint could be overcome by selling up to 50% to outsiders in a listed holding company with at least a 50% controlling stake in the operating company.

This process of divesting ownership rights without surrendering proportionate control was taken to an entirely legitimate extreme by the Rupert and Herzog families who controlled Remgro. Their concern to maintain control of the operating companies of the large Rembrandt Group led to the formation of four JSE listed holding companies. Top of the listed pyramid was Technical and Industrial Investments Limited with a 60.4% stake in also listed Technical Investment Corporation Limited that held 40.56% of listed Rembrandt Controlling Investments that owned 51. 07% of the listed operating company Rembrandt Group Limited that generated all the earnings and dividends.

Just in case you thought that this did not add up to 50% ownership, the top of the listed pyramid Technical and Industrial Investments Ltd held a further 9.6% of Rembrandt Controlling Investments Ltd. In this way, by inviting outsiders to share ownership in a tier of holding companies, the founding families continued to appoint and control the managers of businesses within the large Rembrandt Group with an ownership stake in it of about 5%. It was not democracy but it was a case of capitalist acts between consenting adults.

Clearly all of the other shareholders in Rembrandt and its holding companies, as those in PIK and PWK, understood fully that by buying shares in the operating or holding companies they would be sharing in the fortunes of the operating company without ever being able to force their collective will on the controlling shareholders. That they were willing to do so was to the great credit of the founding and controlling shareholders. They were trusted by those providing a large majority of the risk capital employed to act in the interest of all shareholders in wealth creation. That the family interests in the operating assets were proportionately small but represented a large proportion of the wealth of the controlling families would be a source of comfort to effectively minority shareholders, in votes if not in claims on dividends or assets.

There are of course simpler ways of separating ownership and control than layers of holding companies. Shares in the operating company with differential voting rights can serve the same function more simply and much less expensively. But these arrangements were until recently effectively prohibited by the listing requirements of the JSE, with the exception of a few grandfathered arrangements such as applied to Naspers with its great majority of non-voting shares. With a change in listing requirements and in SA company law, Rembrandt was able to collapse its pyramids while maintaining control with unlisted B shares and Pick and Pay has broadly, with the enthusiastic approval of its shareholders, followed this example. Family control of PIK is being controlled with family ownership B shares with effectively over 50% of the voting rights in PIK.

The shareholders in PWK who are to receive PIK shares in exchange had every reason to welcome the new arrangements. They, on the announcement of the intention to proceed with the collapsing of PWK and the unbundling of its 52.69% holding of shares in PIK to its shareholders, saw the value of a PWK share increase by over 12% on the day of the announcement.

Shares in PWK, the holding company, had until then always traded at a variable discount to the value of the shares of PWK held in PIK. Or, in other words, the market value of PWK was always less than the market value of the shares it held in PIK. In 1999 this discount was as much as 30%. On 13 June 2016, before the unbundling announcement, the discount was 18.8%. By the close of trade on 14 June it had fallen to 3% after the PWK share price had gained 12.6% on the day while PIK shares lost 2% (see below).

The reasons for this persistent discount, or more particularly why it varied so much over the years, is not immediately obvious. After all PWK was but a clone of PIK. A discount could be justified by the fact that the holding company incurred listing and other expenses as well as perhaps additional STC. Consequently we calculate that PWK shareholders received less by way of dividends than the 52.69% ownership stake in PIK would ordinarily imply. We calculate from the dividend flows paid by the two companies (share price*dividend yield) that PWK received dividends equivalent to roughly 48% of those paid by PIK (see below).
Consequently the dividend yield on a PWK share consistently exceeded that of a PIK share – a lower entry price making up for the lesser flow of dividends (see below).

 

The value of a PWK share in which control of PIK rested may have been boosted (it was not) by the chance that a takeover bid for control of PIK via PWK might have been offered and accepted. Control of PIK would change with a smaller 50% stake in PWK – a possibility that might have attracted a control premium to a PWK share. I recall Raymond Ackerman announcing that any such change in control premium paid for the controlling stake would be shared by all shareholders, presumably in PIK as well as PWK. If so, there would have been no value to be added holding the effectively high voting rights in PWK rather than in PIK. The premium or possible discount that might be paid for the high voting 26% of PIK held by the family controlling interests in the form of B shares, would presumably not now be subject to formal approval by the full body of shareholders.

