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    August. What a month!

    The end of winter and the market looks like its getting ready for spring, bouncing up 750 points to end 28660. OK the weather in Cape Town is decidedly still winter, but even this will turn will in time, just as the equity market prices have.

    A few days on the equity market can make a big difference and it shows that any investor cannot be too concerned with intra week, intra month and even intra quarter moves. Market prices are extremely volatile, but in and by themselves they do not mean much.

    A 5% move up or down on Anglos or a 6% move in Angloplat like we had today infers very little, because this is simply a normal ebb and flow of prices. At times the volatility is lower, and at times much higher, but higher volatility does not mean higher risk.

    At one stage the local equity index was down 9% on the month. But from its lows mid month, it steadily gained, actually ending up 98 points for the month. Taking some dividends into account it will be up around 0,7% for the month!

    An amazing turnaround. As my colleague Mike noted, when looking back at monthly data in a 6 months and a years time, the volatility will be totally forgotten about. It does not even feature in the month on month data points.

    This gets to the heart of the investment horizon issue. Too short a horizon, and one gets whipsawed with the volatility of the daily movements. Stand back a month and market prices are far less volatile. This reduces even further on a quarterly and then annual basis.

    My colleagues and I spent the afternoon discussing and debating asset allocation and whether we should be increasing the allocation to offshore. The stronger rand is one factor, now back to R7,12 to the dollar and R9,71/euro, but this cannot be the dominant determinant.

    A big factor in the decision making process is the relative valuations of global equities versus those in emerging markets including naturally South Africa. There does appear to be a strong possibility for continued steady shift in favour of capitalism versus labour across the globe. Cheaper cost of production has and is likely to continue to favour company profits.

    Locally the valuations of the overall market does not appear on the expensive side, with the market on an overall average price to earnings ratio of 14,6 times historical or an earnings yield of 6,85%. The earnings yield is the reciprocal or the inverse of the price to earnings ratio.

    The idea is that the market’s expected long run real rate of return is equal to the current earnings yield. Remember the real return is that return after inflation and so the market is currently estimating a long run real rate of return at just under 7%. This is very close to its long run historical rate of return.

    Certain shares are trading at higher yields. Example Standard Bank is on an earnings yield of 8,65%. It gained 3,97% to 10449c

    Foschini trades on an earnings yield of 9,22%

    Telkom trades on an earnings yield of 9,44%

    As I have mentioned before there is some selected value on the local market. Earnings have however re-rated up very strongly and so many shares are trading at high prices to underlying book values when compared to a few years back.

    Higher earnings have the effect of making price to earnings and thus yields appear attractive. I have been saying for a long time now. It’s not all out bargain basement giveaway prices, but at the same time not high street prices.

    That’s all for now.

    I am welcoming in spring after a long and wet, but much needed, Cape Winter.

    Have a great weekend


    Ian de Lange

    Permalink2007-08-31, 21:11:50, by ian Email , Leave a comment

    A slightly different approach to equity values

    Just because share prices are more volatile today when compared to yesterday, does it make them more or less risky? As I mentioned yesterday, risk is not the same as volatility but investing into equities now “feels” more risky given the adverse news flow, and volatile prices.

    This is the view of Dave Fishwick, a director of tactical asset allocation at Prudential in London.

    Dave Fishwick, a director of tactical asset allocation at prudential I London has a premise that forecasting global economic news and prices in an attempt to out forecast a competitor and gain some advantage is futile. Sometimes it works, but unfortunately with very little consistency. All investors and market commentators love to forecast, but with very little real advantage.

    Even institutions with lots of manpower, tools and data etc at their disposal, have no real ability to forecast on a consistent basis.

    The next problem with forecasting economics is that even if one gets its right, prices of underlying assets don’t always move as expected. An example cited has been steadily declining global inflation, despite the record oil prices.

    On a top down method, a more efficient model is not to try and forecast economic factors, but to look at the current pricing of all assets relative to each other and relative to their long term trends.

    This should be done in real returns (i.e. stripping out inflation). A price gives some indication of risk perception and the required returns from that asset class.

    Think about it this way. Prices in SA as in most countries around the world have been rising firmly and steadily on the back of strong underlying fundamentals. 4 years ago there were fewer investors willing to invest into shares. Equities were perceived as risky and their values reflected this, i.e. anyone wanting to take on the risk was requiring a higher yield.

    Those investors that took on the risk have been rewarded. As the fundamentals improved, so the perceived riskiness of holding equities declined. Now we have a bit of shakeout in the US sub prime and the perceived riskiness of holding equities escalated up again.

    If you are an investor with R5m to invest now, what are your investment beliefs and where are these possibly based on false assumptions.

    Is it. I need to have a diversified asset allocation, but I can’t invest into risky local and global equities now, so will wait for the dust to settle down a bit.

    Or is it.

    I need to have a diversified asset allocation. Global asset prices have been volatile, but if I invest into these assets, is the price implying a yield which is relatively attractive. I.e. am I going to be adequately rewarded for taking on some risk? And if so, how generous is this risk premium compared to long term history. Let me look at the range of asset classes and determine risk premium.

    Often when it feels uncomfortable to invest (i.e. feels riskier) it not and vice versa, when risk “feels” low, then there is more risk.

    Today’s investors took local share prices up again, some like MTN to new highs. The rand was stronger, last trading at R7,13/dollar, and R14,37/pound.

    Europe markets closed up, but US is mixed at the moment.

    Kind regards

    Ian de Lange

    Permalink2007-08-30, 20:24:05, by ian Email , Leave a comment

    Why should you cut through the clutter?

    This information age is wonderful, but with so much confusing and even conflicting information, it does not surprise me that investors find themselves frozen like a deer in the spotlight.

    On Monday I spent some time listening to a range of local and some international asset managers. Not only on their views of local asset valuations, the US sub prime problem and the potential for ongoing spill over, but also to their views on portfolio construction, the importance or otherwise of benchmarks, and the inclusion or exclusion of certain shares.

    One thing is common to all - they each have their own views and approach.

    Some investors are very positive about earnings growth for local companies. Others are far less optimistic about growth continuing to come through.

    Some are more nervous about commodity prices holding up, while others are very positive about the longer term trend for commodities.

    Some managers place a large emphasis on constructing their portfolio relatively close to the benchmark index, while others place very little credence in the index when constructing.

    Some investors tend to place a big emphasis on an objective process for share selection, while others have far less of a defined process.

    One of the US managers was emphatic that the US sub prime problem will be a relative drop in the ocean compared to some of the bigger problems experienced in the past and the impact on asset values. Others believed that we are only at the start.

