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This is the Sharenet company blog where we will bring you the latest news and events on the go at Sharenet, together with tips on using our site and our products.

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    Inflation linked bonds

    Investors in conventional bonds issued by government will receive fixed interest payments and a final redemption payment in the future, but inflation linked bonds, introduced in South Africa in 2000, pay a guaranteed real yield and an inflation linked redemption amount.

    The holder of a conventional bond takes the risk that inflation will escalate beyond the fixed return of the bond, resulting in the total return on the bond falling below inflation.

    This risk can be eliminated with an inflation linked bond paying say a 2,5% real coupon rate. This means that the investor derives annual interest payments equivalent to inflation plus 2,5%. The redemption is also inflation adjusted to take into account cumulative inflation over the life of the bond.

    While inflation adjusting may sound like a fantastic investment, there are some pitfalls that investors need to be aware of:

    • Inflation linked bonds are not as liquid as traditional or conventional bonds. This is not normally a problem for private investors.
    • The official inflation rate may not adequately compensate investors for their personal inflation rates.
    • There is a lag time in adjusting the rate for inflation of up to 4 months. This is beneficial to the investor in a declining inflation environment and vice versa.
    • Market forces may adjust the pricing of bonds so that over shorter periods of time investors don’t necessarily receive an exact inflation adjusted interest coupon.

    Let’s look at this last point in the context of the US scenario where the equivalent TIPS (Treasury Inflation Protection Securities) were introduced in 1997.

    Over this period the official average quarterly US inflation has been 0,62%. The average quarterly return for the inflation bond index was 1,66%. Therefore these inflation linked bond returns have beaten inflation by 4,5% per annum.

    But because the total return from an inflation linked bond has 3 components, there can be and are periods when the total return is negative, even while inflation marches on. The 3 components to total return are:

    • The initial real coupon, which is the coupon or interest rate set for the life of the bond.
    • The inflation component, adjusted periodically
    • Price change as the bonds trade, depending on demand and supply.

    As with most traded investment securities it’s the daily, weekly and monthly price fluctuations that are the most volatile component of total return.

    The graph below reflects quarterly inflation compared to the quarterly returns from inflation linked bonds in the US. Over the extended period investors were protected from inflation but on a quarterly basis they may even have suffered a negative loss.

    It was found that the total return from these inflation linked bonds failed to outperform inflation in 17 of the 49 quarters.


    Source : Barclays Capital and TIAA-CREF

    Even so-called low risk investments such as bonds and inflation linked bonds suffer volatility over shorter measurement periods. Investors should be careful not to buy these as low risk investments in the mistaken belief that they only move up.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-31, 16:46:41, by ian Email , Leave a comment

    JSE follows Asian markets down

    Local markets

    By midday, the JSE All Share had fallen 1.49%, as oil & gas and basic materials shares tumbled and the local bourse took a lead from weaker Asian markets.

    The rand was trading at R7.78 to the US dollar at 12:00, weakening as investors act cautiously before the release of current account data from the SARB’s Quarterly Bulletin. More local data is expected later this week.

    Oil cost $70.69 a barrel at noon, sliding 1.82% as the Shanghai index dived and investors in commodities are unsure whether the US could recover properly in the next six months.

    International markets

    On Friday, the Dow Jones closed 0.38% lower while the Nasdaq edged up 0.05%. Boosting US markets were computer manufacturers Dell and Intel after they released positive quarterly performance results, but poor US consumer data offset most gains.

    The Nikkei index slid 0.4% this morning after a stronger yen and weaker Chinese stocks weighed in on gains that came after the opposition party won the Japanese election.

    In Hong Kong, the Hang Seng fell 1.86%, its first monthly loss in six months. The index was hit by losses on the Chinese mainland after investors feared a decrease in liquidity in the market.

    In the UK, the FTSE 100 was closed for a bank holiday.

    Share price news

    Investment bank Cadiz Holdings Limited was one of the top movers upwards at 12:00 on the last day of August. Share prices rose 12.73% to sell at R3.10 after 22 deals. Great Basin Gold rose 9.90% to trade at R10.99 a share after two deals.

    Electrical equipment company Delta EMD LTD tumbled 22.22% after nine deals, to sell at R10.50 a share. Alliance Mining Corporation slid 6.78% as 22 deals pressured the share price down to R2.75 at midday.

    Permalink2009-08-31, 12:32:54, by Natalie Email , Leave a comment

    Murray and Roberts

    Murray and Roberts is the dominant construction and engineering company in South Africa with a market capitalisation of R17 billion. The company has had a long history, founded in 1902 and listing on the JSE in 1948.

    It operates across 7 main divisions, including Engineering, Construction SADC, Middle East, Construction Products, Cementation, the Clough division and then Investments.

    Revenue generation increased 26% to R33,7 billion for the full year, but unlike in the past 2 years which saw higher revenue recognition in the second half, the second half of 2009 was off 8%.

    Overall the company is coming off a very high base of contracts and so while earnings from continuing operations increased 14% to R2,2 billion from R1,9 billion the big question is how will this play out in the future with a reduced order book.

    Construction accounting and how revenue and profits are recognised is a lot more difficult compared to a business like MTN or a Shoprite. Long term projects running over multiple years with payments at various stages makes the calculations that much more complicated.

    The cash flow statement therefore becomes very important to look at. Here we see that the increase in working capital of R1,3 billion and the capital expenditure (capex) of R2,4billion took a total of R3,7 billion out of the business.

    In the 2 previous years this was far lower with each of 2007 and 2008 producing a positive cash flow at the working capital line.

    However the group financial director, Roger Rees pointed out that the group was now well positioned in terms of new capital expenditure and that capex should reduce by at least R1billion in 2010 and run at around R1,4 billion for the next 2 years.

    The net cash outflow saw the company end with net cash down from R4,3 billion to R2,9 billion. This will impact future earnings because depreciation which was running at R0,5 billion in 2008 and R0,8 billion in 2009 will move up to at least R0,9 billion plus in 2010.

    The general expansionary global construction phase saw the group’s order book swell to R61 billion in September 2008 from a previous R20 billion in 2007 and R10 billion in 2006. This has now contacted back to a current R40 billion, with 46% due for completion in 2010.


    Source : Murray and Roberts

    Margins have been expanding as the order book increased. Margins for 2009 came in at 8,6% while the company earned a 38,6% return on average equity. The chart below reflects how this return on equity is cyclical and at these levels is the highest since at least the early 1960’s.

    Offshore is playing a bigger and bigger roles in earnings with 35% of revenue generated offshore but close to 40% in operating profit and because of the lower tax regimes and the assessed loss of R1 billion in the Clough business, on an after tax basis its closer to 50% being generated offshore. Rand volatility therefore becomes a bigger factor when converting offshore profits.


    Source : company reports and Allan Gray

    The share price jumped 5,8% to 5180c. It appears cheap on an historical price to earnings ratio of 7,7 times and a dividend yield of 4,2%. The big factor going forward is whether it can continue to price in these higher margins on projects and thus sustain the high return on equity.

    That’s it for today – have a wonderful sporting weekend

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-28, 17:18:07, by ian Email , Leave a comment

    JSE firmer as resources bounce back on a weaker dollar

    Local Markets

    The JSE opened slightly stronger this morning, led by resources after a weakened dollar. After opening sharply on the upside, there was a bit of profit-taking but the market is now looking towards the Dow for further direction. With the Michigan consumer sentiment data due out today, market players will track movements in the US. By midday, the All Share was trading 1.12% higher.

    The rand was firm against the dollar this morning. It is expected to trade within a tight range until the release of consumer sentiment figures in the US later today. The reports from Eskom yesterday showed that electricity supply would remain tight but there was little risk of power cuts over the next 12 months, which certainly helped the rand. At midday, the rand traded at R7.74 to the dollar.

    The gold price improved slightly this morning as a weaker dollar pushed investors towards safe-haven assets. By noon, the gold price had gained 0.28% to sell for $950.74 per troy ounce.

    International Markets

    US equities finished higher yesterday as investors bought again in the late session after an early sell-off. This return was thanks to a rebound in oil prices. Energy stocks rallied after crude oil prices rose and the broader market followed suit. Among the biggest gainers was Boeing Co which received a major boost after reporting that its long-delayed 787 Dreamliner model would make its first flight by year-end. By close, the Dow Jones was 0.39% up whilst the Nasdaq had gained 0.16%.

    The Nikkei edged up slightly overnight, recouping losses made in the previous session. Trade was thin though as investors remain cautious over the impending national election this Sunday. However, an 8-day rising streak from the Dow certainly aided sentiment and many of the exporters were able to monopolise on the improved demand suggestions. Japan’s benchmark index closed 0.57% higher this morning.

    Shares in Hong Kong dropped 0.7% overnight tracking a steep loss in the Shanghai bourse. The equities there are under pressure on worries over the shrinking flow of liquidity into stocks. However, losses in Hong Kong were slightly mitigated by the gain of Bank of China Hong Kong which led the banking stocks higher. It posted a lower than expected interim earnings drop which prompted buying. The Hang Seng closed 0.71% lower this morning.

    London stocks rebounded this morning, aided greatly by an upward revision to national GDP data. The second reading for the UK’s second quarter GDP reflected a 0.7% shrinkage as opposed to the previously reported 0.8% shrinkage. Importantly, inventories have declined significantly from the beginning of the year so a raised output is probable for manufacturing, wholesale and energy sectors for the second half of the year. By noon, the FTSE 100 was 0.96% higher.

    Share Price News

    Among the morning’s winners was Merafe Resources Ltd of the Metals and Minerals sector. It managed to attract volumes of trade as resources led the All Share higher this morning. By noon, a share traded for R1.56 (a 4.70% gain). From the Platinum sector, Lonmin Plc managed to improve on similar sentiments. At midday, its shares traded for R187.47 each, marking a 4.15% improvement.

    Among the losers, Impala Platinum Holdings Ltd of the Platinum sector stood out as investors remain concerned over the illegal strike actions taking place at its mines in Rustenburg. At midday, a share cost R187.00 (a 2.35% loss). Also performing poorly was Datacentrix Holdings Ltd of the Computer Services sector. By noon, it had lost 2.33% to sell for R4.20 per share.

    Permalink2009-08-28, 12:24:37, by Grant Leyland Email , Leave a comment

    Imperial results

    I attended Imperial’s management report back to the investment analyst society today in order to start gaining an understanding of the nature of business conditions. Larger groups have multiple divisions, which are each differently affected by the economic slowdown.

    The company released annual results yesterday and these were dissected by management, led by CEO Hubert Brody.

    Operationally the business operated in a difficult environment, but from a cash generation perspective, it did extraordinary well. After having fallen to a price of R40 from over R160, the price has recovered back to R80, but fell 2,7% to 7598c today.

    The R16 billion market cap company had a turnover of R52 billion, but margins down to 4,7% resulted in operating profit at R2,4 billion.

    Imperial has a number of divisions, logistics, car rental and tourism, distributorships, motor vehicle dealerships and insurance.

    After tax profits came in at R1,1 billion down from R1,4 billion, but cash flow for the business was strong with operations generating free cash flow of R2,9 billion, largely due to improved working capital management. This figure was R1,8 billion in 2008.

    Over the last 2 years the business has therefore retired debt which stood at R11 billion to the current net debt (i.e. after cash on the balance sheet) of R5,1 billion. Imperial largely being an asset based company has traditionally run at higher debt to equity levels. In June 2008 the net debt to equity ratio stood at 81%, now this ratio is at 50% with the target being 60-80%.

    In other words it’s running at below the lower band, but this is probably correct in the current environment. Even at 50% this is fairly conservatively.

    In terms of the balance sheet management, management will want to be more expansionary in lighter asset based businesses with higher returns and margins, such as logistics, tourism and selected financial services. Part of the thinking is that while this may be initially more expensive to buy, their organic expansion does not require as much capital injection and this should be enhancing for return on committed capital.

    While dealerships and distributorships contributed 56% of turnover they only contributed 31% of profit. The SA logistics businesses at 19% of sales contributed 29% of operating profit. As with most divisions the second half of the year was much weaker than the first half. This division produced R738m for the full year.