For all the variable price discount and the higher dividend yield the total returns holding a PIK share rather than a PWK share were very similar over the years. Though until the unbundling shareholders in PIK reinvesting their dividends in additional PIK shares would have enjoyed marginally higher returns than those in PWK. Though as we show below this total return gap narrowed sharply on the unbundling. A R100 invested in PIK shares in 1990 with dividends reinvested would now be worth R3,463 while the same investment in PWK would have grown to R3,397. Excellent results for long term shareholders have been provided by the managers and controllers of PIK, especially when compared to the returns received from holding the much more diversified shares that make up the JSE All Share Index.

 

The outcomes for PIK and PWK shareholders have not been as favourable since 2010, as we show below. With recent share price gains, PIK and PWK returns have matched those of the JSE All Share Index but fallen below those provided by Shoprite (SHP) a strong competitor and by the General Retail Index which does not include PIK and SHP. This helps make an important point. For any business to succeed over the long run, it demands that the constant threat and challenges from competition that emerges in ever changing forms be successfully withstood. This makes the owners of any business, however well established, at significant risk of underperforming or even failure. Owners sacrificing potential returns for less risk may have appeal at any stage of the development of a business.

Judged by these outstanding returns with hindsight, it could be concluded that the Ackerman family interests might have been better served by keeping the company private and not inviting outsiders to share in the company’s significant successes over the years.

Hindsight however is not an appropriate vantage point to make investment decisions. Start-ups, as Pick n Pay once was, are always highly risky affairs. Most start-ups will not succeed in the sense that the returns realised for their owner-managers exceed those they could have realised, taking much less risk working for somebody else.

But when a start-up is a proven success, the incentive for the successful owner-manager to reduce the risks to their wealth so concentrated, by effectively investing less in the original enterprise and diversifying their wealth, becomes an ever stronger one. Risks can be reduced by withdrawing cash from the original business through selling a stake in the business or equivalently by withdrawing cash more gradually from the business in dividends, cash that is then invested presumably in a more cautious, more diversified way. The Ackerman family appears to have followed this route.

An alternative approach is that taken by the Rupert and Herzog families and that is to use the successful business that is the original foundation of their wealth to fund a programme that diversifies their business risks – by investing in a variety of listed and unlisted enterprises that remain under firm family control. And to invite outside shareholders to share in the risks and rewards the family is taking with its own wealth.

Both approaches to building and diversifying wealth can clearly succeed despite (or is it because?) of the concentration of control and the differential shareholding voting rights, this may call for. It is a wise financial system that does not stand in the way of such potentially highly value adding arrangements shareholders might make with each other – that shareholders be allowed to trade off any possibility of a hostile takeover for the benefits of sharing in the rewards of great family controlled enterprises, as the Pick n Pay shareholders have just agreed to.

The end of higher interest rates is in sight – a different monetary policy narrative is still called for

The end of the current cycle of rising short term interest rates in SA that began in January 2014 is thankfully in sight.

Given the continued weakness of demand for goods and services, it will take the assumption of a more or less stable rand about current rates of exchange rates to bring inflation and forecasts of inflation in 2017 well below the upper 6% band of the inflation targets. The Reserve Bank model of inflation has reduced its estimate of headline inflation in December 2016 to 7.1%, from its May forecast of 7.3%.

The Bank, which was predicting a gradual decline in headline inflation in 2017, has maintained its central estimate of inflation in December 2017 at 5.5%. It has revised lower its already weak GDP growth forecasts. It is forecasting no growth in 2016 (previously 0.6% p.a) and an anemic 1.1% p.a. GDP growth in 2017 compared to 1.3% p.a estimated previously. Our own exercise in simulating the Reserve Bank forecasting model, using current exchange rates, has generated the following forecasts for headline inflation (see below). The Governor indicated that the Bank’s own forecasts were made with unchanged assumptions about the exchange rate, hence the slightly higher estimates of inflation.

 

combination of very slow growth with less inflation vitiates any possible argument for higher interest rates for now and hopefully for an extended period of time to come.

