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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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    Rates adjustment for 2012

    Dear Client

    Every year, the JSE reviews their pricing and as of 1 January 2012, they will be instituting an increase. Due to these and other rising costs, Sharenet, as from 1 January 2012 will be initiating an increase of 9% across its products and services (excluding PowerStocks subscriptions which are increasing to R454 per month).

    At Sharenet, we continually strive to maintain excellence in our service and to enhance our product offerings, adding more data and features where we can. 2011 was particularly exciting as we launched several free smartphone and tablet applications as well as ran a successful national seminar calendar, both of which have been warmly received. We are already developing several other exciting initiates which will be unveiled over the course of 2012.

    We welcome any and all suggestions which could help us improve our service to our clients and encourage you to send these through to support@sharenet.co.za

    Thank you for your continued support and business.

    The Sharenet team

    Permalink2011-10-31, 17:02:41, by Natalie Email , Leave a comment

    Sector Diversification

    All of the companies on the JSE are grouped into industry sectors based on the business sector that they fall into, e.g. Standard Bank falls into Financials and MTN into Telecommunications. As much as it’s unwise to invest all your money in one share it’s also unwise to invest all your money into one sector. The average investor might believe that his portfolio is diversified if he is invested into different companies, but if he is invested into only one sector he will face similar risks as if he’s invested into one share (although slightly less amplified).

    Companies in the same sector or industry are typically driven by the same economic factors and experience similar business cycles. An example of this is when we experience periods with high interest rates, banks come under pressure due to households borrowing less money, and more people default on their current loans. In the same period food retailers with low profit margins generate high turnover as a result of higher inflation that typically leads to an increase in revenue.

    Below is a graph of the rolling 12 month returns of the 9 major sectors on the JSE.

    It is logical (and evident from the chart above) that there are periods when certain sectors outperform the others. For an example Technology, from mid 2007 to the end of 2008, underperformed most sectors, but for the most of 2010 it outperformed the other sectors.

    The graph below shows the ranking of the different sectors compared against each other. They are ranked according to their 12 month rolling return. The sectors with the highest ranking (i.e. best performance) are on top and the worst performers are at the bottom.

    From this chart you can see that there are certain sectors that are more cyclical than others. Consumer Goods is an example of a sector that isn’t very cyclical, which would be expected as it is comprised of shares like SABMiller, Richemont, Tiger Brands, and Clover.

    For this reason it is better to invest across all of the different sectors, although you can still manage your level of exposure to each of the different sectors. If you believe that one sector will outperform the other sectors you can increase your weighting to that specific sector to capture some of the expected excess return and vice versa.

    While this article has purely focused on share portfolios, for most investors a share portfolio will only form a portion of your total investable assets. A similar principle can be used for your investments into the other asset classes and for your other investments.

    If you have any questions or require any assistance with wealth or asset management please feel free to contact us on 021 9144 966 or info@seedinvestments.co.za

    We can also be reached through Facebook or Twitter (@Seed_Invest).

    Kind regards,

    Gerbrandt Kruger
    021 9144 966

    Permalink2011-10-27, 15:27:52, by Mike Email , Leave a comment

    Purchasing Power Parity

    Purchasing Power Parity (PPP) is an economic and investment concept explaining how prices of goods and services increase at the same rate (all else equal) around the world. Over the long run, differences in inflation rates should result in changes in exchange rates, with those countries experiencing high inflation seeing their currencies depreciate and vice versa.

    The table below shows how this concept works in reality (using an extreme example to illustrate the theory):

    In the above example we can see that at the start of the period identical rugby balls cost the same amount (in common currency) in South Africa (SA) and New Zealand (NZ). Over the period SA has a higher inflation rate and at the end of the period in order for the rugby balls to still cost the same (in common currency) the rand would need to have weakened to R9.09/NZ$.

    In a world of zero frictional costs (i.e. transport, taxes, etc) if the actual exchange rate is R4.55/NZ$ (too strong) then South Africans’ would be able to exchange R 1 000 for NZ$ 220 (R 1 000 / R4.55/NZ$) and buy 2 rugby balls in NZ. They would then be able to sell these balls in SA for R 2 000 and make a riskless profit of 100% (R 1 000). Conversely if the rand had weakened to R20/NZ$ then rugby balls could be bought in SA and sold in NZ at a healthy profit. This process is known as arbitrage and will happen until either the price of rugby balls changes to neutralise the difference (change in inflation rate) or the exchange rate moves to neutralise the difference.

    In this frictionless world exchange rates would always trade at fair value. In the real world there are frictional costs which therefore result in currencies spending periods where they are either over or undervalued relative to other currencies. PPP therefore doesn’t hold over the short term, but will generally provide a good estimate of fair value over the longer term.

    As a currency moves further and further away from its fair value, the likelihood being able to arbitrage (make a riskless profit) goods between the two countries increases. At some point the currency will move back to fair value as the flow of goods and cash equalises the exchange rate.

    In reality this plays out in the import and export sectors. Importers always want a strong currency so that imported goods cost less, while exporters prefer a weaker currency which lowers the prices of their goods in foreign currencies and therefore boosts demand.

