Category Retirement
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Who got it right?

25 July 2004 Angelo Coppola

(26.7.04) How many analysts do you think have an end of year rand forecast of 6 to the dollar plugged into their earnings model for resource stocks?

Not many would be the correct answer, says Shaun le Roux from PSG Fund Managers.

This implies that just about everybody is counting on rand weakness from here on to justify the valuations of resources, but if that weakness is not forthcoming there will be some bloodletting on the JSE. 

Having said that, if the rand were to slip a bit - and we believe this is inevitable - the valuations of resource companies would generally look in line with the broader market as they mount impressive growth off an admittedly low base. 

Using Anglos as an example:  consensus earnings growth in rands for the year to December 2004 is expected to be 51% up on the previous year.  This will put the share on a PE ratio of 9.25. 

While current exchange rate levels suggest downgrading of these forecasts, if you had bought Anglos at this sort of PE ratio over the past decade - mid-1998 and early 2003 were such times - you enjoyed a healthy return once the share price bottomed. 

Clearly, the reversal of the currency will be the key event to signal a turn in the share price, though don't expect anyone to ring a bell.

We would be the first to agree that companies that based their business models on an ever-depreciating rand were foolhardy. 

The encouraging recent development has been an aggressive re-engineering by corporates to cope with a stronger rand environment which has seen them become more operationally efficient, with the move towards 24 hour mining, seven days a week by gold miners an example. 

Speaking of the gold miners, the situation is looking dire and managers are looking to the heavens for a tick up in the gold price or a fall in the rand.  The Gold Index has lost 42% this year alone.  The shares are expensive on a PE ratio basis and in many cases there are no earnings to apply a multiple to. 

Yet, if you are bullish on the dollar gold price and expect the rand to weaken from these sorts of levels (both of which we concur with), logic would say that on a medium term view now should be the time to buy.  Generally, when nobody wants to touch the shares provides the best buying opportunity. 

We may not be there yet but it is starting to feel like we are close.

Investor psychology is interesting.  Rand bulls were few and far between when the currency was testing 12 to the dollar, yet you struggle to find someone who bought dollars with rands at those sorts of levels. 

Currently, rand bulls are crawling out of the woodwork and there is no demand for offshore products.  Any bets that down the line you will struggle to find anyone that bought rands at 6 to the dollar?

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