Bloomberg News

Rand Depreciation View Makes Coronation Buy Anglo American

June 28, 2011

The rand may tumble as much as 30 percent, boosting exporters’ profit and mining shares, according to Coronation Fund Managers Ltd. (CML), whose Core Equity Fund was South Africa’s top performer over the past three years.

Coronation, which manages 231 billion rand ($33.6 billion), is buying Anglo American Plc, the diversified miner whose shares have slid 19 percent from a 2 1/2-year peak on Feb. 14, Chief Investment Officer Karl Leinberger said in an interview in Cape Town. Anglo American shares rose 2.1 percent to 325.21 rand by the 5 p.m. close in Johannesburg today.

“The rand is very far off its intrinsic value; it should be 20 to 30 percent cheaper,” Leinberger said. “If you can find a business with revenues priced in dollars and costs priced in rand, and it is reasonably priced at 7 rand per dollar, that is a good investment.”

The rand has appreciated 38 percent against the dollar since the beginning of 2009, as near-zero interest rates in developed nations encouraged investors to borrow cheaply and invest in higher-yielding markets including South Africa, where the benchmark rate is 5.5 percent. The currency has declined 4.1 percent since reaching a 3 1/2-year high on April 29.

“South Africa is not competitive at this exchange rate,” Leinberger said. “Global drivers have been driving the rand, but we just think that can’t last forever. It’s just a question of time.”

The rand will depreciate 6 percent to 7.30 per dollar by the end of 2012, according to the median estimate of 25 analysts in a Bloomberg survey. The most bearish forecast, by Bank of America Merrill Lynch, sees the rand falling to 8.20.

Rand Volatility

The likelihood that the South African currency will weaken 20 percent versus the dollar in the next year was about 33 percent when it was at 6.8860 per dollar, implied volatility from options trading monitored by Bloomberg showed.

Coronation’s Core Equity Fund returned 6.2 percent a year over the past three years, the best performance out of 25 similar funds surveyed by Johannesburg-based Alexander Forbes Asset Consultants.

South African equities offer “reasonable value” following the benchmark stock index’s 3.9 percent decline this month, Leinberger said. The FTSE/JSE All Share Index gained 1.3 percent to 31,291.65 in Johannesburg today.

“Within the local market, stocks would be our preferred asset class,” Leinberger said. “They’re offering reasonable value. You’re at the level where you’re being rewarded for risk now.”

Mining Stocks

Coronation is buying diversified mining companies and platinum miners, Leinberger said. The FTSE/JSE Africa Mining Index of 19 miners has plunged 14 percent since reaching a 2 1/2-year high on Feb. 14, buoyed by rising prices of commodities including gold, platinum and copper. The index rose 16 percent today.

“We’ve been buying the diversified miners, particularly Anglo, which has come off a lot,” Leinberger said. “We’ve also been building up a platinum exposure, which we haven’t had for a while. So we are starting to find value in resource stocks.”

Other rand-hedge stocks that Coronation is holding include AECI Ltd. (AFE), Africa’s largest explosives maker, Omnia Holdings Ltd., southern Africa’s biggest fertilizer supplier, and ArcelorMittal South Africa Ltd. (ACL), the continent’s biggest steelmaker, Leinberger said.

Coronation doesn’t own any fixed-rate government bonds in its balanced portfolios after a three-month rally that drove yields to the lowest since January left debt expensive relative to the outlook for inflation and interest rates.

“We think bonds are overvalued,” Leinberger said. “There is some value in inflation-linked bonds but even they are getting expensive.”

To contact the reporter on this story: Robert Brand in Cape Town Nef at rbrand9@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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