Should inflation sustain a downward trend and growth in SA remain well below potential growth, the case for cutting rates to stimulate growth will become irresistible in due course. Food prices off their high levels brought by the drought have already stopped rising (according to the June CPI) and so will help materially to reduce the rate at which prices in general rise next year. The chances have improved for a very helpful inflation and interest rate surprise in the downward direction.

These developments in the currency and capital markets beg a question difficult to answer, given the impossibility of re-winding the economic clock. Did the interest rate increases imposed on a fragile economy do anything at all to hold back inflation?

Given the global forces that have driven the exchange value of the rand and all emerging market currencies weaker, it is not at all obvious that higher interest rates have made the rand more attractive to hold or acquire. Nor will interest increases have done anything at all to have offset the impact of the Zuma intervention in fiscal affairs that made the rand such an underperforming emerging currency and bond market until recently. Indeed, by further slowing down growth, higher interest rates may have discouraged investment in SA and weakened rather than strengthened the rand, while clearly discouraging the credit rating agencies and investors in the RSA bond market, leading to higher long term interest rates.

Recent trends in the rand and other emerging market (EM) currencies are shown below. We show how the rand has made some gains against other EM currencies recently. We also show that after significant weakness in 2015, the rand in 2016 has now gained against the Aussie dollar and gained even further against sterling. The impact of the Zuma intervention in December 2015 and Brexit on the rand is indicated.

 

What must be conceded is the role of Reserve Bank rhetoric about interest rates – explained as being bound to rise given more inflation and inflation expected. So any reluctance to act on interest rates would have had the Bank accused of being soft on inflation – so undermining its independent inflation-fighting credentials. An essential distinction that needs to be made by the Bank is about the different forces that can drive prices higher. The difference between prices that rise because less is being supplied to the economy, and prices that increase in response to higher levels of demand that run ahead of potential supplies, call for very different monetary policy reactions. It is a vital distinction about inflation that the Reserve Bank very self-consciously has refused to acknowledge.

Inflation in SA has accelerated in recent years mostly because of the supply side shocks to supplies of goods and services and the higher prices that have followed. Exchange rate shocks have caused prices to rise independently of the state of domestic demand, as has the drought that reduced the local supply of essential foodstuffs. These inevitably higher prices have further discouraged demand. Adding higher interest rates to the mixture then depresses demand even further, without seemingly doing much at all to restrain the upward march of the CPI.

What the SA economy deserved and didn’t get from the Reserve Bank was a very different narrative, one that can explain why interest rates do not have to rise irrespective of the forces driving prices higher. That excess demand justifies higher interest rates; reduced supplies do not. And therefore why sacrificing growth, for no less inflation realised, is not good monetary policy. 22 July 2016

The markets after Brexit

Brexit is now seemingly a non-event for the global economy and its financial markets. A move to less quality in financial markets may be under way.

Brexit came as a large shock to the markets – but within two days of extra anxiety and an equity sell off – the Brexit effect came to be almost immediately reversed. Stock markets are now well ahead of where they ended on 24 June and are ahead of levels reached on 30 May. The benchmark MSCI Emerging Market Index on 14 July was 7.5% up on its 30 May level, fully accompanied by the JSE All Share that had lost over 12% per cent of its 30 May value (in US dollars) in the immediate aftermath of Brexit. The key S&P 500 Index has also recovered strongly. A feature of the equity markets in 2016 has been how unusually closely the developed and emerging stock market indexes have been correlated with each other when measured in US dollars (see figure 1 below).

 

The VIX Index that measures share price volatility on the S&P 500, simultaneously and consistently moved strongly in the opposite direction, while volatility on the JSE measured by the SAVI has remained elevated, consistent with the sideways move in the JSE when measured in rands rather than in US dollars. The volatility of the stronger USD/ZAR exchange rate has remained elevated as has, to a smaller degree, the realised volatility of the USD/EUR (see figures 2 and 3 below).
With renewed strength in emerging market equity and (especially) bond markets, emerging market currencies have shown strength against the US dollar, as we show below. We also show that the rand has performed better than the average emerging market currency, represented as an unweighted average of nine other emerging market currencies, excluding the rand and the Chinese yuan, as well as the Korean won and the Singapore dollar that enjoy a somewhat different status to the representative emerging market. The rand has gained about 10% against the US dollar and about 6% against the emerging market average since 30 May, as may be seen in figure 4.