    Car rental and tourism produced R336m in operating profit with an improvement in second half.

    Distributorships and dealerships, where there has been a lot of pain due to the collapse in the new car sales market, produced profit of R770 compared to R1,2 in previous year.

    The insurance business, Regent Group improved profit from R227 to R315 with the second half up massive 209%, but this included profits on investments. Underwriting profits are however improving off a low base.

    Overall this was a good result and management is convinced that at the current level of car sales their dealerships and distributorships are at the right size having being scaled back. The balance sheet has fair gearing. They are looking for Regent to be more outwardly focused after a period of consolidation.

    The car sales business will continue to be difficult given that banks are not financing at present. But should this pick up then there is the benefit of operational gearing. I.e. a lower cost base with boosted sales has a geared impact on the bottom line.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-27, 17:29:23, by ian Email , Leave a comment

    Resources lead JSE lower as major buyer, China, curbs industry production

    Local Markets

    The JSE opened slightly weaker in early trade this morning. In the midst of earnings reporting season, some major local companies are set to release reports today. Producer Price Inflation (PPI) data is the central economic indicator due out today and other event risk affecting the market will be the release of US second-quarter GDP data. The main factor steering direction is the report by Chinese government that it will look to curb expansion and production in a number of industries in order to buoy demand. This has put immense pressure on commodities prices, so the weakened resource stocks have led the market lower. By noon, the All Share was 0.05% in the red.

    The rand is trading within ranges this morning, managing to sustain a level below R7.90 to the dollar. The US government’s decision to issue a further $500 million debt offshore came as a pleasant surprise to currency speculators. However, the pressure to beat market expectations is now even greater as yesterday’s positive housing data left markets unimpressed and actually triggered a bounce in the US dollar. By noon, the dollar traded for R7.85.

    The oil price fell towards $70 per barrel in eastern markets on Thursday. After reaching a 10-month high earlier this week, rising crude oil stocks eclipsed positive economic data from the US and Europe. Analysts are questioning whether commodities and equities markets have priced in the recovery in the US housing markets as well as other encouraging data. The oil price is expected to remain within this tight range for the rest of the day. At midday, a barrel of Brent Crude cost $70.70.

    International Markets

    US markets were fairly flat on Wednesday after recent rallies. Equities remained relatively stable despite reports on new home sales and durable goods orders. Sales of new homes grew at the fastest pace in 10 months but the impact on the broader market was muted as analysts claim the effects were already factored in. The housing sector managed to gain though on the improved demand indications. By close the Dow Jones was 0.04% up whilst the Nasdaq barely improved by 0.01%.
    The Nikkei average shed value after a bout of profit-taking. After a reaching a 20-month closing high on Wednesday and pressured by a stronger yen and depressed Chinese equities, traders remained wary ahead of national elections also coming up on the weekend. Even with improved demand indicators from the US, the earnings figures are out and traders are now looking at the volatile Chinese markets for direction. Japan’s benchmark closed 1.56% down this morning.

    Shares in Hong Kong lost ground in thin volume overnight. Blue chips such as Esprit Holdings and CNOOC Ltd were sold down after a weak reflection in earnings results. The world’s No.6 fashion retailer Esprit posted a 40% fall in second-half profit, as global economic distress clearly affected its core European market. The Hang Seng finished 1.04% lower this morning.

    Equities in London opened slightly higher this morning but the market is in need of more distinctive indicators to steer it in any direction. The reporting season is nearly over so equities might suffer from a short-term information void. With a bank holiday coming up, the market is likely to remain around current levels as traders slip away for an early weekend. The most significant move for the day came from the mid-cap national transport operator National Express, which received a takeover approach from a large consortium that already owns a large stake in the company. By midday, the broader FTSE 100 had made modest gains of 0.08%.

    Share Price News

    Blue Label Telecoms Ltd of the Wireless Telecom Services sector secured voluminous gains this morning as investors retreat from commodities and resource stocks. By midday, it had improved 7.41% to sell for R5.80 per share. Also performing well during the early session was Netcare Ltd of the Hospital Management and Long Term Care sector. Its equities traded for R10.71 each by midday, reflecting a 3.98% gain.

    Among the losing stocks, Metorex Ltd of the Metals and Minerals sector lost ground. Resources and mining stocks across the board shed value on the news that Chinese demand for supply materials would be dampened. Also contributing to the poor performance of mining stocks is the incessant threat of illegal strikes among mine-workers. By noon, a share in Metorex cost R3.99 (a 2.68% loss). After releasing a depressed set of results earlier today, the retailer Massmart Holdings Ltd of the Retailers – Multi Department sector lost ground. It traded for R78.10 per share by noon, a 2.38% reduction.

    Permalink2009-08-27, 12:29:00, by Grant Leyland Email , Leave a comment

    Growthpoint Results

    We have been discussing the results of quite a few companies over the past while as results for the period ending 30 June 2009 continue to be released. This full and half year results are particularly interesting as they have been achieved under generally tough circumstances. If you recall the ALSI peaked in May last year, commodity prices the following month, and inflation soon thereafter. Since then while inflation and more recently interest rates have come down, so has both local and global economic growth rates.

    By way of background, Growthpoint is the largest company in the SA listed property index (i.e. listed property companies excluding Liberty International) and is slightly bigger than Redefine. They own a broad range of some 438 properties in the retail, industrial, and office sector.

    Some of their larger retail properties are the Brooklyn Mall (Pretoria), La Lucia Mall (Durban), Constantia Village (Cape Town), Walmer Park Shopping Centre (PE), and Beacon Bay in East London. This quality portfolio has allowed Growthpoint to revalue their portfolio upwards by 0.6% to R29.2bn, despite prices generally dropping. While growing in nominal terms their portfolio would have suffered in real terms.

    Highlights for Growthpoint over the 12 months in review include:
    • Managing to grow their distribution by 7.6% to 114.6c per linked unit.
    • Inclusion in the ALSI Top 40.
    • Good liquidity as over half the shares traded hands during the year.
    • Foreign shareholding increasing to over 6%.

    A key area of concern will be the increase in vacancy levels over the last 12 months. At 30 June 2008 vacancies were at 2.9%, and this level has moved up to 5.4% (an increase in 86%). While the 2008 level was at historically low levels, and the 2009 level isn’t too bad, the concern for all listed property companies must be where the level finally ends up. Increased vacancies have a direct impact on the level of distributions that the company is able to declare. If vacancies increase too much we could see a drop in distributions in the future.

    While vacancies are rising, Growthpoint has continued to spend on new developments, with over R1.5bn spent in the financial year. They have been developed with decent expected initial yields, but these calculations are premised on them achieving the targeted letting levels which will be under pressure.

    A major reason for local listed property companies holding up so well when compared to their offshore counterparts has been the conservative loan to value (LTV) levels that these companies have been trading at. Many offshore REITS had LTV’s upwards of 60%, which increased rapidly as property values came under pressure. Growthpoint managed to decrease their LTV over the 12 months from 34.4% to 32.2%, which is a conservative level.

    Local property companies are in much better shape than their offshore counterparts, but when putting our investment hats on we feel that offshore property offers much better value.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-26, 18:33:42, by Mike Email , Leave a comment

    Equity markets fairly flat; gold extends gains

    Local Markets

    The JSE opened fairly flat this morning with most investors awaiting local CPI data due out this today and other US economic data due out later today. US markets were slightly stronger after improved home sales data and a rise in consumer confidence indices. Asian markets also stabilized on the prospect of economic turnaround. By midday, the All Share was still relatively flat, having given up a mere 0.55%.

    The rand opened marginally stronger against the dollar in the morning session, but remained in a tight range given little economic data to prompt movement. Firmer regional equity markets, especially in Asia, caused speculators to purchase riskier units such as the euro. By midday, the rand traded at R7.79 to the dollar and is expected to remain around this level for most of the day.

    The price of gold moved up during early trade today. The dollar remained stable but investors were acutely aware of rising equities attracting money away from the bullion. A weaker dollar supports interest in gold as investors sell the currency to buy alternative assets and if the dollar’s weakness is related to US-linked concerns then gold’s appeal is further boosted as a hedge against risk. By midday, a troy ounce cost $949.05.

    International Markets

    US equities gained on Tuesday following the release of encouraging economic data and the renomination of Federal Reserve Bank chief Ben Bernanke’s for a second term. The Conference Board’s August index for consumer confidence exceeded analysts’ forecasts whilst the home price index of S&P rose for a second consecutive month. This suggests improvements in two of the sectors crucial to a recovery in the US economy. The news spurred a rally in retail stocks. The Dow Jones closed 0.32% in the green whilst the Nasdaq finished 0.31% higher.

    Japan’s benchmark average rallied overnight to reach its peak close in 10 months this morning. Improved US economic data strengthened hopes of a recovery but trad was thinned ahead of a national election taking place on August 30. Toyota Motor Corp gained after it signalled an intended cut in global production to match depressed sales. Other electronics stocks also gained after reports that government aid may be sent in that direction. The Nikkei closed 1.36% higher this morning.

    Trade in Hong Kong was fairly flat overnight as investors remained particularly concerned over liquidity problems in China markets. However this sentiment was assuaged somewhat by stronger earnings momentum that buoyed shares in China Life and Air China. The Hang Seng closed basically flat at 0.10% higher.

    Equities in London remained fairly flat during the morning session. The index managed to finish slightly higher by close yesterday, leaving it around a 10-month high despite being in negative territory most of the day. The general feeling is that although the FTSE may well have run ahead of fundamentals, equities will continue to extend gains as traders remain optimistically bullish. By midday, the benchmark index had lost 0.12%.

    Share Price News

    Among the morning’s winners was Arb Holdings Ltd of the Electrical Equipment sector. By midday, its shares traded for R2.35 each, marking a 6.33% gain. Also managing to attract interest in the early session was Bell Equipment Ltd of the Leisure Equipment sector. At noon, a share cost R10.00 (a 3.09% improvement).

    On the other side of the spectrum, Sentula Mining Ltd of the Metals and Minerals sector lost ground this morning. It shed 3.28% value to trade for R3.24 per share by midday. Also performing poorly was Aquarius Platinum Ltd of the Platinum sector, probably due to the mass illegal strike affecting output at its Rustenburg mine. It lost 2.82% during the morning to sell for R34.50 per share.

    Permalink2009-08-26, 12:11:23, by Grant Leyland Email , Leave a comment

    Shoprite

    In yesterday’s report I noted how over the weekend US Federal Reserve chairman, Ben Bernanke had put himself and other central bankers in a good light, essentially saving the global economy from a collapse by stepping up to the plate with bucket loads of liquidity. Today it was announced that Obama awarded him a second term, subject to Senate confirmation.

    Back home local food retailer Shoprite released very good results that were ahead of expectations, but still the share price dropped 1,8% to 5755. This places it on an historical PE of 14,7 times, so ahead of the market ratings.

    The current consensus EPS was 342c and dividends of 185c, but results came in with EPS at 390.8c and the full year dividends at 200c.

    The dividends were upped from 155c in 2008 – a 29% hike.

    Turnover for the group was up 24,5% to R47,6 billion and trading profit up 28,1% to R2,9billion.

    While gross margin decreased slightly from 19,9% to 19,3%, the trading margin increased due to good cost controls and greater efficiencies from 4,82% to 4,96%. This level is the highest ever for the company. The return on equity is running at 41,5%.

    The company produced this information which is a benchmark of its margin against the average international player. It is producing similar operating profit margins on lower GP margins.


    Source: Shoprite

    Stock at year end sits at R6 billion, up 28% due to 59 net new supermarkets and 28 furniture stores.

    Cash on hand at year end was slightly down at R2,8 billion.

    The company benefited from consumers generally trading down in the food purchases from more premium brands like Pick n Pay and Woolies to Shoprite.

    Growth ahead of the market saw the company take market share and increase this to a very high 30%

    Interestingly the group earned R1,2 billion in other operating income, up 26% from 2008. This includes finance income of R198m, net premiums received of 215m, commission received of R278m, operating lease income of R201m etc.

