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    Corporate and Sovereign Bonds

    An investment area that is being widely discussed is the attractiveness of corporate bonds as an investment class. In order to understand the merits of corporate bonds, we first need to assess the long run merits of sovereign bonds. It’s holders of sovereign bonds that have benefited hugely over the last 10 and even 20 years in places where governments have allowed the private sector to expand in favour of a shrinking government. But this has and is changing.

    In a presentation today by a bond manager, he gave some high level insight into why 10 years ago it made sense to buy into South African sovereign bonds. For many years previously bond yields had tracked sideways in an environment of high inflation, low economic growth and high fiscal deficits. A buyer of bonds made no return in real terms.

    The situation started slowly turning around from 1994, where the new government ran a tighter fiscal position, and into the mid 1990’s primary surpluses to pay down the high government debt levels.

    Bond yields spiked in 1998 after the Asian and Russian debt defaults, which was an indication of the perception of risk, but which proved to be an excellent entry level. It was a classic example of high perceived risk providing low prices. From this high level, where sellers panicked, investors made excellent returns, as yields fell steadily.

    Source: SIM

    However, with the era of budget surpluses over, pressure on government’s tax take, and increased capital that it needs to spend over the coming years, there has been a clear shift back to increased government borrowing. Bigger government around the globe is described as “crowding out” the private sector.

    Instead of paying down debt, governments, including South Africa are looking to raise more. More debt raising means bigger supply, which means lower prices. And so while inflation is slowly coming back into line again, there is a floor developing under global bond yields. Despite last years return, we have not been positive on local bonds, which appear to be priced for perfection.

    Yesterday US president, Obama, gave some details of how the US government will expand presence in the US economy – i.e. crowding out. According to the FT, it shows that this years US budget deficit will quadruple to $1,75 trillion.

    The scale of this can be seen on the chart below. Governments like to measure their budget surplus or deficit as a percentage of total GDP. SA’s fiscal deficit is climbing to 3,9%. The US is now pencilling in around 13%. This is a huge increase in government debt in an attempt to revive the economy and the rate of unemployment.

    The US releases their revised 4th quarter GDP number today. The original number was a negative 3,8%. This is now expected to be revised down to negative 5,3%, which is closer to the original consensus number. Many other countries have announced similar or worse results and so in relative terms the US is not as badly off. There is some risk if the slide is larger.

    As governments around the world encroach on the private sector, they start to squeeze out private sector. Higher debt levels, means lower returns for holders, i.e. lenders of capital. Until now yields have priced this in, but they will.

    We will continue to explore this theme as well as corporate bonds.

    Have a wonderful weekend.

    Kind regards,

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

    Permalink2009-02-27, 16:40:30, by Mike Email , Leave a comment

    The value of a steady dividend payer

    Spur is an interesting company with a long history spanning back 40 years. It listed on the JSE in 1986, restructured in 1999 into its current format. While still relatively small with a current market capitalisation of R700m, it has been a generally positive story for investors.

    In its current guise it is structured across 3 main franchise., Spur Steak Ranches, Panarotti Pizza and 65% of John Dory’s Fish and Grill which it purchased in November 2004.

    The business model is one of franchising. This allows expansion without the concomitant capital commitment. It has also resulted in allowed higher margins and reasonable high returns on equity.

    A franchise model has allowed steady growth in brand outlets. The company passed the 300 restaurant level in early 2006, increasing this to 343 in June 2008 and today announced that this had reached the 350 level, with 35 of these outside of SA.

    It is looking to open 7 new restaurants by June 2009

    Investors have seen a 42% decline in the value of their investment from the peak of R12,5 to the current R7,20. While forging ahead with new franchises, management says “Although declining interest rates, the tax relief granted in the recent Budget, lower fuel prices and an easing of food price inflation are positive factors for consumer spending, it is anticipated that disposable income levels will remain under pressure.”

    I looked back to 2000, which saw Spur in its current form to gauge the steadiness of its dividend flows and the impact on the total return that investors have received.

    The price of Spur shares in January 2000 was 225c. These rose to a high of R12,50 and now back at 720c. The dividends have risen from 16,5 cents in 2000 to 55c in the last full year.

    An investor who acquired Spur shares at 225c would have generated an annual return of approximately 21,7%, despite the recent price decline back to 720c. Without the annual dividend cash flow, this return drops to around 15% per annum.

    The company has tended to trade over the years on a high dividend yield. The growth rate may well slow into future years, but investors should be compensated with the higher dividend yield. The total return achieved by investors over the last 9 years has been very good.

    Looking across the unit trust funds that own this company, it’s not that widely held. Given its low market cap, this places a size restriction at a fund level. Some of the high yield and value funds increased their exposure in December at the lower prices.

    Kind regards

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

    Permalink2009-02-26, 17:20:25, by ian Email , Leave a comment

    Company Margins

    Three industrial companies today released their 6 month interim results to the end of December 2008. Two of them, Imperial and Eqstra, used to be part of the same stable until Imperial unbundled their investment in Eqstra and listed it on the JSE in May last year. Murray and Roberts was the other company to release their interims.

    Of the three Imperial has clearly had the hardest time, with group profit from continuing operations 29.7% lower than the comparable period. This weakness came mainly on the back of a tough period in the automotive business. Logistics related operations ensured that the group’s overall results weren’t as bad as they could have been as SA and European profits in this area grew by 13.6% and 9.1% respectively. Despite the weak result Imperial was able to declare an interim dividend of 80c a share.

    Eqstra was able to announce that revenue was up 33.1%, operating profit up 15.7%, and basic headline earnings per share up 3.1%. It is clear to see from these numbers that while they have been able to expand their business, margins have come under the squeeze. This is an area that many fund managers have been focussing on.

    Through much of the bull market we saw that the major driver was ever increasing profits. Part of this was due to an expansion in the economy resulting in companies’ turnover increasing, but a portion can also be attributed to margin expansion as producers and suppliers were able to pass larger cost increases to their customers. Wide margins encourage new entrants into the market, while depressed margins will force the weaker companies out of the market. It therefore makes sense that margins revert to their mean over time. Just as an expanding economy with expanding margins will prove a double whammy to profits on the upside, so a contracting economy with contracting margins will result in a double whammy to profits on the downside.

