South Africa’s Rand Hedges Offer Refuge as Aeon Readies for S. Africa Downgrade

JOHANNESBURG, South Africa: South African money manager Aeon Asset Management is preparing for a potential downgrade in the country’s sovereign debt rating by buying stocks expected to perform the best when the rand weakens.

Naspers Ltd., the media company that is Africa’s most-valuable, and packaging maker Mondi Ltd. are Aeon’s biggest stock holdings, Chief Investment Officer Asief Mohamed said Thursday in an interview in Cape Town. The companies have assets or operations that offset the effect of declines in the rand. Precious metals producers, which have rand costs and sell their output in dollars, may also fare well, he said.

“Until a couple of weeks ago, it was unlikely that we would be downgraded by December,” said Mohamed, whose firm oversees about 3 billion rand ($210 million). “Unfortunately, the talk about the so-called imminent arrest or the replacement of the minister of finance or key individuals in key positions in government that are perceived to exercise good governance will most likely increase the risk of a downgrade.”

S&P Global Ratings Ltd. is due in December to release the next review of its rating, which like that of Fitch Ratings Ltd. is the lowest investment grade.FirstRand Ltd., Africa’s biggest bank by market value, said Thursday it expects economic weakness to lead to a sovereign downgrade before 2016 is over. Wrangling over control of the nation’s finances and a police investigation of Finance Minister Pravin Gordhan has deepened concerns that political instability may prompt a cut before year end.

“On the equities side of things, if we do get a downgrade we’ll most likely have a weakening of the rand, but we’ve already positioned our portfolios by having rand hedges and also some of the platinum counters and gold shares,” said Mohamed.

Fitch and S&P in June said the government must take decisive measures to bolster growth, quell policy uncertainty and end political turmoil to avoid a future downgrade. Aeon is shielded from weakness in debt sold by South African state-owned enterprises that might follow a ratings cut, Mohamed said.

“We won’t have to change our positioning on the fixed-income side, because our assets are short-duration assets anyway,” he said. “We have minimal exposure to SOE’s already for some time now.”

Source: Bloomberg Business News