    While I can understand the reasoning put forward by each and that differing views make such an interesting market, it got me thinking how confusing this is for the investor looking for some guidance. The conflicts pop up on a daily basis, making it extremely difficult for investors to steer an optimal course of action.

    That got me to thinking about RISK again. It was also raised a few times in discussions, but it’s important to define it properly.

    While it is all too easy to get excited about the prospects on the investment side of the equation, or indeed bogged down by its complexity, ALL investors must define and then reduce RISK.

    A focus on risk is something that most investors don’t pay enough attention to. Yes equities are risky, if you define risk as volatility, but think about your biggest risk. Is it really a price zig zagging over a period of time?

    No, for most investors, the biggest risk is so called actuarial or longevity risk. This is the risk that your accumulated asset base at retirement will not be sufficient to meet your long term liability, i.e. your required income stream.

    Once you have this risk clearly defined, the investment decisions become a lot clearer. It’s important to calculate the risk in terms of probabilities. Instead of trying to spend all your time deciphering the market noise, spend some time over the next 6 months defining your specific and very real risk.

    This risk will not dissipate as prices move up 3% one day and down 10% in the next 2 weeks.

    Once you have put a number to your specific risk, then it will make your investment process so much easier; you will be able to cut through the noise, like a hot knife through butter.

    Have a great day


    Ian de Lange

    Permalink2007-08-29, 21:24:41, by ian Email , Leave a comment

    More on ETF

    Yesterday I discussed the new Satrix Dividend Plus ETF, which lists on the JSE as a traded instrument this Thursday. An ETF is an exchange traded fund. This is essentially a unitised portfolio operated on an objective investment methodology.

    Instead of active management, the inclusion or exclusion or certain shares is decided objectively.

    The benchmark of the fund is the FTSE/JSE Dividend Plus Index, which is a relatively new index.

    As with all indices there are some drawbacks. While this portfolio of 30 shares is ranked on a fundamental basis, the universe of available shares is not the total available shares on the JSE but only those already included in the top 40 index and the Mid cap index (excluding property companies). A universe in the region of 100 companies.

    This is about half the generally available investable universe of local shares. So while the index and fund is constructed on one fundamental variable, the universe is constructed on a market cap methodology.

    Over time this index and now the ETF should outperform the satrix top 40 index, given its different construction, but over long periods this may not be the case. The Satrix 40, with a strong bias to resources has and will run hard in a commodity boom, outperforming value.

    Over time I do believe that a fundamentally constructed portfolio will outperform a market cap weighted portfolio as the latter gives more credence to yesterday’s winners.

    ETF’s or tracker funds supposedly have a low cost structure. I don’t believe that this is necessarily the case in South Africa where there is little or no competition. In the case of this new fund, the manager fee is 0,5% per annum, calculated daily.

    This can be increased by providing 3 months notice. All other fees such as brokerage, custody charges, taxes etc will be for the fund’s account and therefore included in the pricing.

    Without a doubt, the introduction of this more innovative portfolio of shares increases the competition for active management, by raising the bar slightly. For multi managers it provides an additional tool for incorporation into client’s portfolios

    At least one fund manager thinks SA still cheap:

    Listened to the interview with Mark Mobius, fund manager Templeton Asset Management

    He was asked what is his favourite market at the moment, to which he replied, South Africa. He sees it as relatively cheap, having underperformed other emerging markets.

    More specifically, he likes the retailers, with good margins, high returns on equity. Also the strong consumer growth coming from the emerging population and also somewhat the influx of immigrants from North.

    He also likes of Anglo American.

    That’s all for now.


    Ian de Lange

    Permalink2007-08-28, 21:14:02, by ian Email , Leave a comment

    Satrix Dividend Plus

    This week sees the launch of a new satrix product, the Satrix dividend plus product. The index was started in August 2006 and the funds will IPO this week on the JSE and hence be available as an investment product.

    Most indices are constructed on a market cap weighted average basis. What does this mean?

    Well, the larger the size of a company as defined by its market capitalisation, the higher its weighting in the index.

    Normally this is fine, because the larger companies will typically have the larger market capitalisations. But sometimes this does not work out so well.

    For example, where 2 companies in the same sector are similar in size in terms of revenues, but the one is currently generating depressed earnings, because of some corporate issue, while the other is achieving higher than normal operating margins and so is producing record profits. For the time being the market may down weight the poor performer and up weight the star performer.

    Two similar sized companies will then have dissimilar weightings in the index, because of their respective market capitalisations. The index will reflect this and therefore tends to “buy” the more expensive company and “sell” the cheaper one.

    This is the opposite of what a value fund manager should do, and hence we are seeing the introduction of all forms of new indices, which try and find ways to avoid this problem.

    The Satrix dividend plus index looks at a different weighting of the same universe of shares. Instead of current market capitalisations, it looks at the shares forecasted dividend yield and gives higher weight to those shares with the higher forecasted yield.

    The forecasted yield is used as a proxy for value, and this the index and the new fund will look at giving higher weight to a strict value criteria, i.e. forecasted yield.

    Cash dividends are an objective measure of the company’s value and profitability and are subject to limited manipulation by accounting methods.

    The initial composition will have African bank with a 6,87% yield as the highest weighting at 7,25% of the portfolio

    Second biggest at 6,99% weighting is Northam Platinum with a forecast DY of 6,98% and so it goes.

    The last entry in the portfolio is PPC at 1,33% weight and a forecast DY of 4,69%

    In the next few days, I will provide more details on this new product.

    Kind regards

    Ian de Lange

    Permalink2007-08-27, 17:00:00, by ian Email , Leave a comment

    IT sector appears to have value

    Just as construction and some junior miners have been the favourite investments on the JSE over the recent past, so it was the same for IT shares in the run up to 1998. From peak prices and valuations, they plummeted and for many years underperformed the market and as a consequence were under owned.

    Many private and professional investors lost money in that IT darling, Didata. Then as one top local manager quipped – “no one loves to hate a share as much as one that has lost him money.”

    Didata came to represent all local IT shares, in which many investors had lost a lot of money – not temporarily but permanently.

    To be fair many of these companies have been steadily moving up over the last few years. But still there appears to be inherent value in this sector, in a market that has expensive sectors.

    Into the beginning of the century a large overinvestment of company spend on IT continued to put pressure on technology companies. Now anecdotal evidence suggests companies are increasing spend on IT.