    Eqstra have been able to remain profitable, but have warned that the effects of the global economic and commodity crisis were only felt in the fourth quarter of 2008. One can therefore expect that the company will struggle going forward.

    Murray and Roberts’ CEO Brian Bruce mentioned, in the release of their results, that they realise the magnitude of uncertainty in the world and that they will be focusing on preserving capital and emerging as a stronger unit. Murray and Roberts were able to expand their margins slightly from 7.7% to 8.3%, and grow earnings by 40%.

    Past growth has been admirable but they aren’t harping on what they achieved and instead will be looking to maintain margins, and retain contracts and keep their order book full (currently R60bn, when compared to 30 September 2008’s order book of R61bn). While the size of the order book is still very healthy, they have realised that the order book isn’t as robust as previously was the case, i.e. it is more likely now that contracts will get cancelled. In the second half of 2008 some R10bn of contracts were either cancelled or suspended!

    The company still does more than half its work in Southern Africa, while the Middle East now accounts for 28% of the order book, Australasia is down to 13% and the remainder is the rest of the world.

    An interim dividend of 85c a share was declared, which is up 10% on last year’s interim dividend.

    It is clear from all three companies that the picture isn’t as rosy as the last few years, and even though some of the results were good, the outlook has significantly deteriorated since they last reported.

    Vincent Heys from Seed is available to meet new clients wanting to discuss their investment portfolio.
    The purpose of the meeting: Discussing client’s portfolio and explaining what Seed does. This is a no obligation meeting.
    Dates: Cape Town 9th and 10th March and Gauteng on the 11th and 12th March.
    Please email: vincent@seedinvestments.co.za.

    Take care,

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

    Permalink2009-02-25, 17:16:46, by Mike Email , Leave a comment

    Investment mandate combinations

    In this extremely volatile market, where economic growth rates have turned negative, it’s important to revisit the longer term merits of an equity only mandate against the lower downside of an active asset allocation strategy. Both have their merits, especially when combined with other asset classes.

    Equity only mandate

    While an equity only mandate can be confused as a buy and hold strategy, this is not the case. While an equity only mandate fund or portfolio does not attempt to sell out of equities and into cash, bonds, property etc, it will rotate its selection of shares.

    In this way the investment manager of an equity only portfolio will on an ongoing basis attempt to reduce and sell out of shares that are overpriced, and increase exposure to shares that are under priced. By doing this a manager is looking to avoid the bigger losses that an overpriced share will sustain and benefit from the typically greater upside in under priced shares.

    All active managers understand that this is a relative investment process. I.e. when prices in general are falling, their portfolios will more often than not decline and vice versa.

    An investor’s aim is to outperform the overall market, with a basic assumption that an exposure to a real business in the form of share ownership is a worthy investment, so long as it is at a reasonable price.

    A buy and hold equities does not mean holding onto a share even when that company’s prospects have dimmed and there is little possibility of a recovery. It may however mean buying Anglo American at R180 because the price is cheap in absolute and relative terms, but watching as it falls to R148 as the company announces a cut in its dividend.

    Active asset allocation management

    With active asset allocation or a flexible mandate, a fund manager has a wider mandate to invest across different assets as he sees fit. In such a portfolio, for instance, a fund will invest into cash and bonds when equity prices are expensive.

    In a flexible fund there is a dual purpose of firstly assessing which asset class to overweight and which to underweight and secondly within each asset class, decide what to buy and what to sell.

    Naturally such flexible mandate funds have merit in a market where the prices of real assets have fallen substantially.

    By and large a flexible mandate attempts to produce an absolute real return over varying market cycles, using various asset classes at its disposal. Over the longer period, given the lower volatility and lower return from cash type assets, these funds will tend to produce lower returns than the equity only mandate with a higher risk profile.

    Looking a small sample of top funds across varying mandates, it’s clear that the superior returns from the flexible asset allocation mandate in the sharply down 2008 may not provide superior returns over longer periods. Despite the negative 15% in 2008 from this fund, the equity only mandate produced 5% per annum out performance compared to the flexible mandate.

    I have included 2 top hedge funds to give an indication of their downside risk protection and longer term returns. In fairness the 5 year returns have been generated using an element of internal gearing, but limited downside in 2008 resulted in superior longer term risk return attributes.

    At an investor level there are few investors that have the ability and stomach for an equity only mandate. Most investors should adopt a multi asset class allocation strategy. While a portion of their funds may be allocated to an dedicated equity only manager, their aggregate diversification across asset classes must be considered.

    As always any questions, please don’t hesitate to contact us to discuss any aspect.

    Vincent Heys from Seed is available to meet new clients wanting to discuss their investment portfolio. Purpose of the meeting: discussing client’s portfolio and explaining what Seed does. No obligation meeting. Cape Town 9th and 10th March and Gauteng on the 11th and 12th March. Please mail vincent@seedinvestments.co.za

    Kind regards

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

    Permalink2009-02-24, 17:34:42, by ian Email , Leave a comment

    Company Announcements and Price direction

    It’s a moot point that market prices are efficient and therefore anticipate underlying economics of companies as they develop. In many instances this is the case, where only unexpected announcements materially impact a price. Clearly the market last Thursday did not anticipate that Anglo American would come out with its results announcing a stop to its share buyback program and a halt on its dividend.

    The price was already cheap on a multi decade basis relative to the market, but promptly fell 15%. Today it fell a further 1% to R152.

    We have said that as results come out, one of the ways to assess the extent to which prices have anticipated is to analyse price movements following the release of results. Naturally this will be varied across sectors and companies.

    Earnings that are down may not impact share prices, where these share prices are down substantially already. Let’s look at a few announcements today – many companies are still reporting positive numbers, but with subdued outlooks.

    Tongaat Hulett has risen in price from a low of R50 to its recent R68. The results today for the year to December reflected headline earnings up from R61m to R583m. The annual dividend was kept the same at 310c per share.