    Going forward management noted some concerns, including:

    • No substantial evidence that the country is moving out of recession.
    • The increasing number of unemployed now over 9 million
    • Governments poor tax take and ability to support poor
    • Lower food inflation now running at 7,4% will also impact performance

    Over a long period of time, the share price has tracked the solid performance. Naturally in a tougher economy its going to be more difficult from this very high base established, but the expansion into Africa is a benefit to this company, which sold 105m litres of Coke in the year - enough to cover more than 1000 soccer fields.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-25, 17:28:33, by ian Email , Leave a comment

    International markets subdued as investors book profits ahead of key US housing data due for release today; JSE follows suit

    Local Markets

    The JSE was relatively flat this morning, following dreary global market performances. All eyes remain fixed on US housing data due for release later today as investors seek firm confirmation that the purported economic recovery is indeed on the horizon. A bout of profit-taking after recent rallies certainly didn’t help matters and resources seemed to suffer the biggest losses in that regard. By midday, the All Share was 0.29% down.

    The oil price fell on Tuesday, after a 6-day rally. A flat US market performance and subdued Asian markets sparked new concerns over the anticipated economic recovery. The drop is linked to the equity market performances as demand for crude oil may have declined slightly but demand for related products remains high. At midday, a barrel of Brent Crude cost $73.03.

    The rand opened slightly lower this morning as dollar buying interest is on the rise. Markets are still waiting on US consumer data due out later today. Production data in the US may have improved but there are still no signs that the consumers on the demand side of the economy are willing to spend aggressively again. Meanwhile, locally the SARB’s lead indicator climbed 1.8% m/m in June. At midday, the rand was trading at R7.79 to the dollar.

    International Markets

    Equities in the US were flat on Monday as traders took cognisance of the 4-day rally that had lifted equity indices to 10-month highs. Initially stocks had gained but US Treasury bond prices climbed almost 2 full points to neutralise any gains made in equity markets. Investors hailed this movement as a signal that too much buying had been taking place and the market remained stable on that level from that point. The Dow Jones closed 0.03% up whilst the Nasdaq finished 0.14% down.

    The benchmark index of Japan shed some value overnight after Monday’s surge of nearly 3.4%. Exporters lost ground after leading the drive to buy on Monday. Investors booked profits after the rally, waiting for US housing data to reconfirm that economic recovery is indeed on the horizon. With a national election taking place on the weekend, traders are reluctant to buy. The Nikkei closed 0.79% down.

    Shares in Hong Kong opened slightly higher on Tuesday but were quickly subdued by aluminium producer Chalco’s interim losses. The market sought positive data elsewhere but remained fairly flat on that level. Investors await US housing data, due for release later today. The benchmark Hang Seng finished 0.49% lower.

    London stocks were suppressed this morning as resources retreated from the forefront of recent rallies. Investors booked profits ahead of key US data coming out today. Analysts are questioning whether the encouraging economic data of late is justification for such high stock prices. The retreat from risk also took a toll on Sterling as the pound hit its lowest level against the euro in over 2 months. By midday, the FTSE 100 was trading 0.12% lower.

    Share Price News

    Mustek Ltd of the Computer Hardware sector managed to secure voluminous gains during the morning session. At noon, a share sold for R2.20, reflecting a 4.76% improvement. Also performing well during the morning was Metorex Ltd of the Metals and Minerals sector. At midday, a share traded for R121.50 (a 2.50% gain).

    Exxaro Resources Ltd of the Metals and Minerals sector saw volumes of investment retreat this morning. By midday, it had shed 3.11% in value to trade for R93.01 per share. Also among the morning’s losers was Arcelormittal SA Ltd of the Steel sector. Resources are definitely much of the cause for a subdued local index today. It had lost 2.99% by midday to sell for R121.50 per share.

    Permalink2009-08-25, 12:43:38, by Grant Leyland Email , Leave a comment

    Central bankers unite

    Central Bankers met this past weekend in Jackson Hole Wyoming. The agenda assessed the monetary and fiscal policies enacted over the past year. Chief of global central bankers is Ben Bernanke, US Federal Reserve chairman. His speech was titled, “Reflections on a Year of Crisis.”

    His global colleagues were in agreement that there was unlikely to be a rush to reverse the stimulus that central banks have provided to the global financial situation.

    A year ago they met just before the collapse of Lehman Brothers. Now from reports and speeches, it seems that the central bankers are the ones patting themselves on the back for a job well down in helping avoid a total financial meltdown in 2008/9.

    His speech outlined some of the major milestones in the financial crisis since their meeting 12 months back, including:
    • The placement of Fannie Mae and Freddie Mac into conservatorship.
    • Securing $85 billion line of credit to AIG
    • Approval of conversion of Morgan Stanley and Goldman Sachs to bank holding companies.
    • Bank capital injections and the extension of deposit insurance
    • Commitment of Federal Reserve to provide liquidity as necessary
    • Bringing the federal funds rate down to a target of 0% to 0,25%
    • Having Congress approve $700 billion TARP (Troubled Asset Relief Program), to provide emergency funding to large banks.
    • Having the Fed buy up long term debt from financial institutions, so as to help unfreeze financial markets.

    He noted that the case with Lehman Brothers proved exceptionally difficult, but because of a lack of resolution from the government and because the Federal Reserve could not make an unsecured loan, they were unable to save the bank, but had to concentrate on mitigating the fallout.

    He continued saying that the financial crisis had elements of a classic panic, particularly during its most intense phases and this helped to motivate a number of Federal Reserve policy actions.

    Because of this panic scenario the Fed and other central bankers provided large amounts of short term liquidity to financial institutions. This did not solve all the problems, but helped restore confidence of investors and promote stability.

    He concluded saying, “The world has been through the most severe financial crisis since the Great Depression." But he continued, "As severe as the economic impact has been, however, the outcome could have been decidedly worse. Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk.”

    There is a strong case to be made that the seeds for this last financial crisis were actually sown by his predecessor, Alan Greenspan, who took interest rates down to the then new low of 1%, which sparked a run in credit expansion, culminating in the crisis.

    Now in an attempt to get the world out of the mess, interest rates are again one of the main tools used and these are at even lower lows.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144966

    Permalink2009-08-24, 17:51:32, by ian Email , Leave a comment

    Equity markets rally on sustained hopes of global economic recovery

    Local Markets
    The JSE opened firmer this morning, on the back of strong Asian market performances. Resources led the upside as many exporters continue to rally on hopes that global markets are beginning to stabilize. European stocks are set to follow trends started late last week in the US that have moved to Asia. By midday, the All Share had improved 1.35%.

    The rand improved immediately on open this morning, breaking the R8/dollar mark. The positive housing data in the US helped to promote gains in equity markets there, which had positive effects for emerging currencies such as the rand. With little event risk to impact the market, the rand should remain stable around the R7.80 level today. Tuesday, however, should bring some volatility to the movements as local and international data due out this week is sure to spur a change in sentiment. By midday, the rand was trading for R7.78 to the dollar.

    The oil price improved earlier today, extending recent rallies made on hopes that energy demand will rebound as the US economy looks set for recovery. At midday the oil price was $73.47 for a barrel of Brent Crude.

    International Markets
    US equity markets peaked on Friday to close at their highest marks for 2009. Reassuring comments from Fed chairman Ben Bernanke along with an unexpected rise in home sales sent a wave of optimism through the markets. At the Fed’s annual conference in Wyoming, Bernanke gave his clearest indication yet that the global economy is indeed emerging from its recession. Investors responded positively to the assertions although with key consumer spending data and other like statistics due out this week, profit-taking seems a likely outcome. The Dow Jones finished 1.67% up whilst the Nasdaq closed 1.59% in the green.

    Japan’s benchmark average rallied considerably overnight. The gains were largely tracking movements of US markets where anticipation of a global economic recovery is spurring the impetus. Canon Inc and other major exporters led the way with voluminous gains. Oil and gas developer Inpex gained along with other energy-linked shares as the oil price began to steady around the $74 mark. The Nikkei closed 3.35% up this morning.

    Shares in Hong Kong also rallied overnight, tracking gains made in international markets. Refiners and Chinese financial stocks took advantage after Sinopec and China Construction Bank reported strong earnings. The Hang Seng finished 1.67% higher this morning.
    Equities in London continued their forward movement during the morning session. Investors are pleased with the rallies taking place across global markets and there appears to be sustained outlook for economic recovery. These gains extend the FTSE 100 into its best summer rally since its creation in 1984, building on 10 month highs reached in the previous session. At midday, the FTSE 100 was trading 0.77% up.

    Share Price News
    Among the morning’s winners was Trans Hex Group Ltd of the Diamond sector. Its shares were trading 13.64% up by midday for R3.75 per share. Also performing well over the early parts of the session was Pallinghurst Res Ltd of the Investment Companies sector. It managed to secure gains of 8.11% before midday. A share traded for R4.00 at noon.

    Among the losers, Alliance Mining Corporation Ltd of the AltX sector stood out. As investors moved towards the better known resource stocks, Alliance suffered a 8.82% loss to trade for R3.10 by midday. Also performing poorly was Lonrho Africa plc of the VCM (Venture Capital Market). Its shares traded for R1.01 (a 8.18% reduction) by midday.

    Permalink2009-08-24, 13:14:03, by Grant Leyland Email , Leave a comment

    Due diligence on private investments

    Because the investment returns from a private equity investment are often far superior to that of a listed investment, these are many aggressively marketed in various forms. At face value the investment offers appear attractive, often with a tantalising possibility that the entity being invested into will list on a stock exchange at a time in the immediate future - as if this is a guarantee of an immediate substantial profit.

    When these offers and even seemingly mainstream offers are received, one should apply a large dose of common sense and some due diligence questions, before parting with any capital.

    Some questions that should be asked:

    • When and how will I get back my money? Remember a share in a company is sunk capital – it is not a loan with repayment terms. The typical way of receiving back cash is by selling shares to a buyer. A stock market facilitates secondary trading in shares, but does not guarantee any liquidity.

    When shares are not listed on an exchange the liquidity declines dramatically and share owners, especially minority shareholders, may never have an opportunity to sell out to a third party.

    • Who is the seller? Many times this is also not that clear and before parting with any funds, this is absolutely critical. An investor may believe that he is making an investment directly into a company, but perhaps he is transacting in the secondary market – i.e. purchasing shares from an existing seller.

    • How was the price of the shares determined and how many shares will be in issue? Many, many times I have seen prospectuses where the original founders of the business allocate millions of shares to themselves at virtually no cost, but then shares to the public at say R2 a share.

    Because a nominal R2 appears cheap, the investor incorrectly assumes that its good value. However when calculating the inferred valuation of the business, one must multiply the total number of shares in issue by the issued price.

    A case in point is a recent unsolicited offering made in unlisted company Platfields for shares at a price of R3,20 a share. This appears cheap, especially in the light of possible future prices, but when looking at the implied value of the company, with over 436m shares in issue, this comes in at a massive R1,4 billion.

    • How does this valuation compare to listed, established and liquid competitors? While there may be a good opportunity for growth with an unlisted investment, unless there is a high degree of receiving back your capital, it is advantageous to consider the risk versus reward payoff of a listed competitor company.

    I hope that these few questions may help and may even trigger of other questions that you can ask.

    Have a wonderful weekend

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-21, 17:38:31, by ian Email , Leave a comment

    JSE recoups earlier losses as financial shares gain

    Local markets

    Gains in financial stocks lifted the JSE All Share by 0.95% at midday, managing to offset earlier losses when resources tipped the local bourse into the red after a poor performance on Asian markets.

    The rand was trading at R7.86 to the US dollar at 12:00, remaining strong beneath the R8 mark but generally lacking direction.

    Gold was selling at $942.10 an ounce, edging up 0.22% though analysts suspect the price might fall due to the lack of firm fundamentals.

    International markets

    The Dow Jones rose 0.76% yesterday while the Nasdaq closed 1.01% higher after gains in financial stocks boosted US markets. Investor confidence increased on news of positive US manufacturing data and the recovery in Chinese stocks.