    The local technology companies include the likes of:

    Didata, which trades on a high PE of 37 times, with a market cap of R12,4 billon. 2 years out this is expected to drop to 16,7 times - still on the relatively high side. Naturally should earnings come through stronger than anticipated, the price will continue appreciating,

    Datatec has a market cap of R7,3 billion and an historical PE of 15,5 times, dropping to 9,8 times 2 years out.

    Bytes trades on a PE of 14,2 times, dropping to 11,3 times 2 years out. It has a market cap of R3,1 billion

    Looking at the unit trust holdings of these companies, there is still no fund taking any big bet in these IT shares. Not a bad thing.

    BCX has a market cap of R1,7 billion and trades on a PE of 16,8 times with 2 year forward PE of 9,9 times.

    Some smaller successful companies such as Digicor (market cap of R1,6 billion) have performed very well over the last few years. Interim EPS up 41%.

    EOH, market cap of R674 has been a star performed. Its recent EPS was up 20%

    UCS (market cap of R1,3 billion). Last interims headline EPS up 77%

    Many of these companies, especially, Didata and Datatec operate on thin margins and any expansion here will have an immediate benefit to the bottom line. Didata reported its margin increasing by 0,6% to 3,1% at the interim stage.

    A possible sector to look into for longer term value investors.

    Have a great weekend


    Ian de Lange

    Permalink2007-08-24, 20:13:40, by ian Email , Leave a comment

    Some more on BHP Billiton

    BHP Billiton is a company that has been at the forefront of world demand for its products, namely commodities. Earnings for 2002 were around $3 billion. These have grown exponentially to $20 billion.

    Over this same period, the margin grew from 20% to a massive 48%.

    So where does this giant derive its earnings from.

    Biggest contributor is base metals at $6,9 billion up 28%

    Stainless Steel at $3,7 billion up 310%

    Petroleum at $3billion up 2%

    Iron Ore at $2,7 billion up 8%

    Aluminium at $1,8 billion up 56%

    Others include coal, diamonds, and manganese.

    Most of these products operate at high EBIT margins. Base metals the highest at over 60% margin, then petroleum at 60%, stainless steel around 55%, iron ore 50%. Energy coal has the lowest margins at just over 10%.

    Sales of products are across the world, with sales into China currently running at 20% and increasing.

    The company has stepped up its capex programme from $3 billion in 2002 to over $9 billion forecasted in 2008. Of this $7 billion is growth, $1,5 billion is sustaining and $1,2 billion is exploration.

    The company is big on new projects and has 33 projects either in execution or feasibility representing an expected capex of $20,9 billion.

    The company sees continuing strong growth in demand, saying that the rate of growth of the Chinese economy has shown no signs of abating with economic growth expected to be maintained or perhaps accelerate over the second half of 2007.

    They also say that discussions with their customers have indicated that they do not expect recent US and European credit market volatility to have any material impact on raw material demand.

    However they do make the very important note that over time they expect commodity prices to move towards long run marginal cost of supply. This is where some analysts are showing concern. Commodity prices have raced way ahead of the marginal cost of supply.

    Over time, prices will tend back to this cost of supply. In the interim because of supply constraints and very strong demand, prices are running far ahead and the upside for this company will be how long this can persist, before prices fall back on greater supply to the market. At that stage, BHP Billiton’s margins won’t be running at the 50% level.

    The business has some interesting names for some of its projects. This is typical in this industry. Names such as Genghis Khan (it acquired a 44% stake in this oil field this last year), and Olympic Dam.

    A question was asked of CEO designate, Marius Kloppers if they would be getting into platinum at any stage. His answer was that if it met their criteria, but with a caveat on safety.

    The price gained 0,5% to R198 on the JSE

    Kind regards

    Ian de Lange

    Permalink2007-08-23, 21:55:55, by ian Email , Leave a comment

    BHP Billiton is Bullish

    BHP Billiton is the world’s largest diversified resource company. It is listed in Australia, London and SA. It’s a phenomenal business with an historical SA connection. The last 5 – 6 years have favoured this global commodity producer, and according to the company the outlook looks very positive.

    I listened to current CEO, Chip Goodyear on Bloomberg at the results announcement. He and the others including incoming CEO, South African Marius Kloppers, came across extremely positively about the last year and the future of operations.

    This company exudes strong performance. They say that this comes from their defined strategy meeting opportunity.

    This global company has a strategy of concentrating on operating large, long life, low cost, expandable assets, diversified by geography and commodity. The priority is to reinvest cash into expanding the asset base.

    Billiton has been strong on selling down underperforming assets and concentrating on higher barrier to entry businesses.

    In the last 12 months to June, production targets were set by 17 assets.

    EBITDA 27% to $23 billion and underlying earnings before interest and tax at $20,1 billion up 31,4%. At this level the margin is running at 48,4% margin.

    The Return on capital employed came in at 38,4%, which is extremely solid.

    Attributable profit gained 34,7% to $13,7. This is up a massive 7 times just 5 years ago and shows the massive volume and price impact on bottom line earnings.

    EPS grew faster than attributable profit up 39,1%. This was due to share buybacks that the company has made.

    On the share buybacks the company has a $13 billion approval and has completed about half of this.

    The final div 27 US cents. Up 46% from 2006. The compound growth rate has been 24% pa. since 2002. Management announced a step up of the dividend base.

    Going forward this multi national has a very strong pipeline in new projects.

    Volumes growth will grow big in 2008, oil base metals and iron ore.

    Despite the very strong growth, management is looking at a step up of volume growth going forward.

    Cash flow has been superlative and they are producing more cash than they can use in the business. $13 billion in buybacks ½ through and completed by Aug 2008.

    Profits over last 6 years - volume has been a big contributor with a 55% increase over last 6 years. The big kicker has been price increases.

    Marius Kloppers used the analogy of building a house when describing their business. The foundations and a few walls have gone up, now the next set of walls go up faster. They believe that they have strong teams and management in place.

    I will go into a bit more detail on this very fascinating business.

    The price picked up 4,6% to R197 today on big volumes. Again widely held by various funds.


    Ian de Lange

    Permalink2007-08-22, 20:58:16, by ian Email , Leave a comment

    This proposed offer gives an indication of value

    Clearly the market had underpriced Ellerines at Monday’s closing price, when the company traded down to R60 with a market cap of around R7,6 billion. African Bank (Abil) puts a value of R85 of Ellerines at Abils' price of R32 and Ellerines share price closes up at 17% to 7080c

    Again it gives some indication of the possible value of some of the companies listed on the local JSE, especially after the price decline.