    The company’s various divisions have good outlooks as far as prospects are concerned – its property portfolio north of Durban will benefit from the new airport. A weaker rand is also generally favourable for this company.

    The share price gained almost 3% to R70.

    ARM – African Rainbow Minerals announced interims with headline earnings up 201% from R741m to R2,2 billion. It has a strong balance sheet and despite the outlook for weaker demand in 2009, the company remains fairly upbeat on its projects.

    The price fell 1,7% to R113

    Kagiso Media announced interims with revenue up 26% and headline earnings up 20%. They maintained their dividend at 35c per share, despite their policy being to pay 50% of headline earnings, “due to the current market conditions”. The operating margin reduced from 37% to 33%.

    The share price fell 2,5% to 1170c

    Construction company Wilson Bayly announced its interims to December with revenue up 35% and headline earnings up 78%. They have a strong order book and raised their interim dividend from a previous 60c to 100c. The share price, like most shares has fallen substantially from its high and today traded up 99c to 8699c

    JSE Limited issued a trading update for the year to December saying that EPS should be up between 43% and 53% and headline earnings up between 60% and 70%. The share price is down substantially from its high of just over R90, but today gained 7,8% to R39,50.

    Pinnacle Technology’s results reflected revenue up 39% to R1,3 billion, but operating profit down 7,3% to R66m. headline EPS fell 11,4% to 30,4c. The company does not pay an interim dividend. The shares fell 1c to 189c. They are down substantially from highs around R5.

    In all these instances the news – good and bad appears to have been correctly priced in. We will keep watching for signs of market direction.

    Vincent from Seed is available to meet new clients wanting to discuss their investment portfolio. Purpose of the meeting: discussing client’s portfolio and explaining what Seed does. No obligation meeting. Cape Town 9th and 10th March and Gauteng on the 11th and 12th March. Please mail vincent@seedinvestments.co.za

    Kind regards

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

    Permalink2009-02-23, 17:59:08, by ian Email , Leave a comment

    Wold Gold Supply

    Global markets remained under pressure. Locally the Anglo American annual results disappointed investors with the suspension of the dividend. The price fell almost 16%. This dragged the local JSE down. The one area that remained firm on the local market was gold, which moved close to the $1000/oz level – currently around $996/oz.

    We discussed the demand side of gold yesterday. Let’s look at the supply side.

    The World Gold Council reckons that the best estimate of gold mined over history is approximately 158 000 tonnes, of which around 66% has been mined since 1950’s. As can be seen from the table below annual mine production is coming in at around 2500 tonnes per annum.

    While gold is mined on every continent, South Africa has been the dominant producing country in the world, producing 1000 tonnes per annum in the 1970’s. This has steadily declined. Until 2006 SA was the world top producer. China overtook SA in 2007 and it looks like USA overtook SA in 2008.

    SA produced 247,2t in 2007 and the 2008 number was down 16%.

    The statistics from the WGC reflect global mine production slowing to 2476 tonnes in 2007 and an annualised 2388 tonnes in 2008. From this they subtract producer hedging (i.e. gold sold forward in previous years) to arrive at mine supply.

    Central banks and government sponsored organisations hold around 1/5 of global above ground stock of gold as a reserve asset. This percentage is decreasing steadily. These are largely owned by central banks in Europe and US.

    Central Banks have been net sellers in recent years and from 1999 the bulk of these sales were covered under the Central Bank Agreement on Gold, which put a cap on the annual total sales by central banks. There does appear to be a slowdown in the sales from this sector, even as the price gains ground.

    Classically the Bank of England auctioned off a large portion of its gold holdings in 1999 to “Restructure the UK’s Reserve Holdings”. It did this at the bottom of the gold price.

    Then gold is also supplied as recycled gold. This comes from fabricated products and is melted down, refined and reused. Most recycled gold comes from jewellery, smaller amounts from electronic components and some from investment bars and coins.

    Have an excellent weekend

    Regards

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

    Permalink2009-02-20, 17:40:28, by ian Email , Leave a comment

    Wold Gold Council demand stats

    The World Gold Council (WGC) updates important statistics on the global gold market. Prices follow supply and demand, and as with any other commodity, gold has its own supply / demand dynamics. Because gold is both a commodity and a monetary asset, this makes it unique.

    Because it is virtually indestructible, all the gold that has ever been mined over the centuries still exists above the ground in some form or another.

    This means that in a mostly unfabricated form, above ground stocks are easily mobilised, which means that when prices spike upward, this is often met with the resale of above ground stock. This is perhaps one reason why the gold price is less volatile than the majority of other commodities.

    The annual demand for gold falls into 3 main categories:
    o The biggest is the jewellery market
    o Industrial demand – electronics and dentistry
    o Investment demand – mostly over the counter trading.

    The supply comes from mine production, recycling of metal mined in previous years.

    As the price of gold increases, it tends to have an immediate impact on jewellery and industrial demand. However investors tend to get more excited as prices rise and when combined with the impact that exchange traded funds have had on the market, investment demand increases as the price rises

    The official figures:

    So while demand from jewellery fell, this was more than made up by the 64% increase in identifiable investment, brining total demand up to 3659 tonnes in 2008.

    The investment demand for physical gold was up 87%, while demand via listed ETF’s was also above trend. The latter has been a growing cumulative source of demand as seen in this graph:


    Source: World Gold Council

    I will discuss some of the supply issues tomorrow.

    Regards

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

    Permalink2009-02-19, 17:36:34, by ian Email , Leave a comment

    Shoprite Releases Results

    Shoprite has been one of the star performers on the JSE over the past 12 months while many other companies have struggled. Today they released their unaudited interim results for the 6 months ending 31 December 2008.

    As a low cost provider of a staple product, it should not come as much of a surprise that:
    a) Shoprite has performed better than their competitors during a period where economic conditions are tough and consumers are more than likely buying down (i.e. shopping at cheaper stores)
    b) Shoprite has done well compared to other listed companies as a result of the fact that they sell a staple product (food) that no-one can go without.