    In Japan, the Nikkei index fell 1.4% this morning as automakers and other exporters were hit by a stronger yen. Also damaging sentiment was news that the US intends to end its car rebate programme in the near future.

    The Hang Seng dipped 0.64% as investors resumed their fears about a tightening up of monetary policy from Beijing. China Mobile shares continued to fall after yesterday’s report of poor 2nd quarter results.

    The British FTSE 100 had risen 0.82% by noon, continuing yesterday’s rally as investors took heart from positive closes on Wall Street, and oil majors rose as the price of crude held.

    Share price news

    Cenmag Holdings Limited, whose subsidiaries are involved in the manufacture of electromagnets, rose 14.24% as shares sold for R3.45 at 12:00. Second top mover upwards this morning was Great Basin Gold Limited, whose shares rose 7.40% to trade at R10.89 after just one deal.

    On the way down was Gold One International Limited, whose shares fell to R1.95 after 13 deals took the price lower by 6.70%. Mining company Sephaku lost 6.67% after shares slid to R7 after two deals.

    Permalink2009-08-21, 12:34:15, by Natalie Email , Leave a comment

    Mondi Releases Interims

    Mondi released their interim financial results earlier today. Mondi operates in the paper industry that has had excess capacity for quite some time now. There has been a gradual consolidation of the industry (with rival Sappi buying out a competitor with the sole purpose of shutting it down) and as the industry consolidates, so the capacity should reduce to more normal levels. A big concern is the east, who could increase capacity in an attempt to gain market share. We know that China in particular can often pay scant regard to profitability in an attempt to get foothold into industries.

    An industry that is facing tough internal issues, that has had weak demand, and then is also exposed to a global economy that has entered a recession is bound to be hit on the bottom line.

    This hardship can be seen in some of the headline figures:
    • Group revenue down 20% to EUR 2.6bn.
    • Earnings Before Income Tax Depreciation Amortisation (EBITDA) down 32%.
    • Reported loss of EUR 1mn, down from a profit of EUR 171mn.
    • A reduction in the dividend per share to 2.5c from 7.7c (but at least still maintaining a dividend)
    • The Group’s Return On Capital Employed (ROCE) is also down in the magnitude of 33% (from 11.1% to 7.4%).

    These are some fairly dire performance numbers, but should be viewed in the context of the environment in which they have been produced. Mondi has been focussing on survival so that they are able to participate in any recovery that comes their way.

    Some of the positive highlights include:
    • Net debt not changing materially (up to EUR 1.66bn from EUR 1.65bn, but down EUR 29mn since the end of December) in an environment where competitor Sappi had to do a rights issue.
    • Cash flow from operations improving by 26% to EUR 392mn.
    • Costs savings of EUR 109mn year to date (full year target of EUR 180mn).

    These efforts are clearly a ‘belt-tightening’ exercise which Mondi believes is the best way to go in current market conditions. Quoting Group Chief Executive David Hathorn in the half yearly report

    “We believe the decisive actions taken to reduce capacity, lower the overall cost base and optimise cash flows, coupled with our high-quality, low-cost asset base leave us well positioned to benefit when market conditions improve.”

    The Ltd quoted share ended the day up 2.81%, while the Plc was up only 0.52%. This compares to the ALSI which was up 1.41% today.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-20, 17:57:46, by Mike Email , Leave a comment

    Drop in US oil stockpiles boosts global markets

    Local markets

    By 12:00 on Thursday, the JSE All Share had risen 1.31% with basic materials stocks and gold miners leading the upward charge. The local bourse took direction from stronger US and Asian markets.

    The rand was trading at R7.94 to the US dollar, strengthening in line with positive local and US equity markets.

    Oil cost $73.48 a barrel at midday, rising 0.66% as the commodity continued to enjoy support from industry data that revealed that crude imports and inventories in the US had fallen considerably.

    International markets

    Yesterday the Dow Jones closed up 0.66% while the Nasdaq lifted 0.68% as investor sentiment improved on news of a steep drop in crude oil inventories that suggests economic recovery may be on its way.

    The Nikkei average gained 1.76% this morning, rebounding from its lowest close in three weeks on positive investor sentiment as crude oil rose to boost resource stocks.

    The Hang Seng jumped to 1.88%, taking a lead from the Shanghai index which surged to 4.52%, though closing off its highs as weak earnings for China Mobile dampened investor sentiment slightly.

    The British FTSE 100 risen 1.36% as energy stocks gained on stronger crude oil prices, and as the bourse followed gains on US and Asian markets.

    Share price news

    Continuing to rally, Illovo Sugar Limited NPLs gained 41.54% as share prices rose to R4.60 at midday after 24 deals. Transpaco Limited in the containers and packaging industry rose 17.92% after three deals took the share price to R6.25 at noon. The company issued its reviewed results and dividend announcement this morning, reporting an increase in turnover of 11.5% and an increase of 71.4% in dividends.

    First Uranium Corporation fell to R26.04 a share after a single deal, a loss of 10.21%. Also losing ground was IPSA Group whose shares fell 7.41% to trade at R1.25, after one deal.

    Permalink2009-08-20, 15:08:34, by Shaun Crous Email , Leave a comment

    Global State of Affairs

    Economies around the world have been assisted since the end of last year by co-ordinated government assistance. Governments did everything in their power to avoid the pending deep recession becoming a depression. By and large this has been achieved, with a few large economies now technically out of recession. France, Germany, and Japan announced 2nd quarter GDP growth in the past week.

    Much of the optimism has centred on terrible data ceasing to be as bad as initially predicted, and not from strong growth data. Various stimuli packages from tax cuts, to incentives from government to keep idle workers employed, to a multitude of buy back programs have provided an impetus to global stock markets.

    This has further increased risk appetite around the world with emerging market bourses and currencies performing better than their developed market counterparts since the beginning of March. We have also seen the spread between emerging market bonds and US treasuries declining on the back of money flowing into this asset class.

    Clearly the stimuli packages have worked in that they have stimulated the various economies in which they were implemented, but as the word suggests, these packages were merely a stimulus, and not a complete solution. The stimuli can only help so much, and then the economies need to start running under their own steam. This process can be likened to trying to start a fire. You require a match (stimulus) which will get the fire (economy) started, but for you to get a meaningful flame (economic growth) you require fuel (economic activity) of sufficient quality and quantity. And just like holding a match waiting for the flame to catch, the holder (in this case government) will get burnt if they fail to withdraw the stimulus in time.

    Only time will tell if governments are able to withdraw the liquidity in time to prevent them becoming too indebted, which will put a massive burden on future generations. At the same time withdrawing the stimulus too soon could result in another recession, in what is often termed a ‘double dip’. A double dip is when a country enters recession for a period before it technically ends (i.e. the economy experiencing a quarter of positive GDP) only for it to fall back into recession as the economic recovery fails to take hold.

    Germany is possibly at risk of double dipping as many companies will be required to roll their debt at the beginning of next year (i.e. retire old debt and issue new debt), which they could find difficult with weaker balance sheets and tightening lending standards from the bankers. Drying up of credit will spell the death knoll for many companies.

    Warren Buffett recently mentioned in today’s New York Times column that the US stimulus was necessary to avoid a deeper recession but warned that the side effects of this ‘medicine’ could be worse than the initial problem if not managed effectively.

    Herein lies the conundrum that all policy makers face. Remove the match too soon and fail to get a sustainable fire going, or remove the match too late and burn your fingers.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-19, 17:18:53, by Mike Email , Leave a comment

    Financial stocks led JSE downwards

    Local markets

    The JSE All Share had fallen 0.98% by midday on Wednesday, as weaker metal prices took their toll on resource stocks. However, financial shares experienced the largest loss of the sectors, down 1.57% by 12:00.

    A strengthening US dollar had the rand on the back foot at noon, when the local currency exchanged at R8.06 to the dollar.

    Gold was selling at $934.65 an ounce, falling 0.25% as the precious metal’s appeal as a currency hedge against the dollar dimmed.

    International markets

    US markets rebounded yesterday after retailers released better results than were expected, which offset negative sentiment from weaker housing figures. The Dow Jones closed 0.9% higher, while the Nasdaq rose 1.3%.

    The Japanese Nikkei index finished 0.79% lower this morning, its lowest close in three weeks after investors were discouraged by tumbling Chinese shares and futures sales caused the cash market to slide.

    In Hong Kong, the Hang Seng dropped 1.73%, reaching its lowest close in a month as the bourse shadowed losses in the Shanghai index.

    Britain’s FTSE 100 dipped 0.87% at midday, reversing yesterday’s rally as investors became more risk averse and sold off banking, mining and oil stocks.

    Share price news

    Great Basin Gold Limited gained 7.74% by 12:00 as shares sold for R11 after just one deal. Capitec in the banking sector rose to R53 a share, a gain of 6% in share price after 22 deals. The company issued a trading statement this morning announcing that their earnings and headline earnings per share exceed last year’s figures by 35-55%.

    CIC Holdings Limited, parent company to smaller fast moving consumer goods companies, experienced a 9.09% loss as shares fell to R1 each after two deals this morning. After 20 deals, Chemical manufacturer African Oxygen Limited lost 6.83% as shares slid to R19.52 each.

    Permalink2009-08-19, 12:22:08, by Natalie Email , Leave a comment

    The Chinese stock market

    The Chinese market, both real and financial is playing an increasing role in global markets. The sharp decline in the last few weeks of the Shanghai index seemed to have an impact on risk aversion across the globe. The question now – Is the effect of government stimulus starting to fade?

    We have discussed the extent to which the government has provided stimulus to the local economy. The stockmarket benefited enormously from the end of 2008 until the beginning of August.

    The 3 stock exchanges operating in the Peoples Republic of China are the Shanghai, Shenzhen stock Exchange and the Hong Kong Stock Exchange.

    Together the Shanghai and Shenzhen stock exchanges list over 1500 companies, with a market capitalisation of around $2,6 trillion in 2008.

    The SSE Composite (also known as Shanghai Composite) Index is the most commonly used indicator to reflect SSE's market performance. The constituents for this index are all listed stocks (A shares and B shares) at the Shanghai Stock Exchange.

    Some of the largest Chinese companies as ranked using sales, profits and assets by Forbes include:

    • PetroChina
    • ICBC
    • China Telecom
    • Sinopec-China Petroleum
    • Bank of China

    The government stimulus and extended credit helped propel up share prices with the SSE index gaining some 100% from November 2008 to the beginning of August. It then promptly shed 17% to Monday’s close.

    This morning the index gained 1,4% and global markets started to move up. The JSE ended up 0,76%, Europe ended up and the US is up.

    Over the years there is likely to be a steady shift in the relative weights of economic power from west to east. China must be on the radar screen of all investors.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-18, 18:08:06, by ian Email , Leave a comment

    JSE gains while awaiting direction from local GDP figures

    Local markets

    At noon on Tuesday, the JSE All Share had recovered by 0.71% after yesterday’s losses, though the local bourse is still awaiting direction from local GDP figures due this afternoon.

    The rand had strengthened against the US dollar, reaching R8.04 at midday after yesterday’s turbulent session. The local currency is expected to react to GDP figures later today.

    Oil was trading at $70.34, rising 3.44% after hitting a two-week low yesterday as investors continue to be concerned about the speed of global economic recovery and oil demand.

    International markets

    The Dow Jones tumbled 2% and the Nasdaq slid even further, losing 2.75% yesterday as poor Japanese data and a negative outlook from a leading retailer dampened investor sentiment.

    The Japanese Nikkei edged up 0.16% this morning, overcoming investor worries that the recent rally in risk assets may be overdone.

    The Shanghai index closed higher by 1.4% while the Hang Seng rose 0.84% as Chinese shares recovered part of recent losses and boosting Hong Kong stocks in the process through bargain hunting.

    The FTSE 100 had lifted 0.75% thanks to gains in banks, miners and oil stocks as investors awaited July inflation data.

    Share price news

    Once again the top mover upwards at midday, Illovo Sugar Limited NPL rose 12.18% to sell at R1.75 a share after 14 deals. Shares in Simmer and Jack Mines Limited gained 5.39% after 23 deals boosted the price to R2.15 at 12:00.