 

A more risk-tolerant market place in the aftermath of Brexit has not only been helpful to emerging markets generally, but it has proved particularly helpful to the rand and the market in RSA bonds. As shown below, default risk spreads have receded for emerging market bonds, including RSA US dollar-denominated bonds. Judged by the spread between RSA yields and those of the high risk EM Bond Index, SA’s relative credit rating has improved recently as shown in figure 6.

 

A further important spread, that between RSA 10 year rand yields and US Treasury 10 year bond yields, has also narrowed as long term interest rates in developed markets and in emerging markets receded in the wake of Brexit. This spread represents the rate at which the rand is expected to weaken against the US dollar over the next 10 years (see figure 7 below).

The fact that most government long term bond yields declined further and immediately in the wake of Brexit – including gilt yields in the UK – indicated that Brexit was not regarded as a financial crisis, but rather as an indicator of slower global growth and less inflation to come. This conclusion was also evident in the decline in inflation-linked bond yields to very low levels.

This decline in the cost of funding government expenditure (especially in the form of negative costs of borrowing for up to 10 years for some governments) can be expected to encourage governments (not only the UK government) to borrow more to spend more and to attempt to reverse the austerity forced on them by the Global Financial Crisis of 2008 and the subsequent Euro bond crises, that were such a particularly expensive burden for European taxpayers. That burden of having to meet ever larger interest rate commitments has become something of a bonanza for European governments, faced as they are with a fractious electorate.

The sense that less austerity is now more firmly in prospect may have led investors to price in less risk when valuing equities. We have argued that a high equity risk premium is reflected in the value of the S&P 500 Index when valuation models that discount S&P earnings and especially dividends with prevailing very low interest rates. Still lower discount rates after Brexit may help explain the higher equity values. A search for yield in emerging bond markets, driving emerging market discount rates lower, may explain why more risky emerging market equities have also added value.

The very recent economic news moreover has been surprisingly good, rather than disappointing. The trends in the US economy have been particularly encouraging. The Citibank Economic Surprise Index for the US has moved significantly higher with the stronger S&P (revealing more data releases ahead of rather than behind consensus forecasts) (See figure 8 below).

The very recent news from China is that stimulus there has been working to stabilise GDP growth rates. Such more positive indicators of global growth will also have helped to modify what was already a high degree of global risk aversion before the UK referendum. Commodity prices, of particular importance for emerging economies and emerging equity markets, have recovered from depressed levels in January and have stabilised recently after Brexit (see figure 9 below).
This strength in emerging markets may be regarded as something of a reversal of the move to quality in equity markets that has so dominated equity market trends in recent years. A marked preference has been exercised for shares with bond-like qualities, revealed in the form of predictably defensive earnings flows, accompanied by relatively low share price volatility. These are qualities more easily found in developed markets but capable of adding to well above average price earnings multiples to favoured companies in emerging markets, including on the JSE. The JSE, by market value, has come to be dominated by relatively few companies with a global rather than a SA economy footprint. And the price-to-earnings ratios of these companies has risen markedly, dragging up the multiples for the JSE as a whole. We have described this class of shares that are well hedged against the rand and SA economy risks, as Global Consumer Plays.Chris Holdsworth in his Q3 Strategy Review for Investec Securities, published on 13 July has identified these trends – a preference for quality in response to lower interest rates that have left the average share price to earnings ratios well behind the elevated few (see figures from Investec Securities below).

Any further move away from quality will be very welcome to emerging market currencies, bonds and equities. It would be very helpful to the exchange value of the rand and the outlook for inflation and interest rates. It would be especially helpful to the SA economy plays that have so lagged the high quality Global Consumer Plays in recent years. Rand strength for global as well as SA-specific reasons could reverse such relative performance. Less quality may come to offer better value should global risk tolerance, even though justifiably elevated, continue to improve as it has done since Brexit.