    Below is a graph of the share price performance of Shoprite versus some of its competitors and the ALSI over the past 12 months (note graph excludes the effects of dividends):

    The food retailers have clearly outperformed a poor ALSI over the past 12 months, and if one takes dividends into account, then they have all produced a positive return, while the ALSI is down in the order of 25%. Shoprite’s share price appreciated 34% in this period.

    Another factor that has assisted Shoprite over this period has been their foray into Africa. While many companies listed on the JSE have attempted to enter first world markets (read the UK, USA, Australia) Shoprite have gone the route of entering Africa and India. The rationale for this decision is probably two pronged.
    Firstly they are typically low cost providers, and therefore entering first world countries wouldn’t make sense as the populations have high levels of disposable income (at least before the credit crunch) whereas developing economies seek out low cost providers that can provide an excellent product.
    The second logical reason would be that first world countries typically are highly competitive. This makes it extremely difficult to break into the market, and once a foothold is established; margins are typically not that great. On the other hand, developing countries usually don’t have highly competitive markets which may make it tougher to initially break into the market, but once a presence is established margins are excellent.
    Shoprite also profited from a weakening rand, with exchange rate gains up from R7m to R26m.

    Shoprite’s nominal growth in turnover and earnings would have been boosted by high levels of food price inflation which came in at 16.9% for the period. Profit increased over the corresponding prior period by 38.2%, while turnover was up 27.3%. The increase was obtained despite decreasing their gross margins.

    Much of the sales growth came from existing stores, with the contribution from new store openings remaining fairly muted. Looking the presentation to analysts Shoprite now operates in 17 countries with 81 000 employees.

    CEO Whitey Basson was pleased with the results and went on to say that the effects of the global financial melt down will be difficult to predict, but that Shoprite should be better placed than most to weather the storm.

    Shoprite ended the day up 1.7% at R50.70, just 11% shy of its all time high. The ALSI ended the day down 0.45%.

    Take care,

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

    Permalink2009-02-18, 18:30:56, by Mike Email , Leave a comment

    Results Season

    We are now well and truly into the results season, not only in South Africa, but across the world. Many listed companies use the calendar year as their financial year end and with many others having a June year end we have a plethora of companies releasing their final and interim results from the second week of February through until the early parts of March. JSE listed companies are required to report results twice a year, and within 3 months of the period end.

    The last few years has typically been characterized by companies religiously churning out positive earnings surprises, but this year we have seen this trend reversing. South African company earnings probably won’t be as affected as many other countries as we have lagged the global slowdown to a certain extent, but many CEOs will be warning of future headwinds.

    Yesterday saw the release of buoyant results by Kumba Iron Ore.

    Kumba produced excellent revenue growth of 85.8% (from R11.5bn to R21.36bn) for the financial year ended 2008. This came as a result mainly of a large jump in metal prices and a weakening rand. Remember that the iron ore price is only set once a year (it happens around this time of year), and last year there was a 93% price increase (in USD) in the price of iron ore as ‘the China story’ was gathering to its peak. Below is a chart, taken from the Kumba results presentation, indicating how the increase in revenue from 2007 – 2008 was apportioned:

    In a time where excessive debt has been punished, Kumba has been able to decrease their debt/equity ratio over the year from 106% to a respectable 45%. Despite decreasing their reliance on debt over the course of the year they are still paying out a large portion of their earnings in dividends. The dividend declared in December was R13, bringing the full year’s dividend to R21, which equates to a dividend yield of just over 13% at today’s price.

    While the outlook for growth in previous years has been exceptional this year they are only looking to increase volumes by 10% (market permitting) in 2009. It is encouraging for them that they are able to hopefully increase production even through a global recession, but it is way lower than previous projections. Margins too will be squeezed to a certain extent, but still remain healthy when compared to long term averages.

    Kumba projects that demand from Europe and Asia ex China will be weak. Demand from China should remain as the government provides a massive stimulus to infrastructure spending.

    As with all mining operations, safety is of paramount importance. So much so that they addressed their safety record right at the beginning of the presentation. Their records have improved dramatically over the past 8 years or so, but they still aim for zero fatalities and life threatening injuries.

    The share price has been punished over the past year, after trading as high as R379.21 in March. The share price fell all the way to R102.55 in October last year before rebounding slightly to its current level of R161. Kumba was marginally down yesterday, but ended today down 3.56%. Gold mining companies were the start performers of the day, up 7.06%!

    Take care,

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

    Permalink2009-02-17, 18:35:50, by Mike Email , Leave a comment

    UK Property Returns

    UK property has been a popular asset class for many investors and indeed for many SA investors over the years. Investors bought into apartments for rental and also into commercial property with the promise of excellent returns. With all investments, including property, it’s important to have a clear understanding of how a return is likely to materialise.

    We have discussed property returns in the past, but here we discuss recent developments in the UK property market.

    A recent report by property experts Jones Lang and LaSalle made the following comments

    o Lack of credit has continued to drive risk premiums higher. This is another way of saying with no credit there are no buyers and hence prices of property and other assets have fallen substantially.
    o Rental values are likely to fall over the next two years with London offices reporting the greatest decline.
    o Their current forecasts indicate that fixed property yields will bottom out in Q3 2009.
    o They expect negative total returns of between -7% and -12% in 2009.

    With banks being encouraged to resume their “normal” lending, while at the same time having to recapitalise their balance sheets, they find themselves in a difficult position.

    In both the listed and unlisted property market, prices have fallen, especially as weak sellers have exited for the safe haven of government bonds and other lower risk investments. With far fewer buyers property yields have increased and some are starting to see value in this asset class.

    The report indicates that rising yields (another way of say falling prices) have “wiped a full 35% - 40% off capital values since June 2007. This already exceeds the 27% correction that occurred between October 1989 and 1993.”

    They point out that in the 5 years to December 1995 rental values fell by 22%, yes gross incomes actually rose by 18%. So in an environment when rentals were increasing, property values continued to be written down.

    This set the scene for the subsequent rise in values far ahead of the steady income returns.

    Remember the total return from an asset is a function of

    o The income yield; and
    o The increase or decrease in the capital value

    As indicated on the attached chart, income yields are generally steady. With property, this is a function of the long term rental contracts.