    Ellies Holdings Limited fell to R1.55 a share, a drop of 7.74% after two deals. TWP Holdings Limited in the construction company lost 7.54% after two deals pressured the share price down to R6.01 each at noon.

    Permalink2009-08-18, 12:38:48, by Natalie Email , Leave a comment

    Unnecessary investment risk

    The Financial Advisory and Intermediary Services Act (FAIS) Act is now almost 5 years old and still the number of investment related problems persist. Many investors seem to be perplexed that the law is not eliminating these problems, but I noted at the outset of this act, that it would not be the panacea that some were hoping for.

    In some respects FAIS was eventually introduced in an attempt to try and avoid a repeat of the Masterbond type debacle that occurred in the early 1990’s.

    There is no doubt that FAIS has introduced a fairly high level of compliance, but as with most law – there is only so much it can achieve as it caters for the lowest common denominator in a very broad industry.

    Investors should look to deal with managers who consider the laws as the minimum requirement.

    The Weekend Argus reported on the failure of King Financial, which was apparently placed in liquidation. The company appears to be a hybrid between a financial advisor and itself a private equity play. A July article in Finweek warned investors about investing into its unlisted shares that it was supposedly flogging to its own investors.

    Other recent investment frauds and investment failures include

    • Fidentia
    • Corporate Money Managers
    • Tannenbaum
    • Dividend Investments.

    Let’s be clear – there is always risk when making an investment. A deposit into a bank account or a money market account carries risk. But it is important to distinguish between the various risks, and where possible reduce or mitigate against these.

    Listed and regulated investments do not automatically convey low risk when compared to unlisted or unregulated investments.

    As investment advisors and managers, we categorise and try and assess the various risks on behalf of our clients.

    • Investment risk can be defined in terms of not meeting your long term investment objective and by losing capital over the short to medium term.

    • Custodian or institutional risk is the risk that we are talking about. This risk can’t typically be quantified. While the percentage may be low, when it does occur, it has the possibility of seriously damaging a large portion of an investor’s wealth. For this reason, we pay particular attention to this risk in terms of the various custodians and counterparties used.

    • Other risk classifications include reinvestment risk, credit risk, currency risk, and liquidity risk.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za

    021 9144966

    Permalink2009-08-17, 18:06:09, by ian Email , Leave a comment

    Weak US consumer confidence evokes caution in global markets

    Local markets

    The JSE had lost 2.79% by 1pm on Monday, as the local bourse followed Asian markets down after weak economic data from Japan and poor performance of the Shanghai index.

    The rand was trading at R8.20 to the US dollar, losing ground against the American currency after the gold price took a tumble.

    Gold slid 1.09% to sell at $935.55 an ounce, continuing last week’s losses as poor consumer confidence reports from the US dampened hopes of economic recovery, which also took a toll on the oil price.

    International markets


    On Friday, the Dow Jones closed 0.82% down, and the Nasdaq slid 1.19% after US stocks were hit by weak consumer data.

    The Japanese Nikkei fell 3.10% this morning, its lowest plunge in almost five months, as investors took profits after suspecting shares were overbought.

    The Hang Seng lost 3.62% as Hong Kong shares tracked the fall in Chinese stocks which came after negative consumer sentiment was reported in the US.

    Britain's top share index fell 1.79%, also shadowing Asian markets and Friday’s Wall Street results after investors renewed concern over the delay in economic recovery.

    Share price news

    Just before 1pm, Illovo Sugar Limited NPL gained 10% to sell at R1.65 a share after 19 deals. Mvelaphanda Resources Limited rose to R40.47 a share after 167 deals this morning, gaining 6.5%.

    Moving down was Diamondcorp PLC, whose shares fell to R2, 20% down after four deals. B & W Instrument & Electrical Limited slid 9.68% after two deals sent the share price down to R1.40 each.

    Permalink2009-08-17, 13:33:59, by Natalie Email , Leave a comment

    Government finances under pressure

    There is no doubt that global economics continue to puzzle both the layman and professionals alike. On the one hand are many positive signs that the worst may be over. At the same time there are nagging concerns that a sustained economic recovery may be some years into the future.

    What is a lot clearer is that its not only private sector finances that are under pressure and over geared, but also government finances.

    Exactly how this is going to play out no one is sure. One just needs to look at the US fiscal deficit which is currently running at 9% of GDP and headed for 12-14%. The UK is staring similar fiscal deficits in the face.

    In their ongoing attempt to reflate slowing economies, governments have dramatically escalated their spending, but in the case of the US and UK with limited ability in terms of either reserves and ability to raise new debt.

    The US federal non defence spending has risen more than 20% over a year ago, far stronger than at any time from at least 1990. At the same time that government has felt the need to spend more, income tax receipts have contracted by 25% year on year – a reflection of the contraction in the private sector.


    Source: Wells Fargo Securities

    With limited political ability to reduce spending, raise taxes, borrow (although this will continue), to meet the escalating shortfall, governments, especially the US are being compelled to monetise their debt – i.e. put more money into circulation.


    Source: Wells Fargo Securities

    Should the trend continue, then despite official inflation rates on goods and services remains muted for the foreseeable future, asset prices may continue to escalate as the new stock of money needs to find a home.

    It’s not going to be a smooth road. Increased global money supply is going to come up against generally weak company earnings.

    This looks like a recipe for ongoing high volatility, which is why investors need to try and have a multi asset class approach.

    If you are looking for an independent investment advisor to assess your overall investment plan, don't hesitate to contact Seed Investments.

    Have a wonderful weekend

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-14, 16:27:02, by ian Email , Leave a comment

    JSE fairly flat after week of mixed data; rand remains firm around the R8/USD mark

    Local Markets

    The JSE opened relatively flat this morning after a steady session of gains yesterday. The market is waiting for key US inflation data due out today before moving further. Of course, some profit-taking (especially in the prominent stocks) hasn’t helped matters but the slightly weaker rand is limiting losses. By noon, the All Share was trading 0.26%.

    The rand fluctuated within a reliable range during the morning session, after a week of relatively volatile sessions. Mixed economic data throughout the week failed to give traders a firm sense of direction. Having closed in a strong position yesterday above R8 to the dollar, the currency lost a fraction against the dollar on open. The SA Reserve Bank’s repo rate decision certainly affected the upward momentum the rand was enjoying up to the announcement. By midday, a dollar cost R8.012.

    The gold price improved marginally this morning as a cautious mood began to infiltrate equity markets. Disappointing US retail data saw equity markets pull back from previous sessions’ momentum. Many investors hedge their bets with investment in gold as a safe-haven asset. By noon, a troy ounce traded for $955.65.

    International Markets

    Equities in the US managed to creep upward on Thursday after the surprisingly favourable earnings figures posted by Wal-Mart Stores Inc boosted enthusiasm in trading circles. It’s positive 2nd-quarter earnings and promising outlook for the rest of the year helped to assuage woes over the disappointing government data on retail sales and joblessness (which still indicate weak consumer demand). Wall St were defiantly bullish in the face of this negative news and the Dow Jones closed 0.39% up whilst the Nasdaq finished 0.53% higher.

    The Nikkei index closed nearly 1% higher to reach a 10-month pinnacle overnight. The surge was aided by evidence emerging from various corners that the global economy is indeed set to improve. However, ailing Chinese equity markets put up resistance against the upward movement. Once again, construction machinery manufacturers were amongst the biggest winners having received brokerage rating upgrades recently. Japan’s benchmark average closed 0.76% up.

    Shares in Hong Kong managed to claw back nearly 0.2% by close early this morning after shedding over 1% earlier in the session. Encouraging earnings momentum, especially from selected goods exporters, prompted the return to positive territory. The Hang Seng closed 0.15% up this morning.

    Persistent speculation over a possible bid from wealthy Asian investors or sovereign wealth funds for British property firms is leaving traders excited over the improved liquidity prospects and related benefits. British Land, Hammerson and land Securities (all from the property sector) gained significantly this morning. However, disappointing US retail data that pushed Wall St indices off their peak levels yesterday are prompting a cautious mood globally. By noon, the FTSE 100 was trading 0.14% in the green.

    Share Price News

    Richemont, of the Clothing and Footware sector, performed well this morning. By midday, a share traded for R21.40 (a 5.47% improvement). Also managing to attract volumes of investor interest was Merafe Resources Ltd of the Metals and Minerals sector. At noon, its shares traded for R1.66 each, marking a 3.75% gain.

    Among the morning’s biggest losers was Sentula Mining Ltd of the Metals and Minerals sector. At midday, a share traded for R3.01 (a 9.06% decline). Also performing poorly during the morning session was Absa Group Ltd of the Banks sector. This comes on the back of issuing a lower than forecasted preference dividend. Its shares traded for R124.00 each by midday, reflecting a 1.59% loss.

    Permalink2009-08-14, 12:54:40, by Grant Leyland Email , Leave a comment

    Local Markets

    The JSE opened relatively flat this morning after a steady session of gains yesterday. The market is waiting for key US inflation data due out today before moving further. Of course, some profit-taking (especially in the prominent stocks) hasn’t helped matters but the slightly weaker rand is limiting losses. By noon, the All Share was trading 0.26%.

    The rand fluctuated within a reliable range during the morning session, after a week of relatively volatile sessions. Mixed economic data throughout the week failed to give traders a firm sense of direction. Having closed in a strong position yesterday above R8 to the dollar, the currency lost a fraction against the dollar on open. The SA Reserve Bank’s repo rate decision certainly affected the upward momentum the rand was enjoying up to the announcement. By midday, a dollar cost R8.012.

    The gold price improved marginally this morning as a cautious mood began to infiltrate equity markets. Disappointing US retail data saw equity markets pull back from previous sessions’ momentum. Many investors hedge their bets with investment in gold as a safe-haven asset. By noon, a troy ounce traded for $955.65.

    International Markets

    Equities in the US managed to creep upward on Thursday after the surprisingly favourable earnings figures posted by Wal-Mart Stores Inc boosted enthusiasm in trading circles. It’s positive 2nd-quarter earnings and promising outlook for the rest of the year helped to assuage woes over the disappointing government data on retail sales and joblessness (which still indicate weak consumer demand). Wall St were defiantly bullish in the face of this negative news and the Dow Jones closed 0.39% up whilst the Nasdaq finished 0.53% higher.

    The Nikkei index closed nearly 1% higher to reach a 10-month pinnacle overnight. The surge was aided by evidence emerging from various corners that the global economy is indeed set to improve. However, ailing Chinese equity markets put up resistance against the upward movement. Once again, construction machinery manufacturers were amongst the biggest winners having received brokerage rating upgrades recently. Japan’s benchmark average closed 0.76% up.

    Shares in Hong Kong managed to claw back nearly 0.2% by close early this morning after shedding over 1% earlier in the session. Encouraging earnings momentum, especially from selected goods exporters, prompted the return to positive territory. The Hang Seng closed 0.15% up this morning.

    Persistent speculation over a possible bid from wealthy Asian investors or sovereign wealth funds for British property firms is leaving traders excited over the improved liquidity prospects and related benefits. British Land, Hammerson and land Securities (all from the property sector) gained significantly this morning. However, disappointing US retail data that pushed Wall St indices off their peak levels yesterday are prompting a cautious mood globally. By noon, the FTSE 100 was trading 0.14% in the green.

    Share Price News

    Richemont, of the Clothing and Footware sector, performed well this morning. By midday, a share traded for R21.40 (a 5.47% improvement). Also managing to attract volumes of investor interest was Merafe Resources Ltd of the Metals and Minerals sector. At noon, its shares traded for R1.66 each, marking a 3.75% gain.

    Among the morning’s biggest losers was Sentula Mining Ltd of the Metals and Minerals sector. At midday, a share traded for R3.01 (a 9.06% decline). Also performing poorly during the morning session was Absa Group Ltd of the Banks sector. This comes on the back of issuing a lower than forecasted preference dividend. Its shares traded for R124.00 each by midday, reflecting a 1.59% loss.