    Some investors were more than prepared to pay the lower price that Ellerines had declined to, in order to receive the greater value. The unit trust with the largest exposure to Ellerines is Investec Value with the share comprising some 4,5% of its fund. They have suffered with price declines in these retailers, but now somewhat vindicated.

    On today’s closing price at 7080c, and consensus EPS of 893c, the price to earnings ratio for this business drops to 7,9 times. Not expensive by any measure.

    The forecasted dividends per share for current 2007 year is 306c, putting the share on a DY of 4,3%. Again the current consensus forecast for this dividend yield is a rise to 4,9% in 2008 and 6% in 2009.

    Abil came in and made an initial proposal to the board of Ellerines, which they accepted. Upon the outcome of a successful due diligence, Abil will likely make an offer of R85 per Ellerines share paid by an issue of new Abil shares at R32,10/share

    Abil provides credit to its customers. Ellerines is a traditional furniture retailer, selling on credit and in so doing generating a large portion of its earnings from interest on its debtor’s book.

    Abil goes as far to estimate that approximately 70% of Ellerines profits are generated from financial services, i.e. credit and insurance and just 30% from its actual retail activities.

    From Ellerines side they say that for the past 30 months they have been exploring ways to expand their financial services operations, which they have identified as a strategic priority. They see this as forming the backbone of their “customer for life” strategy.

    They have outlined plenty of benefits of a merged group including greater footprint with almost 2000 branches from Ellerines compared with Abil’s existing 600 outlets. Greater critical mass, improved and more product offerings and ability for Abil to introduce its credit and risk underwriting models into the greater Ellerines operations.

    Abil operates as a bank, which as I mentioned operates on lower equity versus debt, in order to enhance the return to shareholder capital. Ellerines has a less aggressive gearing model and so Abil has identified this as an area that can be optimised for improved return on equity.

    Implicit in this is the freeing up of equity, and even at the initial announcement Abil estimates around R2 billion in surplus capital within Ellerines that can be freed up and funded by debt and Tier 2 capital.

    This type of deal tells me that there are some excellent pockets of valuation within the local equity market. This is clearly relevant for all investors with large cash holdings, but scared because of all the market noise.

    Kind regards

    Ian de Lange

    Permalink2007-08-21, 21:47:23, by ian Email , Leave a comment

    Watching the US Fed

    By announcing another round of cheap drinks, the US Federal Reserve, managed to keep the party going a little while longer. The party goers want more otherwise they will head on home.

    US marketed ended positive on Friday, on Monday Asia turned around from its large Thursday losses and Europe ended up.

    The local JSE gained 2,5% or 655 points back to 26640.

    But the US financial markets don’t appear too excited on Monday. Despite allowing for more liquidity to flow, the concerns still remain and not easy to quantify.

    Bloomberg reported the mistake made by the US Federal Reserve when just 2 weeks ago they commented that inflation was still their biggest concern.

    Unlike locally, where the Reserve Bank mandate is just inflation, the US Federal Reserve has an inflation and growth mandate.

    On Friday the US Federal Reserve made an about turn and was forced to provide liquidity to banks at less punitive interest rates. Banks and financial institutions were found wanting on liquidity and this is a no no for any bank.

    Banks operate at high leverage and so can come horribly unstuck in times of sudden demand by depositors (whatever form they take). It’s the classic run on a bank that just cannot be tolerated in a highly leveraged world.

    It’s a difficult position for a central banker to balance. In the past 10 years following the Mexican peso crisis in 1994, then the Asian crisis, which impacted the HIGHLY leveraged US hedge fund, Long Term Capital Management, and then the IT meltdown in 1999/2000, Alan Greenspan, former chairman of the U Federal Reserve used lower interest rates as an excellent tool to provide required liquidity to a highly leveraged world.

    There is no doubt that worked – there is a valid concern that he merely delayed the inevitable and set the financial world up for a greater fallout. He lowered the US Fed Funds rate to an historic low of 1% and this has surely set the stage for the amount of “bad” debt in the US system.

    From that 1% level, interest rates were raised 17 times in 0,25% increments to the current 5,25% in June 2006.

    The rest of the world has been tightening, but now there is talk that the next US Fed move is a down. Bernanke is probably not averse to providing more liquidity. In a speech in Nov 2002 before becoming chairman, titled “Deflation: Making sure “It” does not happen here” he referred to Milton Friedman’s “helicopter” drop of money as a way of providing newly created money to alleviate any risk of deflation.

    Now deflation of asset prices is a possible risk and the market is now betting whether Bernanke will go all the way in helping prop up asset values.

    The US markets opened up, now the S&P 500 is down 0,24%.

    That’s all for today. Watching as events unfold.


    Ian de Lange

    Permalink2007-08-20, 17:53:45, by ian Email , Leave a comment

    Some points on today's volatility

    Talk about volatility on the local market! Despite the late rally on Wall Street, the Asian markets ended down sharply, with the Japanese off 5,4%. The JSE opened steadily, then down and by midday was down to 25500. But then the US Central bank stepped in and global prices raced up.

    Come early afternoon, it suddenly rallied on the back of the US Federal Reserve lowering its discount interest rate. The local market swung around 1250 points to 26750.

    1250 point swing is a lot of movement.

    Clearly the US central banks had no real choice but to provide liquidity to banks. It did this by lowering the discount rate, which is a penal rate at which banks can borrow. Typically they don’t borrow at this more expensive discount rate, but because of the squeeze, banks required liquidity.

    They cut the discount rate from 6,25% to 5,75% and also said according to Bloomberg that it’s prepared to take further action to “mitigate” damage to the economy.

    In some quarters it is described as a central bank PUT. Prior to current Fed chairman, Bernanke, the low US Federal Funds rate was described as the Greenspan Put.

    This Put essentially means : Let the market make bad loans. Let lenders go crazy lending money against absolutely no security and when it goes wrong, we the Central Bank will step in and provide that required guarantee.

    Its possible now that the Federal Reserve will cut its main Fed Funds rate to 4,75% at the next meeting on the 18th September.

    Locally the JSE soon dwindled down towards the close as US markets opened up only 1% to 1,5% with the JSE All Share index ended down 7 points.

    Hmm, that is a lot of volatility.

    Great for traders but then not always, especially with a day like today when the market is down 2,5% in the morning and then suddenly up 2,5% and then ends flat.

    Back in 1981 Robert Shiller authored a paper titled, “Do stock prices move too much to be justified by subsequent movements in dividends”.