    However the total return is influenced by how capital values move above and below the yield received.

    The chart depicts rolling 5 year holding periods.

    In the early to mid 1990’s the total return was less than the rental yields received. Then, despite rental incomes remaining steady, capital values escalated and investors received a far higher capital growth.

    Now, despite positive cash flows, capital values have dropped substantially, delivering total negative returns.

    For existing investors with offshore property, the total return decline has been as sharp as that of equity returns. For investors looking for opportunities, property is starting to look attractive. But this is the case with other asset classes and there is a fair possibility that prices continue to decline in 2009.

    Regards,

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

    Permalink2009-02-16, 16:39:25, by Mike Email , Leave a comment

    Global GDP Numbers

    We have written about the fact that over longer periods of time asset prices have often moved contrary to the direction of a country’s growth as measured by GDP. It was Warren Buffet who pointed out that over two discrete 17 year cycles, asset price appreciation and growth rates showed no correlation. Asset prices have fallen substantially in 2008, so what are growth rates doing.

    Because of the substantial lag effect in measuring economic output, these are lagging indicators. Still we note the type of declines in economy’s in the 4th quarter of 2008.

    Growth rates or rather rates of contraction of economies across various countries are being released as follows:

    4th quarter provisional numbers indicate that the US slipped by 3,8% in annualised terms.

    The 10 year chart indicates the extent of the swing.

    UK slipped 6,1% annualised in the 4th quarter of 2008.

    Today the Eurozone GDP results were released. The FT reported that these contracted at a record rate. GDP over the 16 country region slumped a negative 1,5% for the 4th quarter. This is the steepest since records for this region began in 1995.

    Germany itself plunged 2,1% for the quarter, its worse contraction since 1987. This is an annualised rate of negative 8,7%

    Next week the 4th quarter numbers for Japan will be released. Reports are indicating that these could be as low as a negative 11,7% in annualised terms. This would make it the steepest decline since the 1974 oil shocks.

    Japanese exporters are under immense pressure as the currency has appreciated across all major currencies.

    Expectations:

    The IMF has been dropping world growth expectations, to its current growth rate of 0,5%.

    But given the actual numbers being released, even an official growth rate of 0,5% may be optimistic. These numbers will be revised again.

    Eurozone GDP is now expected to decline by around 3% for 2009

    The G7 Finance Ministers meet today and tomorrow. The more important meeting will be held in April – i.e. G20 countries in the UK. Global contraction in growth and how to revive this will be on their agenda.

    Have a wonderful weekend

    Kind regards

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

    Permalink2009-02-13, 17:20:06, by ian Email , Leave a comment

    2009 Budget Speech

    Another year has gone by, and Trevor Manuel has presented another budget to the South African population. We were fortunate enough to attend a breakfast this morning where Mr Manuel fielded some questions on the budget and spoke about other issues. As we have been accustomed to over the recent past, there was the inevitable question on whether this would be the last time that he presents the budget, and he predictably avoided answering the question by asking if that was the last question of the morning! Time will tell whether the next budget will be presented by Trevor Manuel, and I am sure that a lot of that has to do with the new ANC leadership that gets chosen after the elections this year.

    One of the more topical issues that received some attention in the budget and at the breakfast is Government’s intention to increase its borrowings. There was cause for concern from the floor that the government would struggle to raise capital at affordable rates owing to global risk aversion. The response was that government will take into account the cost of any debt potentially raised, and weigh it up with the potential benefits that the debt would be able to achieve.

    Specific reference was made to the fact that debt should be maintained at levels that don’t constrain the country’s future development (something the US have failed to do). When Trevor Manuel assumed office in 1996 the ratio of public debt to GDP was at a staggering 48%, ensuring that a large portion of the country’s GDP was spent servicing this debt. Unpopular as it was at the time, Mr Manuel oversaw greater control of public spending that allowed amounts borrowed to be systematically paid off. The debt servicing burden was slowly but surely decreased (as it should be in periods of economic prosperity) and it currently stands at 2.5% of GDP. The current level of debt is 23% of GDP, which makes it possible for the government to increase borrowing (as it attempts to provide fiscal stimulus through increased spending).

    An attempt to improve the financial position of the Road Accident Fund (RAF) has resulted in the levy owing to them being raised by 17.5c a litre up to a total of 64c a litre. The general fuel levy will rise by 23c and 24c per litre for petrol and diesel respectively.

    In other areas of the budget the Minister has attempted to guide the general population to live more responsible lives. Among the proposals is a R3 levy per bulb for light bulbs that aren’t energy efficient, an increase in the levy on shopping packets, and an increase in air passenger departure tax. Another proposal to make green investments more attractive is the proposal to allow a write off of 115% of the cost of energy efficient equipment to commercial property owners. On top of the proposals that will hopefully steer South Africans to living greener, was the usual increase in ‘sin’ taxes. Cigarette taxes will be up 88c per pack of 20, a bottle of wine will cost 10.5c more, a can of beer 7c more, and the cost of a bottle of spirits will go up R3.21.

    There was nothing drastic on the income tax front, where the changes to the income tax brackets were mainly to adjust for inflation. The interest income exemption (for under 65’s) was raised by 10.5% to R 21 000 per annum. Homeowners will be pleased to know that the CGT exemption on your primary residence has been increased from R1.5m to R2m.

    Most people seem to be reasonably happy with a budget that Trevor Manuel earlier today described as his hardest yet.

    Take care,

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

    Permalink2009-02-12, 16:56:24, by Mike Email , Leave a comment

    Chinese economic stats

    The story of China growth and productivity has long been given out as a major driver of global growth. In many respects though China, through its low cost base and large run efficiencies has benefited global growth by assisting in lowering prices. Now the hope is that the Chinese economy picks up the slack left by the rapidly declining US and European countries. Let’s look at some recent stats from China.

    According to the IMF 2007 stats, in US dollar terms, the US is ranked the biggest economy with GDP at approximately $13,8 trillion. It then falls off to Japan at $4,3 trillion and Germany at $3,3 trillion. China was officially ranked 4th with a 2007 GDP of $3,28 trillion.

