How do you protect your wealth when a country goes belly-up?

Fortunately, we have a case study in Zimbabwe to help answer that question.

Old Mutual is listed in South Africa (JSE), London (LSE) and Zimbabwe (ZSE) on each of their respective stock exchanges. One share of Old Mutual on each of these exchanges represents the same economic interest in the wider Old Mutual Group. In other words, while the currency of your Old Mutual share is different depending on which stock exchange it is listed, it still represents one unit (one share) of the same company which has one underlying economic value. In theory, you could buy a share of Old Mutual on the JSE and then, if your stockbroker allows it, transfer that same share to the LSE and the other way around. One share in Old Mutual holds the same value, regardless of which country it is listed in and which currency that value is denominated in.

This means that when you own one Old Mutual share on the JSE share register, you are less concerned with the Rand weakening against the British Pound. When the Rand weakens against the British Pound, Old Mutual’s Rand share price should also weaken by the same percentage. However, the underlying value of your one Old Mutual share remains intact. This is particularly true when the company derives a big portion of its earnings from a hard currency source (like the UK).

That is what is meant with a currency-or Rand hedged share.

The same applies to Old Mutual listed in Zimbabwe. Whilst the Zimbabwe dollar has long ago become worthless, with no official exchange rate existing, locals have used Old Mutual shares listed on the ZSE as a rough gauge of the forex rate between the Zim Dollar and the British Pound. Investors can simply take the price at which one share of Old Mutual trades at on the ZSE and compare that to the Old Mutual share price in GBP on the London Stock Exchange. Divide one by the other and you find what is called the Old Mutual Implied Rate (OMIR). In effect this is the implied exchange rate of the Zim Dollar to the British Pound.

Zimbabwean investors therefore used the ZSE listing of Old Mutual to circumvent foreign exchange regulations. By holding one share of Old Mutual on the ZSE, they could gain exposure to some sort of protection against the worsening situation in Zimbabwe because their investment’s underlying value remained intact.

This is now set to change.

Earlier this week the Zimbabwe government announced that they want to delist Old Mutual from the Zimbabwean Stock Exchange. This would effectively end the Old Mutual Implied Rate which people use to value goods and services. This is one of the last loopholes Zimbabwe’s citizens had in preserving their wealth.

Fortunately for South Africans, there are still many dual listed companies that offer Rand hedged exposure should they have a dim view about the future of the country. Alternatively, it is a relatively straightforward process to legally remit capital offshore for onward investment. We are able to assist with both.

 

 

Fintax Consulting Group is an authorized financial services provider (FSP 642). This article is for information purposes only and should not be construed as being financial advice. Please contact us directly on 011 880 7180 to request tailor-made financial advice.