It isn’t often that events in South Africa affect the performance of UK-listed stocks, but that is certainly happening with the following three FTSE companies, all of which have links to the politically troubled country.
Southern discomfort
Credit agency S&P has just cut South Africa’s sovereign rating to junk status. Three large UK companies with links to the politically troubled country could get caught in the fallout: asset manager Investec (LSE: INVP), insurer Old Mutual (LSE: OML) and private healthcare group Mediclinic International (LSE: MDC).
The downgrade followed South African President Jacob Zuma’s controversial cabinet shake-up last Thursday, which saw the removal of widely-respected former finance minister Pravin Gordhan. The country’s troubles are beginning to make people nervous, and the ratings downgrade only makes matters worse. The rand has also plummeted, along with government bonds, with yields now topping 9%.
Mutual destruction
Shares in Old Mutual were down a hefty 6.22% to 203.4p each at one point this morning, while Investec’s stock plunged a whopping 9.77% to 545p, although both have since stabilised. However, expect further uncertainty ahead, with ratings agency Moody’s warning of another likely downgrade, after expressing concerns over the timing and scope of the reshuffle.
It has been a painful few days for all three, with Investec and Mediclinic both down more than 7% over the last week, and Old Mutual down almost 9%. They already had enough problems on their plate.
Troubled times
Mediclinic has had a tough time since merging with Abu Dhabi-based FTSE 250 firm Al Noor Hospitals and joining the FTSE 100 last year, falling 20% over 12 months, as earnings and revenues in its Abu Dhabi business dipped. Broker Macquarie has just downgraded it to neutral, warning of a continuing tough business environment in the UAE, difficult trading in South Africa and regulatory risks in Switzerland. Trading at 19.36 times earnings and yielding 0.76%, I cannot imagine many investors looking to put money into MediClinic right now.
Investec’s performance has been patchy for years, and it still trades well below pre-financial crisis highs. In mid-March, the FTSE 250 wealth manager was heralding a comfortable rise in full-year operating profits and revenues, aided by the stock market recovery. However, it faces uncertainty in both South Africa and the UK, expressing concerns over a hard Brexit. Some of that may be priced-into its valuation of 13.16 times earnings, while the 3.87% yield is tempting. Forecast earnings per share growth of 16% and 8% over the next couple of years suggest the future may be brighter.
Breaking up
I remain wary about Old Mutual, which has been warning of uncertainty in all three of its main markets, South Africa, the US and UK. It is also going through a strategic overhaul, breaking the company into its four constituent parts, Old Mutual Emerging Markets, Old Mutual Wealth, Nedbank Group and OM Asset Management. This only adds to the sense of uncertainty. I would steer clear even at today’s valuation of 10.23 times earnings, and yield of 3.07%, especially with Zuma now facing opposition attempts to unseat him.