    There is some debate with Chinese growth recently revised for the 2007 year to 13% instead of 11,9% and the GDP re-stated at $3,4 trillion compared to Germany’s $3,3 trillion. This revised growth rate was apparently confirmed by the World Bank.

    According to Wikipedia data, a senior World Bank economist said in January 2009 that the Chinese economy may even be 15% bigger than that of Germany.

    So while its measurement is always questionable, the absolute number is still far lower than the US powerhouse, especially considering that “growth” in the US has been three quarters consumer driven.

    The question is with China as largely a production and agricultural economy can it trasntion quickly enough into a consumer driven economy.

    Growth rates
    China's economy grew at an average rate of 10% per year during the period 1990–2004, the highest growth rate in the world. But this has started to slow and reports indicate that the GDP growth rate for the December quarter came down to an annual 6,8% compared to 9% in the previous quarter.

    The two most important sectors of the economy have traditionally been agriculture and industry, which together employ more than 70% of the labour force.

    The latest producer price inflation numbers tumbled to the lowest in 7 years – down 3,3% - and inflation is back at 2006 levels as the economy has not avoided the global slowdown.

    Consumer price inflation, which was running at 7,1% in January 2008 and 8,7% in February 2008 is now coming in at just above 1%.

    Imports and exports
    In a definite sign of the slowdown, Chinese exports fell 17,5% year on year to $90 billion in January. Imports fell 43.

    Economic Stimulus plan
    The authorities are concerned about the slowdown and last November announced plans to inject $586 billion inot the economy.

    It is focused on increasing affordable housing, easing credit restrictions for mortgages, lowering taxes and more money into infrastructure development.

    Motor vehicle sales
    Data released reflects December sales of cars in China surpassing that of the US. While still down 14,4% to 735,000 they exceeded US sales of 656 976 cars – down 37% to a 26 year low.

    Sales for 2009 may still come in slightly lower than that of the US, but US sales have fallen dramatically. A number of between 9m and 9,5m car sales in China is predicted. 2008 sales at 9,38m was up 6,7% on previous year.

    So in many respects the growth rate has fallen quickly. All economic stats will be closely watched for signs that China is resilient enough to pick up some of the slack.

    Kind regards

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

    Permalink2009-02-11, 17:43:55, by ian Email , Leave a comment

    A bank, a micro lender and credit retailer

    Absa Bank reported annual results yesterday. Today African Bank (Abil) reported a trading update for their first financial quarter to the end of December. Abil recently acquired furniture retailer, Ellerines, which itself is largely a credit provider. It’s interesting to look at a few key numbers across these 3 credit providers of a major bank, a micro lender and a furniture retailer.

    Absa reported its annual results to December. At its core retail and commercial banking division, sales or advances increased 11% for the full year to a massive R347 billion. Non performing loans rose from 1,8% level to 3,5%. Total advances to customers across all divisions increased by 16,7% to R532 billion.

    Impairments increased, as did other key criteria such as vehicle repossessions and property sales in execution. The total impairment charge rose by 140% to R5,8 billion.

    Absa managed to increase earnings and dividends, but is not optimistic about the business environment going forward.

    The share price has held up – gaining 1,1% to 10187 today.

    Absa has a market cap of R69 billion and a dividend yield of 5,8%.

    African Bank is at its core a micro finance lender. While still relatively small compared to the main four banks, it has developed into a serious contender as lender to the mass consumer, competing with the larger scale banks.

    The typical bank states that it has made advances. Abil knows that it’s in the business of selling loans and so says “Sales of new loans granted for the quarter increased by 17% to R3 billion.” This brings total advances to R17,4 billion. The December quarter is typically a good period to advance loans.

    While Abil says that the quality of its loans is improving, it still records non performing loans of R4,5 billion, equivalent to 26,1% of gross advances. Bad debts written off are annualising at 5,8%. This is down from 6,6%.

    At the Ellerines business they are undergoing a substantial revamp, downscaling from 7 brands to 6 and cutting back on number of stores. The credit granting prior to the takeover by Abil was not as stringent and non performing loans are now at 37,7% of gross advances. The annualised bad debt write offs are running at 14,2%.

    Across these 3 levels of credit provider, the level of non performing loans to total advances is very wide. Non doubt Abil was too early in coming in and buying the relatively poor Ellerines business, but in time they will right size this credit retailer.

    Abil has a market cap of R22,7 billion and a dividend yield of 7,4%.

    The share price fell 20c to 2830c.

    The advances and bad loans status across all retailers will be watched for an indication of the underlying economics turning.

    Kind regards

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

    Permalink2009-02-10, 17:52:06, by ian Email , Leave a comment

    S&P500 earnings

    A few weeks back we discussed earnings forecasts and how these are likely to continue to come down as and when companies report. The good news is that earnings have come down sharply from their highs already. We know that prices have fallen dramatically. The ongoing question now is when will sustainable earnings bottom out?

    One respected US analysts, Ed Yardeni, noted that analysts have cut their S&P500 forecast by more than 18% since November 20th.

    The chart below reflects the earnings collapse across the S&P500.

    We have mentioned how positive analysts typically are, often more optimist after a period of rising earnings, only decreasing their forecasts when faced with slowing earnings. I.e. they tend to be behind the curve in their forecasts.

    This is clearly illustrated with the forecasts for the full 2008 year.

    In March 2007, the consensus forecast for the broader S&P500 earnings was $92. Throughout 2007 and 2008 the forecast kept falling, until at the end of 2008, they were forecasting a figure of $48,05 across the S&P500 companies. I.e. almost half what was originally forecast.

    At the end of January, the forecast has fallen to $46,86. The graph below indicates the historical actual and the lower forecast by S&P500 to an estimated $37,90 in September 2009.

    Depending on final reporting for Q4, 2008 the forecasts may be lowered yet.

    For the full 2009 year the current projection is $42/share.

    Given the severity of the decline, companies will also be using this opportunity to create a cleaner base. They will increase provisions, impair asset values and write down whatever they can.