    Permalink2009-08-14, 12:45:28, by Grant Leyland Email , Leave a comment

    Monetary stimulus

    The South African monetary authorities have generally lagged the rest of the world in stimulating its rapidly slowing economy, but today outgoing governor, Mboweni, cut rates by an unexpected 0,5% to 7%. This takes the decline to 5% from December and the prime rate down to 10,5%.

    One economy that has not lagged in stimulating by way of cheap lending is China.

    The Economist Intelligence unit reported that it now looks like the official GDP for 2009 will reach the government target of 8% per annum.

    The bulk of this massive uptick has “only been possible owing to a massive increase in state-mandated bank lending.”

    Rapid lending always brings with it the concern that asset prices may become inflated and that banks make unproductive loans which in time will need to be impaired (written down).

    i.e. the growth rate may be more illusionary than real.

    In the first half of the year, according to the Economist, new loans reached an incredible Rmb7,4 trillion (US$1,1 trillion), a growth of Rmb4,9 trillion on the year earlier period.

    The results from mining giant Billiton alluded to the substantial sharp injection into the Chinese economy in their annual results announcements, saying, “As with all economic stimulus policies, the degree of support will be difficult to measure and there remains uncertainty about economic growth beyond the period of each specific program. In China, the response has been a sharp increase in investment that has accelerated a range of existing infrastructure and construction projects. This has provided strong support to short-term economic growth.”

    The annual report went on to say that the commodity restocking in China now appears largely complete with substantial inventory build-up in specific commodities over the last 3 months at end user level and in strategic stockpiles.

    The Shanghai stockmarket, which has been one of the best performing in the world in 2009, has doubled from its lows in October 2008.

    Some key economic data from the Economist Intelligence Unit

    A contraction in China will impact exporters, but right now though the world, including South Africa, is basking in cheaper debt.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-13, 17:29:15, by ian Email , Leave a comment

    Markets rally on positive news from the US Federal Reserve

    Local Markets

    The JSE rallied this morning as it tracked gains made overnight in US and Asian markets. News from the US Federal Reserve spurred hopes that the global recession may be drawing to a close. Exporters were particularly pleased as demand from the world’s largest consumer market is expected to recover in the upcoming months. By midday, the All Share was 1.71% in the green.

    The rand recouped some its losses earlier in the week as the dollar lost some ground on trade data released earlier that reflected an increase in the US trade deficit. The emerging market currency is expected to make further gains as equity markets rally and investor sentiment turns bullish. By noon, a dollar traded for R7.97.

    The oil price climbed higher overnight over renewed optimism that the worst of the global recession has passed. The US Federal Reserve indicated on Wednesday that the US economy is beginning to level out. This encouraging information counterbalanced the worrying inventory data for the world’s largest oil consumer. Hopes of an imminent economic recovery spurred optimism that demand would rise again. By midday, a barrel of Brent Crude was selling for $73.81.

    International Markets

    The US Federal Reserve announced on Wednesday that “economic activity is leveling out”. Many analysts were also encouraged by suggestions that emergency measures to stimulate the flow of credit shouldn’t be necessary in the near future. The Fed intends on completing its $300 billion Treasury purchases by October but no further debt-buying initiatives are in the pipeline. Equity markets responded positively to the Fed’s announcements and by close, the Dow Jones was up 1.30% and the Nasdaq 1.47% in the green.

    Japan’s benchmark index crept towards its 10-month closing high overnight. These gains come on the back of US Federal Reserve’s suggestions that the US economy is on the road to recovery. Demand-sensitive exporters such as Advantest Corp led the way as equities rallied. Investors also focused on individual shares that had benefited from specific movements. Kawasaki Heavy and other manufacturers involved in making trains surged on reports that Vietnam would be using Japan’s bullet train technology to construct its high-speed railway system. The Nikkei eventually closed 0.79% in the green.

    Shares in Hong Kong gained 2.08% overnight, recouping some of the losses made in the previous session. These movements were spurred by supportive comments from the US Federal Reserve as well as positive earnings momentum of late.

    Equities in London opened higher this morning after equity markets in the US and Asia rallied overnight. Investors worldwide seem to be enthused by the suggestions of the US Federal Reserve that the US economy is leveling out. The mood was also lifted by news that the French and German economies had returned to growth in the second quarter, after a year of recession. Robust consumer and public spending (largely due to stimulus programs engineered by government) helped to create growth impetus. By midday, the FTSE 100 was 1.18% in the green.

    Share Price News

    Metorex Ltd of the Metals and Minerals sector managed to secure voluminous gains during the morning session as equity markets rally over excitement that the worst of the global recession may well be over. Exporters stand to benefit significantly as demand is expected to rise once more. By noon, its shares trade for R3.85 each (a 10.00% increase). Also performing well this morning was Merafe Resources Ltd of the same sector. At noon a share traded for R1.58, reflecting a 7.48% gain.

    Sentula Mining Ltd, also of the Metals and Minerals sector, experienced a volatile morning after posting rather a worrying trading update. By midday, a share traded for R3.45, marking a 6.50% loss. Reunert Ltd of the Electrical Equipment sector also lost out this morning. By midday, a share cost R43.00 (a 2.27% reduction).

    Permalink2009-08-13, 12:55:20, by Grant Leyland Email , Leave a comment

    MPC Starts Their Meeting

    As Ian mentioned yesterday, the MPC started their two day meeting today, which will ultimately culminate in them deciding whether to increase, decrease, or make no change to the repo rate (rate at which commercial banks borrow from the Reserve Bank) and if it does change by how much it should.

    As mentioned the current consensus is for there to be no change.

    There has been much change since the last meeting at the end of June, both in terms of data that has come out, and other events. At that meeting the MPC halted their rate cuts that had seen the prime rate cut from 15.5% to 11% in less than 6 months from the end of 2008 and the statement generally had a hawkish tone to it (i.e. more of a slant to tightening monetary policy again).

    Some of the events that have occurred since are listed below:

    • Gill Marcus (ABSA Chairperson and former SARB deputy governor) has been appointed as the new Reserve Bank governor effective 9 November, i.e. Tito Mboweni has 2 meetings as head of the Bank after the conclusion of this one before Ms Marcus takes over.
    • Tito entertained the idea of increasing the committee to 9 members from the current 7 after questioning by unions about their lack of representation on the committee. Mr Mboweni did, however, mention that any new member would have to resign current posts held (as Gill Marcus will be doing) to avoid any conflicts of interest.
    • June’s inflation data came out 0.3% below consensus at 6.9% at the end of July. A good sign that inflation might fall into its target band sooner rather than later.
    • Economic data has continued to disappoint across many sectors. With excess capacity increasing appreciably. Another good sign for inflation, although negative for economic growth and job creation.
    • Workers around the country and across a wide spectrum of employment sectors have gone on strike demanding higher wage increases than their employers were offering. Many strikes have since been resolved with wages hikes in excess of 10% (above both current inflation levels and the upper band of the inflation target – 6%). A big negative for inflation falling into the Reserve Bank’s target range.

    The members will discuss the conflicting data that is coming out, and then come to a decision. As can be seen there are reasons to both increase and decrease interest rates. Many different interest groups are lobbying for a decision in their favour, for example car makers want a rate cut to help the slide in demand for vehicles.

    The markets look to the MPC for direction, so they therefore word their statements very carefully. The MPC guides the markets both with their conclusions and comments. We will therefore see from their statement tomorrow where they see rates going in the future. A dovish tone will indicate that they’re more likely to cut rates in the future again, while a hawkish tone would indicate a desire to increase rates at some stage.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-12, 16:07:28, by Mike Email , Leave a comment

    Poor US production data and impending interest rate decisions prompt equity markets downwards

    Local Markets

    The JSE opened slightly lower this morning. Having tracked losses on Wall St and the cautious profit-taking in Asia, local investors appear to be following suit. Focus remains on the US Federal Reserve monetary policy outcome due out at 20:00 tonight whilst the local reserve bank’s interest rate decision looms as well. It was red across the board this morning and by midday the All Share was 0.85% down.

    The rand remained fairly static during the morning session, lacking direction ahead of the interest rates outcome of Thursday’s Reserve Bank meeting. Having rallied in the last two months, global markets are enduring a bout of profit-taking and the rand is inextricably bound to these movements. Today attention remains focused on the Federal Reserve’s interest rate decision in the US; the Fed’s decision should give direction to both equity and currency markets. By midday, the rand traded at R8.15 to the dollar.

    Gold stocks are hovering around the $945 mark as investors focus on the movements in equity markets after the interest rate decisions due out this week locally and in the US. As a safe-haven asset, gold is expected to reap the benefits of any cautionary market data that is released. At midday, a troy ounce cost $944.10.

    International Markets

    US stocks fell for the third consecutive session yesterday after a distinguished banking analyst warned that the sector’s key ratios and statistics have yet to improve. Richard Bove of Rochdale securities described a bleak outlook for the banking industry, forecasting that baking stocks would soon pull back from earlier gains. The reduction in wholesale inventories was larger than expected which also prompted concerns over the health of the economy. The Dow Jones closed 1.03% under whilst the Nasdaq finished 1.13% lower.

    Japan’s benchmark index pulled back from 10-month highs reached recently. Much of the poor performance can be attributed to the surprisingly negative consumer and production data to come out of the US. Investors keenly await the outcome of the US Federal Reserve’s monetary policy decisions. Japanese traders followed the trend of booking profits from previous sessions and by this morning, the Nikkei average closed 1.42% lower.
    Shares in Hong Kong fell overnight as investors booked profits voluminously. A sharp sell-off after the Shanghai bourse and the dire news coming out of the US served to encourage profit-taking. The benchmark Hang Seng dropped 3.03%, its largest single-session decline in three months.

    Equities in London were weaker this morning as UK data releases this week are expected to dampen investor sentiment. The Bank of England’s quarterly inflation report is expected to downgrade forecasts for the performance of the UK economy whilst unemployment data is largely anticipated to reflect a sharp rise in the number of people out of work. Mining giant BHP Billiton also posted its first fall in earnings for seven years (a 30% decline in annual profits) but reassured investors that emerging market prospects were set to improve operations. By noon, the FTSE 100 was trading 0.08% in the red.

    Share Price News

    Mutual and Federal Insurance Company Ltd of the Insurance – Non Life sector managed to attract large volumes of trade this morning as investors retreated from resources and mining stocks. At midday a share traded for R17.70, reflecting a 2.91% gain. Anglogold Ashanti Ltd of the Gold Mining sector also fared well in the morning session. At midday, its shares cost R292.50 each marking a 0.86% improvement.

    Tongaat Hulett of the Food Processors sector was among the morning’s biggest losers. This decline comes on the back of a JSE announcement earlier in the day that Anglo American Plc would be selling its shares in Tongaat to institutional investors. By noon, its shares were trading for R92.00 each (a 8.28% loss). Metorex Ltd of the Metals and Minerals sector saw volumes of trade withdraw this morning. By midday, a share traded for R3.46, marking a 6.23% decline.

    Permalink2009-08-12, 12:45:24, by Grant Leyland Email , Leave a comment

    Valuations and economic data

    The combination of weaker actual earnings coming through from many companies and the rapid rise in equity prices over the last few months has seen the valuation of the JSE back to long term normal levels and above from a relatively cheap level in March.

    Over the longer term it stands to reason that the price of a company will follow company earnings. But we know that over shorter periods of time – sometimes up to even a few years at a time, valuations and company earnings can move in opposite directions, causing confusion to many investors.

    Understanding that valuations and a company’s return on equity are mean reverting, Graham Benjamin and David Dodd adjusted the well know price to equity valuation metric, by smoothing earnings over 10 years.

    The graph below is the smoothed price to earnings of the financial and industrial index. It’s evident that on this method, prices are back and indeed slightly higher than longer run averages

    Source : SIM

    The JSE

    From the trough at the beginning of March, the JSE All Share index is up 38% to its current level.

    The combination of higher prices and weaker reported earnings has escalated up the average price of shares from a PE of around 8 times to its current 13 times.

    Clearly at this level, equities are now not as cheap as they were a few months back.