    While the paper had its critics about some of the methodologies used, he concluded that stock market prices clearly exhibit excess volatility compared to their fundamentals.

    It’s a fact, prices are driven around the intrinsic value by fear and greed. Now its fear and the US Federal Reserve has had to pump in liquidity to the financial system to make sure no ceasing up and restore some confidence.

    This volatility around the reasonable range of a company’s intrinsic value of a company has probably escalated over the years. Although even volatility of prices goes through periods when it’s quieter and when it’s much higher like now.

    One of the first things that you must decide is whether you are a trader or a long term investor.

    If you are a trader then you WANT volatility at all times.

    If you are a longer term investor then at worst you should NOT MIND volatility and at best USE volatility for advantage.

    The FACT is – Stock prices DO move too much above and below intrinsic value.

    For your core long term equity portfolio prices have dropped. But when measuring those same assets in terms of their intrinsic value (i.e. net assets, earnings and dividends), its unlikely to have dropped by even 0,5% to 1% year on year.

    Have a great weekend

    Kind regards

    Ian de Lange

    Permalink2007-08-17, 20:59:43, by ian Email , Leave a comment

    Have you considered what your real risk is?

    Markets are volatile, but can this really be described as an increase in risk. I think not.

    The JSE All Share down 1099 points or 4,06%.The UK FTSE100 down even more off 4,1%, the CAC 40 down 3,2% and the Hang Seng down 3,29%.

    Global markets have taken a bath. Over R18 billion is traded on the local JSE with 408 shares down against only 79 up.

    It’s the herd instinct at work.

    Excess liquidity has driven up asset prices around the globe, now the punchbowl is being taken away and the lights are being turned off – i.e. higher interest rates and a squeeze on cheap liquidity.

    For the last 4 years local equity prices have moved up strongly – was risk declining or increasing?

    Has investment risk now increased because suddenly prices are more volatile?

    The Chicago Board Options Exchange volatility index, called the VIX rose a massive 19% to 36%. Has risk increased?

    All news services are highlighting global sub prime and global credit crisis problems and the impact. Surely investment risk has increased?

    Plenty of noise unfortunately feeds investor fear.

    BUT can this sudden volatility really be classified as RISK?

    I don’t believe so – investors can too easily get caught up in the noise.

    For most investors THEIR MAJOR RISK is actuarial or longevity risk. This is an important point. Volatility is not risk; the biggest risk for most investors is not having a sufficient asset base to fund their long term retirement liabilities.

    Once we can define this as the major risk that investors face, then we can start to look at methods to reduce this MAJOR RISK.

    For all those investors with high cash holdings, now is the time to properly define your risks, and importantly use this market volatility for improved entry levels into real assets.

    I spoke about Standard Bank yesterday. Now down to 9480c today, but on a forward dividend yield of 4,1%

    Abil down 3,58% to 2990c, but on a forward PE of 10,9 times and DY of 7,3%.

    Investec down 3,95% to 7588c.

    Barloworld down 8,2% to 10856c, on a forward PE of 8,6 times.

    Assess YOUR investment risks, not some arbitrary definition of risk. Invest to a defined plan and use this opportunity that sellers are giving you.

    Kind regards

    Ian de Lange

    Permalink2007-08-16, 21:28:35, by ian Email , Leave a comment

    Standard gives some insight into the consumer market

    Standard Bank released their interim results for the period to end of June 2007. This company is a first class operation and has consistently produced year on year earnings growth. Local banks have enjoyed a high return on shareholder equity - no investor will sneeze at a 24,4% ROE.

    Banks are interesting businesses. Whatever the interest rate environment, they make a mark up on providing capital. Naturally when demand for funds is high, their advances increase dramatically, but because a lot of this stays on the books for many years, even when demand starts to wane, they remain profitable.

    They take a small margin on advances but then gear up their balance sheet to produce a very good return on equity for their shareholders.

    One of the biggest risk factors for lenders of capital is making sure that capital IS returned, i.e. a low bad debt to overall advances ratio. It’s said that bad loans are made in boom times.

    Besides the higher interest rates the other headwind is the new National Credit Act which kicked in from the 1 June. The results don’t want to make too big an issue about its introduction, supporting the Act, but saying that there has been a slight decrease in mortgage and instalment sales, but a more significant reduction in new credit cards.

    The group reported an increase in non performing loans, up 46%. As a percentage of loans and advances these increased from 1,1% to 1,3%

    In the last 6 months the bank was able to increase their net interest margin by 16 basis points, i.e. 0,16% to 2,91%. This is no small amount with total advances in December of R502 billion and R589 billion in June. On the stronger advances, net interest income grew by 37% to R10,1 billion.

    Profit for the period rose from R6 billion to R7,6 billion with attributable income up to R6,3 billion.

    In today’s results, management make the comment that there is evidence of waning consumer demand, reflecting the evidence of the 250 point rate hike since June 2006. The Reserve Bank started their 2 day meeting today and pronounces on rates tomorrow.

    The general buoyant state of the economy meant that the group was able to increase its non interest revenue by 31%, with its corporate and investment banking net fee and commission revenue jumping 47%

    The cost to income ratio is one area that Standard Bank, as do all banks, concentrates on. Banks rely on gearing their balance sheet to generate a return on investment. Where they can reduce their cost to income ratio, this has an immediate impact on the bottom line.

    This ratio is still above the 50% level running at 51,9%. Still better than Absa for example which is running at 53,6%.

    Banking share generally appear well priced on relatively low price to earnings ratios and higher dividend yields. Standard Bank shares fell with the market today, down 0,86% to 9899c

    They have been as high as 11725c

    The consensus forward PE is just over 10 times. With today’s positive result this may drop slightly. This forward PE drops to 9,1 and 7,5 two years out.

    Absa fell 1,7% to 13020c, Nedcor down 1,6% to 13430c, Firstrand flat at 2240c and RMBH up 1,69% to 3310c

    Standard Bank is a popular fund held by a range of unit trusts. Some such as Investec Equity having bought in for the first time in the last quarter and taken the holding to over 5% of their portfolio.

    Kind regards

    Ian de Lange

    Permalink2007-08-15, 18:25:38, by ian Email , Leave a comment

    The JSE Reports Interims

    JSE Ltd released its interim results for the 6 months to end of June 2007. This used to be a non taxable mutual organisation, converted to a company and then subsequently listing on its own bourse in June 2006.

    It’s a substantial business with a market capitalisation of R5,6 billion.