    Kind regards

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

    Permalink2009-02-09, 17:13:03, by ian Email , Leave a comment

    Daily Equity Report Friday 6 February 2009

    We spent some time this past weekend in a small group with well known
    scenario planner Clem Sunter. It was a fascinating time discussing various possible outcomes to global and local economies and how this would impact on asset allocation decisions. In the month ahead in our quarterly update, we will go into more detail on this.

    One point that we raised and was confirmed by Mr Sunter was the fact that a clear distinction needs to be made between the economic outlook and valuations. Because prices and hence valuations try and anticipate the economic position 12 - 18 months out, it's not the current economy that drives prices, but to what extent the news is already been factored into prices.

    While this always holds true, it's particularly relevant now, when we have already been through a massive write down in global share prices - an estimated $30 trillion in total.

    So when looking at scenarios, it is important to try and identify what is already priced in, and what may be seen as a possible flag not currently priced into assets.

    In discussing various scenario outcomes in a very volatile environment, one aspect that was discussed at some length was the ability (or inability) of China to take up the slack that is rapidly being left by the slowing developed markets, but especially the consumer in the US.

    The general consensus appear to be that China's GDP growth this year will fall to between six and seven percent, given the slowdown in exports. Many are looking for a so called V shared bounce back up in the economy.

    While there is some agreement to how China has been transforming over the last 15 years, there is some debate as to its ability to generate internal demand. The understanding is that China is still an export led economy, underpinned by rapid investment growth, but that consumption is still a relatively small part of Chinese GDP.

    A possible devaluation of the Chinese currency?

    One tool that the Chinese authorities have is the ability to devalue their currency, the Yuan. They have pegged it to the US dollar, managing the appreciation very steadily. But there has been a history of devaluing and given the rapid slowdown, this is a tool that they may well use.

    The Economist calls a devaluation of the Yuan foolish, because it will do little to bolster exports, which have been hurt by weak external demand rather than declining competitiveness.

    The Soc Gen report mentions that at the end of 1993, the authorities
    devalued the Yuan by 33%.

    It continues.

    "What is unambiguous however is that the authorities are very concerned about the risk of an economic slowdown. The very survival of the regime depends on growth. The Financial Times recently reported Prime Minister Wen saying, ""We must be crystal-clear that without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development.factors damaging social stability will grow"

    Though extreme, the Soc Gen report says that "A Yuan devaluation would
    undoubtedly be likely if the alternative was the overthrow of the Communist Party."

    At this stage, the economic implosion of China would be a major flag
    ratified by a large devaluation of the currency.

    By lunch time on Friday however global markets were all trading positively on the day.

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 944 966

    Permalink2009-02-06, 17:41:06, by admin Email , Leave a comment

    A Possible Scenario

    We spent some time this past weekend in a small group with well known scenario planner Clem Sunter. It was a fascinating time discussing various possible outcomes to global and local economies and how this would impact on asset allocation decisions. In the month ahead in our quarterly update, we will go into more detail on this.

    One point that we raised and was confirmed by Mr Sunter was the fact that a clear distinction needs to be made between the economic outlook and valuations. Because prices and hence valuations try and anticipate the economic position 12 – 18 months out, it’s not the current economy that drives prices, but to what extent the news is already been factored into prices.

    While this always holds true, it’s particularly relevant now, when we have already been through a massive write down in global share prices - an estimated $30 trillion in total.

    So when looking at scenarios, it is important to try and identify what is already priced in, and what may be seen as a possible flag not currently priced into assets.

    In discussing various scenario outcomes in a very volatile environment, one aspect that was discussed at some length was the ability (or inability) of China to take up the slack that is rapidly being left by the slowing developed markets, but especially the consumer in the US.

    The general consensus appear to be that China's GDP growth this year will fall to between six and seven percent, given the slowdown in exports. Many are looking for a so called V shared bounce back up in the economy.

    While there is some agreement to how China has been transforming over the last 15 years, there is some debate as to its ability to generate internal demand. The understanding is that China is still an export led economy, underpinned by rapid investment growth, but that consumption is still a relatively small part of Chinese GDP.

    A sign of slowdown in China

    Source: Societe Generale and Datastream

    A possible devaluation of the Chinese currency?

    One tool that the Chinese authorities have is the ability to devalue their currency, the Yuan. They have pegged it to the US dollar, managing the appreciation very steadily. But there has been a history of devaluing and given the rapid slowdown, this is a tool that they may well use.

    The Economist calls a devaluation of the Yuan foolish, because it will do little to bolster exports, which have been hurt by weak external demand rather than declining competitiveness.

    The Soc Gen report mentions that at the end of 1993, the authorities devalued the Yuan by 33%.

    It continues.

    “What is unambiguous however is that the authorities are very concerned about the risk of an economic slowdown. The very survival of the regime depends on growth. The Financial Times recently reported Prime Minister Wen saying, “”We must be crystal-clear that without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development…factors damaging social stability will grow”

    Though extreme, the Soc Gen report says that “A Yuan devaluation would undoubtedly be likely if the alternative was the overthrow of the Communist Party.”

    At this stage, the economic implosion of China would be a major flag ratified by a large devaluation of the currency.

    By lunch time on Friday however global markets were all trading positively on the day.

    Have a great weekend

    Kind regards

    Ian de Lange
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 944 966

    Permalink2009-02-06, 11:56:26, by ian Email , Leave a comment

    Lower interest rates fail to ignite asset prices

    Investors focus was on central bankers today. The consensus was for rates to fall in the UK and South Africa. It was expected that the ECB would remain with their base interest rates at 2%, the Bank of England to drop by 0,5% and the South African Reserve Bank to drop rates by 1%.

    This all happened today. The base rate for the UK is now at 1%, which is the lowest ever in 315 years of history.

    Demand across the globe fell so drastically in the last quarter of 2008, that when combined with a retraction of credit, prices of assets and goods are falling. Official inflation in the UK is likely to fall below the 2% target range.

    The EC maintained their base rate at 2%. They are likely to cut their rate down by a further 0,5% in March, given the severity of the downturn.