Making sense of S&P 500 valuations – a dividend perspective

Is the best measure of past performance on the S&P 500 Index earnings or dividends per share? It can make a big difference

Our recent report on S&P 500 earnings per share indicated that, adjusted for very low interest rates, the S&P 500 Index at June month end could not be regarded as optimistically valued, even though earnings had been falling and the ratio of the Index level to trailing earnings was well above average. Since then, the Index has marched on to record levels (helped by still lower long-term interest rates) to support this proposition of a market that was not very optimistic about forward earnings.

The case for regarding the key US equity market as risk averse rather than risk tolerant would be enhanced, should S&P 500 dividends rather than S&P 500 earnings be regarded as a superior measure of how companies have performed for their shareholders in recent years. As we show below, S&P 500 dividends per share have continued to increase even as earnings per share have declined, while the growth in dividends declared has remained strongly positive even as the growth rate has declined (figures 1 and 2 below).

Clearly the average listed US large cap company has been paying out relatively more of the cash it has generated (and borrowed) in dividends – rather than adding to its plant and equipment. The pay-out ratio (that of earnings to dividends) has declined from the over three level in 2011 to less than two times earnings recently (see figure 3). This, presumably, is more of a problem for the economy than for shareholders, especially when interest income has come under such pressure.

When we run a regression model to explain the level of the S&P 500 Index using dividends discounted by long term interest rates, the Index appears as distinctly undervalued for reported dividends on 30 June 2016. This is more undervalued (some 30% undervalued) than in a model using Index earnings as the measure of corporate performance – as demonstrated in our report of Monday 11 July (see figure 4 below).

On the basis of the dividend model, the market has been pricing in a high degree of risk aversion. Or, equivalently, it has been demanding a large equity risk premium to compensate for the perceived risks to earnings and dividend flows (the larger the equity risk premium, the lower must be share prices – other things held the same, that is trailing earnings or dividends and interest rates – to compensate investors for the perceived risks to the market).

The equity risk premium can be defined directly as the difference between the earnings or dividend yield on the Index and long-term interest rates. The larger these differences in yields, the larger the equity risk premium and the lower share prices will be. An undervalued market, as indicated by the negative residual of the dividend model as shown above, where the predicted (fitted) by the model value of the Index is far above the prevailing level of the market, indicates a large equity risk premium. In figure 5 below, we compare the residual of the earnings and dividend models with this equity risk premium. As may be seen, they describe the same facts: a large equity risk premium accompanied by an undervalued market and vice versa.

These equity risk premiums or under-/overvalued markets – relative to past performance, adjusted with prevailing interest rates – may prove justified or unjustified by subsequent performance, reflected by future earnings and dividends declared. Disappointing or surprisingly good earnings and dividends may flow from listed companies. It would appear that despite the record level of the S&P 500 and record levels of dividends, shareholders are currently very cautious rather than optimistic about earnings and dividend prospects.

Their expectations of dividends and earnings to come have become somewhat easier to meet. There is perhaps more safety in the market at current levels than is generally recognised.

Brexit so far – not so bad for the global economy

Having spent the first post Brexit week in London it is hard to exaggerate the disappointment, even foreboding, felt by our colleagues in the London office of Investec. A leap into a world where the known unknowns have multiplied exceedingly is naturally unwelcome to those whose vocation it is to manage risks to wealth in an as well-considered way as possible. Clearly risks to the outcomes in the real economy and the financial markets – particularly in the UK – have become greater than they were and volatility in markets is likely to be exaggerated until a clearer view of what the future may hold for Britain, Europe and the Global economy, of which the share of Britain and Europe is above 20%.

The most obvious unknown is the impact on the UK economy – though the description United Kingdom may well be an exaggeration – with the sharp regional and generational divides of the referendum revealed. The political unknowns seem unlikely to be resolved any time soon as the UK is understandably in no hurry to formally invoke the exit option. An accompanying unknown is who will lead the UK through these negotiations, the outcomes of which, to be decided in Westminster by the legislators not the voters, will surely lead to further appeals to voters by way of a general election or even a further referendum. However, under new rules the next general election will only be called in 2020 – unless a large majority of the MP’s determine otherwise. The Conservative government and no doubt the parliamentary Labour Party, in turmoil over its leader, are clearly not of any mind to go to the country any time soon.