    While not a monopoly, it has a very strong position as a gatekeeper to companies looking to raise equity capital. With the massive pick up in equity prices, it has started fulfilling this function and in the last 6 months 15 companies were listed, 8 on the main board and 7 on the Alt X board.

    Liquidity also improved and the average daily number of equity trades rose to 39365 from 32 000 in the last financial year.

    A primary function of a stock market is to be a facility for the primary listing of shares (i.e. efficient capital raising) and efficient liquidity of the secondary trade in these shares.

    It’s debatable as to how much the JSE as a company itself contributed to liquidity in the last few years, i.e. how much is attributable to the boom in global markets.

    Nevertheless with the boom in markets, the JSE reported a solid 31% increase in top line revenues to R411m. Attributable profit fell sharply - 56% to R40,5m due however to the non cash share option costs of the BEE economic empowerment transaction.

    Because this was an accounting expense, it did not affect the cash flow, which increased to R157,8m from R94,7m.

    In the preamble, the JSE notes the tax charge of R47m. It then goes on to say that the first assessment received by the JSE as a tax paying entity was higher than anticipated because SARS has interpreted its contract with London Stock Exchange differently to the JSE treatment.

    Towards the end of the lengthy detailed results it goes on to state that the assessment is “substantially higher” that their estimate. It does not quantify the substantial amount.

    An interesting point that it makes is that the balance sheet is conservative due to the fact that it guarantees JSE trades on the cash equities market. The board is however looking at the group’s capital requirements going forward.

    The JSE consolidates the Guarantee Trust fund for accounting purposes, but these are separate trusts which cannot be accessed by the JSE.

    Also down the end of reports are the contingent liabilities. The JSE lost a case against a supplier on the merits and is now waiting for the quantum to be defined. This could be anything from R0 to R25m.

    It is also one of 25 defendants served with summons relating to loss by a pension fund in the amount of around R1,4 billion. JSE’s counsel believes the claim is unfounded and it will defend.

    This case relates to the losses suffered by the Joint Municipal Pension fund

    The price fell on the results to R65, down 4,2% on the day. The price has been as high as R85, and so is sharply down from its highs. At this price does not appears cheap given the earnings and relatively lower dividends. Still shareholders are prepared to pay up for a classic Warren Buffett moat type company with no real competition in the local market.

    Kind regards

    Ian de Lange

    Permalink2007-08-14, 17:45:39, by ian Email , Leave a comment

    Goldreef hits paydirt

    The founders new what they were doing when then named it Gold Reef Casino Resorts. Its shortened name is Goldreef and many investors have mistaken it for a gold company. Today it hit paydirt when it announced that a consortium that may result in a buy out of R34 per share.

    The price of the casino operator shares was trading at 250c in 2002.

    It owns a number of casino licences and operations, the biggest being Gold Reef City.

    These casinos are licences to print money. Profit for Dec 2006 came in at R322m off a turnover of R1,5 billion.

    Net cash from operating activities came in at R312m

    Today the company announced that a consortium led by Ethos Private Equity Fund V which includes management and existing BEE shareholders may make an offer to all shareholders to buy shares at R34 per share.

    This implies an enterprise value of R11,6 billion.

    The largest shareholders have given irrevocable undertakings already. These include the Krok family with 25,9% and Casino Austria with 21,69%.

    Management have also given undertakens, but may not be allowed to vote their shares.

    The share price has been a steady gainer over the years. It jumped 10% on the news to 3140c, so still off the potential offer price of R34.

    Again this type of deal gives an indication of the capital available for private equity deals. Something like this is particularly attractive because of the strong cash flows.

    I wonder how the consortium felt a couple of days ago. For a few months the price has been trading above R30 and then in the volatility it dropped to 2770c last week. In order to obtain the irrevocables, they must have already set the price last week at R34.

    A good day on the JSE with all main sectors up in firmer trade and a steadier US market.


    Ian de Lange

    Permalink2007-08-13, 21:18:25, by ian Email , Leave a comment

    More value on the JSE today

    The local JSE gave back all its gains that it made on Wednesday, falling a massive 1132 points or 4% to 27076. It has now lost almost 3000 points from its July peak. It’s simply a matter of investors turning net sellers and avoiding riskier assets.

    The junk debt markets have been fingered as the asset class shouting “fire in the theatre”.

    Global debt markets came under pressure and with interbank liquidity drying up, and moving US rates from the 5,25% levied by the Federal Reserve up to 6% at the opening on Friday, the central bank had no real choice but to step in and provide liquidity.

    Bloomberg reported that over the last 2 days the central banks of US, Europe, Japan, Australia and Canada have added about $132 billion to the banking system.

    Europe initially lent $83 billion over 2 days and today the US Federal Reserve bought mortgage backed securities in 2 tranches totalling some $35 billion according to Bloomberg.

    Listening to Marc Farber from gloom, boom, doom – and an astute market commentator, he questioned whether it was correct for governments to continue printing money and so supply the required liquidity to prop up junk debt.

    He agreed that in nominal terms real assets would appreciate should liquidity continue to be pumped into the system, but mentioned Zimbabwe as a case in point where printing gets out of hand with no real positive benefit to the economy.

    Locally, prices came down sharply, but now the market is trading on an historical price to earnings ratio of around 14 times and forward around 12 times. Yes it could get cheaper, but it’s not at the sky high valuations, where there is no underpin to company valuations.

    There is no doubt that massive doses of cheap liquidity have driven up prices of all assets globally. Not confined to equities, but property, commodity prices and art. It fuelled the private equity business, in what one market commentator called the Blackstone peak, referring to the recent listing of US private equity firm, Blackstone.

    It listed in June at $31, rose immediately to around $34 and since fallen sharply to $25.

    The local market will take note of the close on the US markets tonight and how Asian markets fare next week.

    Longer term investors with a strategy will not be too perturbed about some more normal downside volatility in prices. If you are too jittery with a 10% decline, rather spend some time ensuring that your investment plan is put in place.

    For most investors their RISK is not volatile markets, risk is actuarial or longevity, i.e. ensuring that they have sufficient asset base to support real income into retirement years. E-mail me on ian@seedinvestments.co.za for further details on how to reduce this bigger risk.

    Have a WONDERFUL weekend



    Permalink2007-08-10, 20:23:43, by ian Email , Leave a comment

    Taking the Emotion Out of Investing

    This topic comes up time and time again. This happens for a very important reason as emotions play a major part in our lives. While some people are very rational, others are more emotional. When it comes to investing it is often best left to those individuals who are rational to help with the process. It also makes sense to have an objective perspective on your financial affairs. Be it an advisor, asset manager, stock broker, or anyone else that can step back and take an objective view of your position.