    The chart below shows how the rand has traded against the US$ over the past 26 years and compares it to the fair value exchange rate implied by PPP (i.e. the difference in inflation rates between the two countries). Notice that there are extended periods where the rand doesn’t trade at fair value, but over this long period we can see that the PPP fair value rate does provide a good anchor of where the actual exchange rate should be. The recent rand weakness has seen it move closer to fair value, but will still think that it is overvalued.

    This method of valuing currencies is a blunt method and should therefore not be used to predict short term movements, but it does give an indication of which way your currency should move over the longer term.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2011-10-24, 14:10:17, by Mike Email , Leave a comment

    Some Thoughts for Retirement

    Coronation recently published their Corolab booklet with quite a few interesting articles that are summarized here.

    1. Plan for higher inflation:
    Over the last 10 years South Africa mostly experienced low inflation. However, we often feel that our personal inflation rates are a lot higher than the published rate (currently 5.3%). The reason for this is because the 5.3% is the average rate across South Africans’ basket of goods, but each individual’s basket is made up differently. E.g. Recreational equipment had a negative inflation rate of 5% for the past 12 months while electricity stands at 18% and private transport (including petrol) at 17%. Inflation of individual sectors ranges between -5% and +18%, which means your own inflation rate is as personal as your own investment strategy.

    It is therefore important to look at your inflation rate and how your investment strategy should be developed to incorporate that.

    2. The returns from the last decade versus the longer term history:

    The graph below shows the annualised real returns of the last decade relative to long term average returns (last 111 years of data).

    Clearly, local assets have done extremely well compared to the longer term averages while offshore equities in rand terms have been dismal. However, if you purely use the returns of the last decade as a proxy of what might happen in the future then you could well be disappointed.

    Coronation set out their 10 year forecast of the various asset classes. Naturally these returns don’t materialize in linear format but could be lumpy. From the table below it is clear that the returns from local asset classes could be muted despite a bleaker inflation outlook. It is also evident that history might not repeat itself, with future returns most likely coming from offshore assets.

    Coronation makes the point that at a 6% inflation rate you probably require nearly 6 times the level of income at the end of say 25 years to be able to buy the same basket of goods.

    This makes it important to invest in growth assets that are able to grow faster than inflation over a longer period.

    3. Life expectancy:

    Finally, the change in life expectancy because of better healthcare technology could mean that the average person is going to live longer. The table below illustrates the life expectancy of people at certain ages. For example, a female that is currently 65 years old is expected to live a further 20 years (age 85)

    Therefore, your personal inflation rate, changes in future returns and life expectancy all influence the investment strategy you need to follow.

    Kind regards,

    Vincent Heys
    021 9144 966

    Permalink2011-10-18, 17:52:56, by Mike Email , Leave a comment

    VIX: Uncertainty may mean Opportunity

    Local and international markets have been incredibly volatile in recent times, with news of the US credit rating downgrade and the threatening European sovereign debt crisis giving investors much cause for concern. Many investors are now tempted to sell off risky assets, but this may be to their detriment as they have already borne some losses and will probably be selling lower than they should. Many analysts regard these periods of increased volatility as ideal opportunities to buy, where informed and less risk-averse investors can profit at the expense of those who are overcome by emotion and uncertainty.

    The Chicago Board Options Exchange (CBOE) Volatility Index (VIX*) is a measure widely used to determine expected future short term volatility in the market, and is also referred to as the “investor fear gauge”.

    VIX values below 20 correspond to more complacent times in the markets, while values above 30 indicate large amounts of volatility as a result of market fear and uncertainty. The VIX has closed above 40 only 166 times since its inception in Jan 1990, indicating that these levels are the result of extreme levels of emotion and insecurity in markets.

    Source: Yahoo Finance

    The VIX started climbing towards the end of July this year as uncertainty in global markets mounted, and breached the 40 level in the first week of August. Between 4 and 8 August the index recorded its biggest three-day increase ever, and closed on a 29-month high of 48. However, this is still way below the all time high of 80.86 seen during the height of the global financial crisis in 2008. At the moment the index is around the 40 mark, but speculation suggests that the previous high in August might be breached depending on the result of the European sovereign debt crisis.

    Analysts usually regard VIX levels above 40 as a good entry point into markets. Historic data indicates that on average US equities have given returns of 3.2% over the 3 months following a VIX close above 40. However, this approach cannot be followed blindly as events preceding the rise in the VIX must also be considered before any investment decision is made. The average figure of 3.2% disguises the massive losses that have resulted in some cases. In 2008, the S&P 500 fell by 34% over 5 months after the VIX rose above 40 on the 2nd of October. Conversely, the S&P rose by 22% over 3 months when the VIX reached 44.28 in August 1998. These contradictory results are a result of the preceding market movements and other macroeconomic factors, and make it impossible to discern a definite buy signal based on the VIX alone.

    It is clear that markets often behave irrationally, and that the VIX cannot be used in isolation to predict future market movements. However it does tell us is that risk-taking investors may be able to benefit from the irrational and fearful behaviour of others in these uncertain times.

    Kind regards,

    Cor van Deventer
    021 9144 966

    * The VIX is constructed by analysing the prices of a wide range of both put and call options on the S&P 500 index, the leading indicator of U.S. equities. The option prices are then used to calculate the implied volatility of the index underlying the options, resulting in a measure of the market’s expectation of 30-day volatility.

    Permalink2011-10-10, 17:24:26, by Mike Email , Leave a comment