The obvious issue for any updated economic forecast of the UK economy is the degree to which the prevailing uncertainties and the risks associated with them will undermine the confidence business and household decision makers have in their economic prospects. Less confidence will mean less spending, as investment and consumption plans are put on hold and as plan Bs are evolved. It will not take much of a deviation from trend to turn positive GDP growth into stagnation, or worse, recession. But neither the Bank of England under Governor Mark Carney nor the Treasury under George Osborne have waited for the dust to settle. They have reacted with promises of counter measures: lower interest rates and less onerous applications of the requirements of banks to reserve capital, at the expense of lending. But as Carney cautioned correctly – “there are limits to what the Bank of England can do” – if people are determined to tighten their belts in a more uncertain environment. Confidence in the future outlook for revenues and employment benefits is the all-important and fragile foundation of all forward looking economic actions. Decisions made today that are taken not only by firms, but more importantly by households, that account for 70% of all spending in the UK.

Though to be sure it is the revenue to be gained or lost from supplying financial services to Europe and the world (a particular strength of the UK economy) – despite, or is it because of, sterling rather than the euro – that is uppermost in the considerations of the City of London. A square mile that is currently in the throes of a most impressive building boom. It is very hard to count the cranes from my bedroom window overlooking much of the City.

George Osborne, the Chancellor of the Exchequer, was doing his best over the weekend to bolster confidence and enhance spending. The intention to balance the government’s budget by 2020 has been abandoned. Less rather than more austerity is in prospect – understandably so – given the encouragement provided by extraordinarily low borrowing costs. In the midst of a financial crisis the yield on 10 year Gilts dropped well below 1%. Gilts, like almost all other government bonds – including those issued by RSA – were regarded as safer, except by the rating agencies. It becomes much less of a crisis when government debt becomes still cheaper to issue rather, than as is more usually the case in a crisis, when government loans become ever more expensive to raise and austerity in a recession becomes impossible to resist.

Osborne moreover promised more than more government spending. He made the case for a sharply lower corporate tax rate of 15% – close to the 12.5% rate in Ireland – a matter of already deep anguish to Brussels who would much prefer less rather than more fiscal competition in Europe. The UK, with all its other advantages in the form of good commercial law and as a tax haven, could become an even more powerful competitor for corporate head offices.

Escaping the clutches of the Brussels bureaucrats may offer Britain many such opportunities to trade more freely with each other and with the rest of the world, while hopefully negotiating full access to trade with the European community, not only with mutually beneficial low tariffs but – more important – to reduce non-tariff barriers to trade. This is particularly the case in services that have made the European community much less of a free trading zone than it appears to be on the surface.

Clearly the biggest threat to growth to incomes and profits of companies in the UK and everywhere, including in the US, is the rising populist threat to freer trade and globalisation generally that is considered to have left important constituencies behind. The leave vote was surely a protest vote as much as a vote for independence (independence to control the flow of immigrants to the UK, who in fact have proved generally to be a source of faster growth) as well as a response to the income earning opportunities that a fast growing UK economy has provided.

For a South African analyst in London with long experience analysing volatile exchange rates, the one most obvious conclusion to draw is how helpful weaker sterling has been to absorb some of the shocks caused by UK-specific uncertainties. Sterling devalued by about 10% on the Brexit news. The sterling value of the FTSE Index has largely held its own. Shares, particularly those of the global companies very well represented on the FTSE Index, have seen a weaker sterling translate into higher sterling values, particularly when their US dollar values improved with the strong recovery registered in New York last week.

Equities can perform as currency hedges when the currency weakness represents additional country specific rather than global risks. The sterling or rather the UK economy hedges on the FTSE came, as they do on the JSE, from global rather than local economy plays.

On this exchange rate note it is encouraging to note how well the rand, in company with most other emerging currencies and bonds, held up through the Brexit crisis (see below). Some stability in commodity and energy prices were consistent with these developments. The news about the global economy since Brexit has not reflected a state of crisis for the global economy, to which emerging markets are especially vulnerable. So far not so bad.