    Your spouse, parent, or close relative, whilst possibly being highly skilled often won’t have complete objectivity, e.g. “Don’t sell your Barlows shares, they have been in the family since when Grandpa bought them when they listed in 1941!” Shares, unlike other assets, shouldn’t hold much sentimental value, but often do. While your Kruger rand may be worth hanging onto because of sentimental reasons only, shares, especially now that they have been dematerialised (i.e. trade in electronic form), should be bought and sold only for sound financial reasons. If you do your research, and Barlows is still attractive, then by all means hang onto them (just as Grandpa did), but if there are sound reasons as to why they should be sold, then you should sell them. It sounds simple in theory, but reality it is never as straight forward.

    Over the last couple of days we have seen Harmony Gold’s share price drop from R95.80 (Friday before the collapse) to R80.60 (on Monday) to R68.50 (on Tuesday). A total loss of 28.5%! This came on the back of a poor trading statement, and the immediate resignation of the CEO, Bernard Swanepoel.

    Had you been able to get out before the price decline you would have been fine. It is those investors that get caught in the slide that need to keep their wits about them. Do you sell? Should you buy more? This also applies to shares that suddenly spike up. When events occur that significantly move the share price (up or down) you need to take a step back, and assess again why you bought/didn’t buy the share. With new information on the table you need to rationally assess whether you still like the share or not. In Harmony’s case you have already made the loss. Buying at lower levels might be the wise move if the market has over-reacted (getting emotional about the plunge), while those who jumped ship would have taken a major loss.

    An aside: Harmony traded up 2.18% today, with a closing price of R69.99.

    One thing that Harmony’s fall taught us (along with the thousands of other 'lessons') is that investing isn’t easy, and even the professionals get it wrong on occasion. However if you can make more good decisions than bad, you should eventually end up on the right side of the coin.

    While you can never completely strip your emotions out of anything you do, emotions are best left to when you start discussing religion, politics, or sport!

    Hopefully you have the day off tomorrow and have a wonderful Woman’s Day!

    Kind regards,

    Mike Browne

    Permalink2007-08-08, 17:06:22, by Mike Email , Leave a comment

    Volatility In Long Term Investing

    It is plain to anyone who follows the markets that the market volatility has recently been increasing. With this increased volatility comes an increase in investor apprehension.

    Wouldn’t it be great if share prices moved up in a straight line at a rate higher than inflation? We would all be able to invest today, and confidently predict where our investment (in real terms) would be over 1,3,6 month periods, and again over 1,2,3,5,10 year periods. It would make financial planning a simple job for anyone with a slight grasp of arithmetic, and armed with a calculator.

    The sad fact is that you will only be ‘certain’ of your real investment return over all of the periods mentioned above if you invest into cash! And while cash provides a certain ‘safe’ return, over the long term the only certainty achieved through investing all your money into cash is that your real return will end up lower than it should.

    Mull over this perceived contradiction, “Over the long term cash is the riskiest asset class.”

    If you claim that waiting for the market to pull back to cheap levels will help you produce superior returns, you will be right in certain respects. But waiting (and the opportunity costs associated with not investing) often proves the costlier than investing regularly. Even if the market does pull back significantly, and you ‘gain’ by having your money in the bank, will you be courageous enough to dive into the market while everyone else is leaving? You run the risk of never actually taking that step into the market. Studies have shown that over 40 year periods (an extreme case of long term investing – but an investment period that anyone under 50 or 60 should consider) the variance in returns over the differing periods (cheap and expensive) is only in the order of a fraction of a percent either way. For example: The average return was 15% pa. Had you invested at the lowest point your return might have been 15.2% pa, while those who invested at the top of the market might only have returned in the order of 14.7% pa.

    I am not advocating jumping straight into the market, because most people have needs well before their 40 year period is up, and investors can be burnt over the short term. The point is that equities should form a vital portion of everyone’s investments. It is only those that are able to stomach the volatility that will have any chance of getting any reasonable return.

    This is one of the most clichéd comments in the investment world, but one that is worth repeating, “It is not about timing the market, but rather time in the market.”

    If you can spend a significant portion of time in the market (without jumping in and out the whole time) the daily volatility will do nothing other than give you heart trouble. If you are truly a long term investor you will best be served by not looking at the markets daily, or even monthly!

    Have a good evening,

    Mike Browne

    Permalink2007-08-07, 18:33:34, by Mike Email , Leave a comment

    Getting Caught Up in the Now

    In this day and age where life is getting more frenetic, days are getting shorter, the globe is getting smaller, are we becoming accustomed to focussing more and more on the short term?

    Your job used to be pretty much a life time commitment, with it not being uncommon for people to start at a company in their 20’s, and then only leave in their 60’s. These days it would be a rarity, and one might even be labelled as not being ambitious enough to try and get a better job elsewhere.

    You may ask, “What does this have to do with investments?”

    “Everything!” I will respond.

    When I signed up for my finance degree at university I was very much of the opinion that I was going to learn many complex formulas, and theorems, and at the end of the four years be able to apply these formulas to assess whether the many listed companies out there were cheap or expensive. While I did learn the many formulas (and they are an important tool), the lecturers waited until I reached my honours year to explain that finance is very much a social science. While I arrived ready to crunch numbers, I left knowing that understanding the other investors was equally important in the investment game.

    As a result, understanding that most folk are fixated on the short term provides opportunities for the astute investor to take that longer term view, and manage to capitalise on the myopic investors’ frailties.

    This point was driven home over the weekend when I met up with a friend. I caught myself being the one with myopic investment views. My friend works at a well respected asset management firm, who have an enviable long term track record. I was chatting to him about some of their funds, and why they hadn’t been doing as well as they usually do. Was there something wrong? Were they losing their Midas touch? Should I maybe sell out? He just laughed! They take a 10 year view, and don’t care that much if their competitors overtake them along the way. He said that I should wait. They have taken some bets, and expect them to pay off in the next 5 to 10 years. That’s a long time!

    Can I wait that long? More importantly can you wait that long? If you are comfortable with the investment process and trust the professionals it will help you sit through the tough times. While it is never nice to underperform the Jones’, everyone will go through a period of not being on top. It will be those who have the patience who ultimately come out smiling. Investors who buy only on yesterday’s news will be the ones who will end up sleeping under yesterday’s newspapers, while those who take the long term view will end up making the news.

    Have a good evening. Here’s to everyone becoming a newsmaker in their own right.