    Economic data

    At the same time economic data remains weak.

    Car sales in July were weaker than generally expected, declining 27,4% year on year from an annual decline of 23,8% in June.

    Statistics SA released Manufacturing data today. The numbers were not good and there was a weakening of the rand. The annual rate of production volume for June contracted at 17%, while sales value was down 19,2%. 8 out of 10 manufacturing divisions posted negative quarterly output growth.

    These numbers are slightly better than the sharp contraction recorded in April, but still reflecting very difficult trading conditions.


    Source : Nedcor

    The Monetary Policy Committee of the Reserve Bank sits for 2 days from tomorrow to discuss the suitable level of the reference interest rates – the repo rate. The last rate cut was by 1% down to 7,5%. Now the consensus is that rates will stay at this level, but there is an outside possibility that the Reserve Bank cuts by a further 0,5%.

    So while we have weak economic data across various areas, valuations of general equities are now back to longer run levels. That is not to say that valuations can’t get more expensive in the shorter term – this is largely dependent on investor psychology.

    The weaker manufacturing data however did seem to scare foreigners – the rand fell to R8,16 / dollar.

    We believe that your total asset allocation should be monitored on a monthly basis. If you are not receiving a composite monthly report from your investment advisor detailing your exact asset allocation relative to an agreed strategy, then please don't hesitate to give us a call to discuss.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-11, 17:06:36, by ian Email , Leave a comment

    Stronger rand helps to mitigate profit-taking this morning.

    Local Markets

    Local equities weakened this morning as traders began to book profits from earlier sessions. The poor performance overnight on Wall St gave some direction as investor sentiment returned towards caution. The stronger rand is cushioning the losses though as resource stocks and miners declined this morning. By midday, the JSE All Share was trading 0.75% down.

    The rand firmed against the dollar during the morning as investors await the Reserve Bank interest rate decision due out later this week. There is a valid expectation that the MPC will leave the repo rate at 7.5% amid concerns over inflation and double-difit wage increase demands. By midday, a dollar traded for R8.11.

    The gold price gained slightly this morning, remaining near its 10-week closing low the previous day after the dollar made broad advancements. Traders keenly await the US Federal Reserve’s meeting outcomes on Wednesday. The Fed is expected to give the market suggestions over its assessment of the US economy. Gold, as a traditional safe-haven asset, could stand to benefit from these outcomes. At midday, the gold price had reached $945.55 per troy ounce.

    International Markets

    Equities in the US fell overnight as investors booked profits cautiously ahead of a number of economic indicators due out this week. Consumer spending data from the government as well as the Fed’s statement on interest rates are among the more meaningful data. The rising dollar also served to depress investors’ appetite for commodities priced in dollars. The Dow closed 0.34% under whilst the Nasdaq finished 0.4% in the red.

    Japan’s benchmark Nikkei index gained for the 4th consecutive session overnight. However, the gains were smaller than modest as traders focus on the impending financial data to come out of the US later this week. Investors chose to focus on company-specific news instead of broader market news from the Bank of Japan and other such sources.

    Construction stocks enjoyed improvements following an earthquake and storm that triggered mudslides. The Nikkei finished 0.58% up.

    Shares in Hong Kong rose overnight to finish near a 12 month closing high. Key data releases from the Chinese government were more or less in line with expectations, an encouraging sign of a possible return to stability. The Hang Seng closed 0.69% in the green this morning.

    Equities in London remained stable this morning, aided by news of an impending take-over bid in the financial sector. Friends provident received an improved take-over offer from Resolution to the tune of £1.86 billion. These advancements in the market come on the back of losses due to profit-taking the session before. The stability of the UK market is particularly encouraging given the downturn in US markets overnight. The FTSE 100 was trading 0.14% up by midday.

    Share Price News

    Arb Holdings Ltd, of the Electrical Equipment sector, fared well this morning. It managed to gain 5.26%to trade for R2.00 per share at noon. Kumba Iron Ore of the Metals and Minerals sector also performed positively despite pressure on resource stocks. By midday, a share cost R247.10 (a 5.01% improvement).

    Mondi Ltd, of the Paper sector, lost ground this morning after an announcement of a major change to shareholding. At noon, a share cost R37.01, reflecting a 6.30% decline. Also among the losers was Mobile Industries Ord of the Shipping and Ports sector. By midday, a share traded for R1.57, marking a 5.42% decline.

    Permalink2009-08-11, 13:40:55, by Grant Leyland Email , Leave a comment

    Asset class returns

    There is no doubt that the single biggest apprehension most investors have in respect of investing into shares is the volatility that goes with this exercise. When compared to the smooth linear returns generated by cash, equities can appear exceptionally risky.

    Yes the substantially volatile movement in equity can be equated to risk, where an investor becomes a forced seller and is obliged to sell at a price lower than purchase price.

    But in itself the volatile price movement is not risk. A better definition of risk for an investment is longer term underperformance against inflation.

    The graph below reflects the 3 year performance of listed property, equities, bonds and cash. Until mid 2008 both property and equities were comfortably outperforming a cash investment.

    But equity prices fell further and for the full 3 years, an investment in either local equities or bonds would have slightly underperformed cash, with far higher volatility.

    source : Investec

    Because there is no volatility in a cash investment, there is a misconception that shorter term risk free also translates into longer term risk free. I.e. cash with no volatility can and has outperformed the more volatile equities - therefore it can continue to do so over the longer period of time.

    This is not true because ultimately an equity investor will demand a higher return than cash because of the additional risk he is taking with capital. He may not achieve this over any shorter period of time, but given a long enough time horizon, he will almost certainly be rewarded with a higher return. When compounded over many years, the widening gap because substantial.

    This is why for any investor with a long time horizon, we always say that there is greater risk in not taking the shorter term risk.

    Over a longer period of time – the last 5 years – cash and bonds have given a cumulative 55%, but equities 171% and listed property 228%. This was during a period of strong out and under performance, but is more indicative of the type of additional returns a long term investor will be hoping to achieve by subjecting their capital to greater volatility.

    source : Investec

    If you would like to consult Seed Investments on your investment and retirement planning, please don’t hesitate to contact us for an initial confidential discussion.

    Have a wonderful long weekend. Go bokke

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-07, 17:04:41, by ian Email , Leave a comment

    Global markets cautious ahead of key US jobs data

    Local markets

    By midday, the JSE All Share had slid 1.70%, following US markets as Wall Street closed lower on Thursday ahead of non-farm payroll statistics, due later today.

    The rand was trading at R8.11, weakening further against the dollar as investors worry about the mineworkers’ proposed strike at Eskom next week, which could interrupt electricity supply.

    Gold was selling at $958.70 an ounce at midday, losing 0.45% as investors were cautious about buying the precious metal as a safe-haven asset when US jobs data could show an improvement in the economic situation.

    International markets

    The Dow Jones fell 0.27% and the Nasdaq lost 1% yesterday on concern about the US employment report due later today, and as investors booked profits after the recent rally.

    The Nikkei index gained 0.23% this morning as several companies published better-than-expected earnings reports and investors bought up their stocks.

    Chinese and Hong Kong stocks continue to be rattled by monetary policy worries that could hamper lending. The Shanghai index tumbled 2.85% and the Hang Seng lost 2.51%.

    The FTSE 100 had slipped 0.95% by noon Johannesburg time, weighed down by losses in banks after Royal Bank of Scotland published weak 6-months results. Trade remains cautious before the release of US employment data.

    Share price news

    Delta EMD Limited in the electrical equipment sector rose to R9.95 a share at midday after three deals, a gain of 10.56%. The company released unaudited results this morning that announced a substantial improvement in earnings for the first half of the year. Also amongst the top movers up, DAWN Limited in the building and construction materials sector rose 8.73% to trade at R7.60 a share.

    Farming and fishing investment company Afrocentric Investment Corporation fell to R3.01 a share, a loss of 19.73% by midday. Specialty chemicals company Freeworld Coatings Limited fell 5.02% after 59 deals to R8.70 a share.

    Permalink2009-08-07, 12:18:35, by Natalie Email , Leave a comment

    Update from African Bank

    African Bank or Abil is a R24 billion market capitalised company. It operates in the lower to middle class market providing unsecured loans. It sources its financing from the wholesale market and recently raised a further R520 million fixed rate capital note at 6,25% above the government R203 bond and another R480 million floating rate unsecured note at 6,3% above Jibar.

    This is fairly expensive funding. Speaking to a few fixed income managers last week they were excited about having picked up some of this tranche of paper at these attractive yields above government bonds.

    Because of the nature of its business – i.e. lending to the lower to middle class and furniture sales via their Ellerine business, they have direct insight into the economic strength of the consumer.

    Today they released a third quarter trading update to June. They started by saying that there is lower economic activity, rising unemployment, and a further deterioration in consumer sentiment, with little respite from lower interest rates and lower inflation numbers.

    Because of this the company has tightened its lending criteria. However its gross advances – i.e. loans mad to customers, was upped by 5% or 31% year on year to R19,5 billion.

    However quarter advances have slowed and at the current annualised rate, advances have slowed to 4% and for the full year are likely to be similar for that of 2008.

    The chart below indicates the monthly growth in gross advances

    Source: Abil

    Given the weaker economy, the company saw a slight deterioration in business written in September to December 2008. In this environment it is concentrating on operating expenses.

    Its other business, acquired a few years back is furniture retailer, Ellerines. Here sales were down 14% to R935m for the quarter. In this business gross loan advances declined by 2% to R5,2 billion. They do believe that the tighter credit criteria and emphasis on collections has improved this debtor's book.

    The share price fell back to below R30, down 3,1%. It has historically traded at a high yield. The market may still be nervous of Abil’s ability to extract benefits from the Ellerines purchase.

    By way of contrast, Nedbank gained 2,5% to R109,61. It released interim results yesterday, which were poor, but held out some promise of the future. Diluted headline earnings per share was down 34% to 474c. The result was only a slight increase in net asset value and a very poor return on equity

    Total advances were down 1% from December, coming in at R432 billion.

    Bank shares have rallied strongly from their lows. Abil fell sharply to below R20, while Nedbank fell below R70. Some value investors have been lightening their exposure.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-06, 17:28:16, by ian Email , Leave a comment

    JSE takes direction from stronger Asian markets

    Local markets

    The JSE All Share had risen 0.18% by midday as gains in the oil and gas sector boosted the local bourse upwards. An absence of local data is likely to mean the All Share will take direction from international markets.

    The rand was trading at R8.01 to the US dollar at 12:00, breaking through the R8 mark predicted by analysts.

    Oil was selling at $74.75 a barrel, continuing its rally by rising 1.01%. Crude’s gains are currently motivated by a declining dollar.

    International markets

    On US markets, the Dow Jones lost 0.42% while the Nasdaq fell 0.91% yesterday after poor data from the services sector and private payrolls moderated hopes for economic recovery.

    In Japan, the Nikkei average closed 1.32% higher after gains in automakers and commodity-related companies came after rumours of an extension for the US auto sales rebate, and rising copper prices.

    In Hong Kong, the Hang Seng climbed 1.97% to reach its highest close in eleven months. Losses earlier in the day were offset by strong gains in China Mobile after rumours that it plans to list on the Shanghai index.

    In Britain, the FTSE 100 had lifted by 0.77% as financial and banking stocks led the movement upwards after positive corporate results, and ahead of news from the Bank of England.

    Share price news

    Merafe Resources Limited in the metals and minerals sector gained 7.14% after a flurry of activity this morning, as 579 deals boosted the share price to R1.50 at midday. Anglo American Platinum Corporation Limited rose 7.84% after two deals to trade at R110 a share.

    In the education and training sector, Adcorp Holdings Limited fell 2.63% after 37 deals pressured the share price down to R24.10 by noon. Assore Limited, also in the metals and minerals sector, lost 4.50% to trade at R506.20 a share after two deals.

    Permalink2009-08-06, 12:12:14, by Natalie Email , Leave a comment

    Some Interim Results

    Ian mentioned in yesterday’s daily equity report that portfolio managers have been moving to companies that have been able to maintain their earnings and that many companies’ earnings will be coming under pressure in the coming months. Today we’ll take a closer look at some companies that released their interim results.

