The Finance Ghost: Why homegrown is the hero when it comes to retail shares

Around 10 years ago, when the JSE was a buoyant place to raise capital and investment holding companies were trading at silly valuations (as were property funds), institutional investors were practically screaming at local management teams to find offshore deals. They were desperate to get their money out of South Africa and as far away from Zuma as humanly possible. Owing to pension fund regulations though, there was a limit on the amount of offshore exposure they could have.

But here is the secret: if a locally listed company made an offshore acquisition, then the holding in the local company would still count as a local asset. The calculation didn’t allow for look-through exposure to offshore assets. Hence, if local management teams wanted to raise capital for deals, they needed to tell an offshore story based on “hard currency” earnings that would hedge against a capitulating rand.

With hindsight, we know that this strategy was half-right. The rand did indeed keep falling, so having offshore exposure was helpful. Sadly, empowering local management teams with almost blank cheques for those deals didn’t achieve the right outcome, as doing business in faraway lands is very different from operating in South Africa. This is especially true in the retail sector, where many scalps have been claimed by countries such as Australia.

Updates in the past week from The Foschini Group (TFG) and Mr Price show us that local remains lekker, as those offshore holdings are still a long-term headache for most of our retailers.

TFG: on the UK offensive, but why?

Mr Price: the poster child for local is lekker