    Kind regards,

    Mike Browne

    Permalink2007-08-06, 17:23:11, by Mike Email , Leave a comment

    That nasty US subprime is affecting my assets

    Some more stories on the US sub prime. Only in the US could they make a more punitive debt obligation actually sound like a huge gift to all those that took them up.

    Sub prime has been getting all the press. It’s been blamed for all world’s current economic problems.

    Newswires have been on this topic for a while now and there is no doubt that it’s causing major downside to global financial markets.

    So where did it all start?

    I think back in 2001, when US Federal Reserve chairman was “forced” to reduce short term rates from 7% in 2001 to a low of 1% in 2003. He did this because of the post 1999 tech bubble and

    This act produced banks to create substantial liquidity. This was the very reason that rates were reduced and it worked very well.

    Lenders do what they do best – they lend money and when it pays them to give debt away, that is what they did. The low interest rate environment literally paid them to give debt away to anyone who asked for no collateral whatsoever.

    It got to the point where borrowers merely had to ask and they received.

    =>No down payments (i.e. initial capital)

    =>No proof of income, asset base etc

    =>No documentation

    They were known by their various names as low doc loans, or no doc loans, or no ration loans (for those not disclosing income).

    Loans were at a more punitive rate, but there is naturally no shortage of borrowers. These more punitive are known as sub prime.

    Jim Rogers, partly speaking his own book because he is short US builders, reported to Bloomberg, “This was one of the biggest bubbles we've ever had in credit,''.

    Jim Rogers was one of George Soros first partners on his Quantum hedge fund. Rogers is an astute long term investor who has been long of commodities since 1999.

    Investors are hoping for the famous Greenspan Put to bail them out, except now its Bernanke in charge. What is this?

    Well Greenspan was always quick to reduce interest rates and so prop up asset valuations.

    Investors are hoping that this will happen again – rates were boosted back up 17 times to 5,25% where they have been held. No indication yet of whether they will fall.

    Hmm, it’s going to be a tough period for equities as liquidity is squeezed back. Great opportunity for patient investors looking for opportunities to buy assets at lower prices.

    I have been putting together a PowerPoint presentation on global markets and our outlook for real rates of return over the next few years. This assists with compiling asset allocation decisions. I will mail this out next week Friday. If you would like a copy, please mail Helena at helena@seedinvestments.co.za with your name and e-mail address.

    Have a great weekend


    Ian de Lange

    Permalink2007-08-03, 21:36:26, by ian Email , Leave a comment


    Brimestone, a company with a market capitalisation of some R2 billion announced today that it expects its headline earnings per share for the 6months to June to be between 80% and 100% up from the previous period.

    Clearly this is a substantial jump with EPS expected to come in at between 97c and 108c, up from 54,1c for the 6 months to June 2006.

    But because of the discounting effect of the market, the price barely moved today.

    An investor will not make money buying a company at full price. I am not saying that Brimestone is fully priced, but clearly the more astute investors were looking at this smaller cap share months and even a couple of years back and looking ahead to an increase in earnings and then re-rating.

    At face value Brimestone looks cheap in this more expensive market – so why are not more institutional investors invested here?

    The biggest reason is size. Larger investors typically don’t like owning more than 5% of a company, especially less liquid companies. The price has moved from around R1 in 2004 to the current R7,50 – R8. Even at a market cap of say R200m, 5% is only R10m, which is extremely small for all mainstream asset managers.

    This is where the smaller asset managers and the private investors have the opportunity for advantage.

    In the case of Brimestone, earnings were at 14,6c for December 2002, 21,8c for Dec 2003 and static at 20,8c again for Dec 2004. Investors had to assess future earnings and then make a call to buy or not.

    The company is an investment company that has made some astute investments along the way. In the year to end of December it managed to raise its net asset value from 216c per share to 674c per share.

    Its large asset is now its stake in the unlisted Life Healthcare business (previously Afrox Health). Brimestone owns 21,9% of this business.

    It made some astute investments into Old Mutual and Nedbank shares, accounting for this interest as options on these share prices.

    For those investors that took saw the potential and bought in at much lower prices 2 and 3 years ago, they have been rewarded with a steadily increasing share price.

    I think that its investors that can hold onto the big winners that are the ones that will outperform over time. Buffett says that the best holding period for any stock is forever. It may be extreme, but sometimes it takes many years for the full value to be realised in a price.

    Selling out after a share has doubled in price from a low value is not going to produce superior results needed to pay for the losing shares in your portfolio.

    That’s all for now.

    If you would like more details on the consulting that we at Seed Investments provide to high net worth investors, please don’t hesitate to contact me on ian@seedinvestments.co.za

    Kind regards

    Ian de Lange

    Permalink2007-08-02, 17:15:23, by ian Email , Leave a comment

    Profits going up - share prices going down

    While share prices track a company’s profitability over any longer period of time, for stretches of time, price and company profitability can move in opposite directions. This often confuses investors, but is exactly the reason why astute investors have the opportunity for outperforming the market.

    The general rule is that the greatest price movements over time will come from those companies that produce the best profitability for their shareholders.

    The exceptions are those start up type companies which don’t have current profits, but lots of promise. Future anticipated profits are discounted back to a present value using the various discounts rates in order to arrive at a price today. Some of these companies may not ever generate a profit, yet have made certain shareholders very rich.

    It’s a case of selling the potential blue sky (future very good profits) at today’s prices.

    Back in the late 1990’s it was the IT start ups that were being listed with no profit history, but plenty of potential.

    Today it’s the so called junior miners.

    Less of an extreme are valuations that have moved to expensive levels, in part not only paying for current profitability at a fair price, but also anticipating super profits coming through for some years.

    Here we can think of the construction companies, that have an excellent future earnings stream, but where shareholders may be factoring most of this into the price already.

    Its not that easy because while these shares appear expensive, profits can continue to surprise on the upside for a while, sustaining the higher prices. But at some point in time, investors overpay.

    Its at that point where prices lag, while profits can continue to come through.

    At this point growth in earnings on the JSE is still looking fairly robust, with one fund manager today anticipating 17% growth over the next 2 years on average.

    A portfolio of growth shares has an anticipated growth rate of 27%.

    The question is “is this growth in the price?”

    Seed Investments consults to private clients on their investment planning. We look at formulating an Investment Strategy Document based on each client’s specific circumstances. Contact me on ian@seedinvestments.co.za for more details.

    Kind regards

    Ian de Lange

    Permalink2007-08-01, 20:46:13, by ian Email , Leave a comment