    Mondi
    Mondi, as most investors know, is an integrated paper and packaging company with key operations in Western and Eastern Europe, Russia, and South Africa. This industry has been struggling as excess capacity is a large problem. As can be expected from a company operating in such a troubled industry, in a tough economic climate, earnings have come under pressure.

    The company reported a loss of 7.1 euro cents per share for the 6 months to June, down from a profit of 17.1 euro cents per share in the corresponding period last year. While profits have been put under pressure the company has been able to take some positives. Cash flow from operations is up 26% as costs have been cut. Some EUR109m in costs have been cut year to date, with the target of EUR180m being cut by year end. Debt has also been kept under control (in a time when competitor Sappi made a rights issue to raise capital).

    Essentially Mondi is putting all its efforts into consolidating the company to ensure that it will be able to take advantage when markets and economies turn.

    Nedbank
    Nedbank is in an industry that has been hit hard by the global recession. Bankers have generally felt the brunt as capital has dried up and clients have started to default more heavily on their debt. As a result of the downturn, Nedbank released results with earnings down over 30%, an RoE attributable to shareholders down to 11.1% from 18.7% previously, and a profit from operations down nearly 30%. Despite the lowering of the firm’s profitability it was still able to produce basic earnings per share of R6.19 and improve its Tier 1 capital to 10% from 8.9%. Tier 1 capital is important for a bank’s ability to raise capital, and an improving level has resulted in better capital adequacy for the company.

    Old Mutual
    Old Mutual is a company that was included in many portfolios not because of its earnings resilience, but more as a result of its share price falling to such an extent that it was indicating that the company was nearly going to cease to be a going concern.

    Basic earnings per share for the company has fallen from 11.2 pence to -1.8 pence compared to the corresponding 6 months in 2008, but the embedded value has increased by 2.49% to 143.8 pence from 140.3 pence. This now places the company’s share price at a 34% discount to embedded value. Embedded value is used as a type of NAV valuation for insurance companies.

    Below is a chart of the respective share price performance for the year to date. Dividends have been excluded (Old Mutual didn’t pay out a dividend in this period.

    Old Mutual’s performance has clearly been the best over this short period, despite concerns at one stage that it would go under. This shows that there is often a disconnect between company health and share price performance. Astute managers will be able to spot this disconnect and take advantage by buying shares that have performed poorly relative to the company’s health, and sell those that have raced ahead of their fundamentals.

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-05, 18:03:23, by Mike Email , Leave a comment

    JSE takes direction from positive US markets

    Local markets

    The JSE All Share had risen 0.7% by 12:00 after gains across the board with the exception of the gold mining sector. Companies in the oil and gas sector and basic materials shares led the movement upwards.

    A US dollar cost R7.90 at noon, as the rand lost ground against the American currency. Analysts predict little other movement today given the lack of event risk and mixed economic data from overseas.

    Oil had lifted by 0.95% to sell at $73.69 a barrel at midday as US inventories were lower than expected and the commodity recommenced last week’s rally.

    International markets

    The Dow Jones closed 0.36% higher while the Nasdaq inched up another 0.13% to reach its highest level since October last year. Despite fears of increasing unemployment, US consumer spending rose in June and economic data seems to confirm a slow recovery.

    The Nikkei fell 1.18% this morning after Toyota reported its third quarterly loss in a row and investors booked profits after the Japanese index’s 10 month high yesterday.

    The Hang Seng lost 1.45% and the Shanghai index slid 1.24% after a report that the China Banking Regulatory Commission may make informal requests to banks to raise capital adequacy ratios, thus tightening monetary policy in stages while it continues to appear loose. Investors worry that it will be difficult to select profitable shares due to the lack of transparency and uncertainty.

    The FTSE 100 had edged up 0.21% as banking shares gained despite poor results from Lloyds Banking Group, overcoming losses in energy and mining shares.

    Share price news

    TWP Engineering consultants to the mining and minerals industries, TWP Holdings Limited rose 11.11% to trade at R6 a share at 12:00 after two deals. Cenmag Holdings Limited, whose subsidiaries supply electrical equipment gained 10% to cost investors R2.75 a share after one deal.

    Investment company Lonrho Africa PLC fell to R2 after one deal sent the price tumbling by 19.68%. Shipping and ports company Mobile Industries slid 6.25% to trade at R1.50 a share at midday after one deal.

    Permalink2009-08-05, 12:41:03, by Natalie Email , Leave a comment

    Afrox

    In the last 6 months plus there appears to have been some move by portfolio managers towards companies that have more stable earnings. I mentioned yesterday about the real possibility that earnings will continue to be under some pressure off the very high base. Naturally those companies with more stable earnings will prove more popular in such a cycle.

    One company that saw its earnings fall sharply in the second half of 2008 and now again is Afrox. Today it announced a profit warning ahead of its results this week.

    The R6,5 billion company Afrox – African Oxygen was founded in 1927 and listed in 1963. It is a leader in gases and welding products for industrial use and is therefore closely linked with the South African economy.

    In May the company announced operational and structural changes to deliver R200m in cost savings by the end of 2009. This is to be achieved through a reduction in sub profitable filling sites, closure of certain branches and a cut back of staff numbers by 15% by the third quarter.

    2008’s net profit came in at R412m or 133,7c. This was down 11% from the December 2007 year, with the big decline experienced in the second half of 2008.

    EPS for the first half of 2008 came in at 89,8c and the second half at 43,9c.

    The very poor second half of 2008 has perpetuated into 2009 and today the company announced that EPS for the first half to June will be down some 50%-60%. I.e. coming in at around 36c - 45c.

    In May, the MD, Tjaart Kruger said "Volumes, sales, pricing, cash-flow, manpower, production costs, are all under market-reflected pressure and we don’t expect any significant reversal in the short term. Customer cutbacks in capex are evident which will undoubtedly affect expansion opportunities in tonnage and we see spare capacity for the foreseeable future."

    On a quarter on quarter basis the numbers were looking less attractive and despite the cost cutting, there does not yet appear to be a reprieve.

    Assuming that there is a 15% pickup on the 2008 second half earnings, then EPS for the full year 2009 should come in at 91c.

    • First half – estimate 40 cents
    • Second half 43,9c plus 15% = 51c

    This is potentially a drop of 32% from the 133,7c of 2008. In May the broker consensus forecast was running at 167c for the 2009 year and 204c for 2010. Unless the second half of 2009 to December reflects a massive jump up – i.e. triple that of 2008 – this is not going to be achieved.

    The weaker forecast earning therefore pushes up the forecast PE. The share currently trades on an historical PE of 14,5 times, but assuming 91c for the full year – the forward PE jumps to 21 times.

    Much of this was and has been factored into the price because it hardly moved today, closing down just 10c to 1940c.

    This is still down some 44% from its peak around R35 and in the more optimistic environment investors are trying to look through the current earnings cycle.

    It will be interesting to see how the forecast numbers are updated.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-04, 17:44:00, by ian Email , Leave a comment

    Losses in resources and gold miners weigh on JSE

    Local markets

    The JSE All Share had fallen 0.55% by midday, opening lower after investors booked profits and weighed down by losses in the basic materials and gold mining sectors.

    The rand was trading at R7.81 to the US dollar at 12:00, weakening slightly but remaining within its recent range.

    Gold was selling at $954.15 an ounce, falling by 0.19% after reaching its highest level is seven weeks yesterday. Increasing risk appetite amongst investors led gains away from the precious metal.

    International markets

    Positive news from the manufacturing sector in the US boosted hopes of an economy recovery, and American equity markets rose accordingly. The Dow Jones finished 1.25% higher, while the Nasdaq closed 1.52% up yesterday.

    Japan’s Nikkei average edged up 0.22% to reach its highest close in ten months this morning, as gains in exporter stocks came after positive manufacturing reports from the US which buoyed investor sentiment.

    The Hang Seng lost 0.05% this morning, putting an end to a three-day rally after losses in mainland banking shares outweighed gains in HSBC. Rumours of tightening monetary controls in China still haunt investors on the Hong Kong index, though Beijing has denied such a move.

    Britain’s FTSE 100 had fallen 0.68% after reaching its highest level for the year yesterday, after lower oil prices weighed on energy shares.

    Share price news

    Lonrho Africa PLC, a pan-African investment company, experienced a 100% increase in share price after three deals boosted the shares to R2.50 at midday. Also gaining was Alliance Mining Corporation Limited on the ALTX, who shares were trading at R3.49, up 7.38% after 24 deals this morning.

    Shares in Great Basin Gold fell 10.26% to sell at R10.50 a share at 12:00. Oil company Oando PLC lost 6.42% in share price as shares tumbled to R5.10 after one deal.

    Permalink2009-08-04, 12:14:25, by Natalie Email , Leave a comment

    Long run earnings

    I spent last week listening to the views of a number of local fund managers. While generally upbeat about prospects given the improved valuations and upward trend, there is this nagging concern that company earnings are still coming off a high base and weaker earnings will prove to be somewhat of a headwind.

    The assumption here is that company earnings and margins are mean reverting. i.e. strong periods of growth are followed by periods of weakness and vice versa. Naturally this will vary from company to company.

    One graphic penned again and again was the US capacity utilisation. This is the actual productive capacity of US industries relative to the potential output at full production. Given the very rapid slowdown in demand, excess capacity has become available. Until demand increases again, company profits and margins face some strong headwinds, especially in the developed world.


    Source: SIM

    The graph below is that of real earnings growth of the JSE from 1960. While the longer term trend has been up, it has gone through long downward and sideways periods.

    Source : Inet and SIM

    While on a case by case basis, we know that the weaker expected earnings has been already reflected in the share prices, this may not necessarily be true across the whole market.

    History tends to prove that after a strong upwards cycle, there is a period of consolidation.

    In the short run however prices are less interested in underlying fundamentals and have been driven up by demand off a low base in March. According to a Merrill Lynch portfolio manager survey a near record 54% of global managers are overweight emerging markets, higher than at any time during the 2003 – 2007 bull market.

    Citibank indicates that some R46 billion has been invested into the JSE in 2009. This has been a huge driver of both the rand and the equity prices.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2009-08-03, 17:20:17, by ian Email , Leave a comment

    Positive sentiment vies with caution on global markets

    Local markets

    The basic materials and oil & gas sectors were strong gainers this morning, boosting the JSE All Share by 1.56% at midday on Monday. Encouraging the movement upwards were stronger metals and commodity prices.

    The rand was trading at R7.74 to the US dollar at noon, gaining as the local currency continued to enjoy safe haven buying after Friday’s mixed economic news from the US.

    Oil rose 4.64% to cost $72.20 a barrel, continuing Friday’s gains after positive Chinese economic data coupled with strong closes on US and certain Asian markets suggested the beginning of a global economic recovery.

    International markets

    On Friday, the Dow Jones edged up 0.19% but the Nasdaq lost 0.29% after mixed data confused investors. US government data reported a reduction in consumer spending, yet commodity prices rose after the GDP data was released.

    The Japanese Nikkei inched down 0.04% this morning despite reaching its highest level in ten months. Investors booked profits, offsetting gains in automakers and tyre manufacturers.

    The Hang Seng rose 1.14% to reach the Hong Kong index’s highest close in eleven months, after solid manufacturing statistics from China signalled economic recovery for the mainland.

    The British FTSE 100 had lifted 1.55% by midday after banking, mining and oil shares rose after positive corporate results from HSBC and Barclays as well as higher metal and commodity prices.

    Share price news

    At midday, the top moving share belonged to Central Rand Gold Limited, which rose 11.36% to sell at R2.45 a share after three deals. Palabora Mining Company Limited in the non-ferrous metals sector rose 5.56% to trade at R76 a share after four deals.

    Investment bank Brait SA lost 9.68% by midday after five deals to sell at R16.71 a share. Meanwhile electrical equipment company South Ocean Holdings Limited fell to R1.25 a share after three deals pressured the share price down by 7.41%.

    Permalink2009-08-03, 12:19:27, by Natalie Email , Leave a comment