    With interest rates across all G10 countries down to the bone, and interest rate differentials now almost non existent, there is an argument that forex traders and investors are virtually rudderless in selecting which currency to invest in.

    Standard Bank’s view is that interest rate differentials are but one component, but given that this has been squeezed down close to 0%, a more important consideration now is the volatility element.

    Because the driver of currencies for the foreseeable future will be more explained by risk or risk aversion than return, lower volatile currencies will be favoured over higher volatile currencies, despite them carrying higher yields.

    With low yields differentials and a focus on risk as measured by volatility, it’s highly likely that high volatility across currencies will continue for the foreseeable future

    Locally due to the rebasing and reweighing of the inflation basket, CPI – the new target is expected to fall to an average of 7,5% in the first quarter and an average of 5,2% in the third quarter according to the Reserve Bank.

    Most risks to inflation moving up, except for the volatile currency risk have dissipated. Expected growth rates across developed and emerging markets are down sharply.

    Taking these facts into account, the policy committee decided to reduce the repo rate by 1% to 10,5%. The rand strengthened against the US dollar and Euro, but fell against the pound.

    The Reserve Bank is taking a more cautious approach to letting interest rates decline, despite the severity of the slowdown. It leaves them with a lot of ammunition for ongoing rate cuts for the rest of the year.

    The local JSE gained some ground, but then fell back as global markets fell back on further negative economic numbers – especially the initial jobless claims at 626 000 – the highest in 26 years.

    Gold is up at $917, but local gold shares fell 2,95%.

    Kind regards

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

    Permalink2009-02-05, 17:50:50, by ian Email , Leave a comment

    It is Not the End of the World

    At 178 in Forbes’ ‘World’s Billionaires List’, with a net worth of $5.5bn as at 11 February 2008 (all self made), Henry Kravis is someone to listen to when he speaks on his area of expertise. He has made his money in private equity and leveraged buyouts, and was immortalised in the book Barbarians at the Gate which detailed his buyout of RJR Nabisco in the late 1980’s with the firm KKR.

    He was recently speaking at the annual World Economic Forum (WEF) in Davos, Switzerland, and then later at the Super Return Private Equity Conference in Berlin, Germany. At both gatherings he told the delegates that despite going through tough times, “Private equity is not dead”. From his presentations we can take some lessons that will hopefully assist us through these tough times.

    To the private equity delegates he spoke about the need for private equity firms to adapt their business model. No longer will there be massive public to private deals that require large amounts of debt finance, companies will need to secure smaller, more diverse deals, and make do with lower levels of debt. While this may not be as ‘easy’ or ‘fun’ as the large deals, it is a necessary process that one needs to go through in order to survive.

    In the same way we can use these lessons in our respective companies. During tough economic times you generally have two options:
    • Work harder/smarter to ensure that your company survives until the good times returns. Relook at your business model and see whether it is still relevant. Many companies start up in the good times, and when the tough times come go belly up because the owners don’t revisit the business plan (that they might not even have thought about that much when the business was set up) and see how and where they can improve their business.
    • Roll over and let your business go under, or just carry on as you were during the boom years and hope that you make it through in one piece.

    It is typically in the tough times that innovation is at its highest as individuals and businesses are forced to try new things in order to remain afloat.

    At the WEF Kravis said in a panel discussion that markets have faced tough times before, and they always have managed to find a way to get through them, and this time it won’t be different. Essentially his point was that this too shall pass, and that being ready to capitalise on the opportunities that will no doubt present themselves over the next months and possibly years will result in those skilled business people gaining a massive edge over their competitors who have totally retreated into their shells, and are only seeking to get through the tough times.

    Sticking your head in the ground and refusing to believe that the world economy is facing some major challenges isn’t going to help you succeed, but at the same time one mustn’t be foolhardy and pretend that things can only improve from year. Realise that there are problems, but that they will pass. Work towards ensuring that when they do pass you are in the position to benefit from the improved conditions.

    Take care,

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

    Sources: www.forbes.com, FT.com, WSJ.com

    Permalink2009-02-04, 18:07:41, by Mike Email , Leave a comment

    UK Property fund

    One area that has been severely hard hit by the outgoing global credit tide has been global property prices. The very expensive areas like UK property is a case in point. This is very evident when looking at the price graphs Liberty International, with a current market capitalisation of R19 billion, but down 73% in sterling.

    Many investors have held the mistaken belief that because property is a physical asset, compared to financial asset like a share in a company, it is somehow immune to any substantial price declines.

    An extension to this view is that property prices always go up.

    Clearly as the credit bubble burst in 2008, this quickly translated into a loss of general investor confidence, and US and UK financial service companies and banks under pressure, resulting in UK property being hit very hard.

    The Investment Property Databank measures prices of physical property. UK commercial property fell by a record 27% in 2008

    Liberty International is a UK domiciled company holding predominantly UK regional shopping centre property. It has a secondary listing on the JSE. Over the years it has been very successful in putting together a portfolio of large shopping centres – owning 8 of the UK top 21 regional and central London shopping centres.

    Donald Gordon, the company founder, favoured the risk return profile of property, having established a large property portfolio in South Africa. Property as an asset class is long term in nature in terms of the leases signed. In the UK these extend from 10 – 25 years and even longer, with upward only rental clauses and fully repairing and maintaining. Add to this the ability to use bank gearing at low and fixed rates and the recipe is very attractive.

    But as risk appetite increased, so investors bid up prices – essentially accepting lower and lower yields.

    Now with tenants under pressure and banks nervous of rising debt levels, prices of property companies have tumbled.

    Liberty has debt of around GBP4 billion and an asset base valued in September at £7,9 billion. The value of this asset base has declined in the 4th quarter.

    Their estimated net asset value per share as at Sept 2008 was down to 975p. But the share price says it all – it has fallen substantially from close on GBP14 to the current 366p.

    Investors have sold because they are factoring in the cost of possible capital raising. UK’s biggest commercial property company, Land Securities, has reportedly said that they could not rule out a capital raising.

    Like Liberty they have scheduled debt repayments, but as property values have declined, so their loan to value ratios have been rising.

    This varies from company to company, but across the main listed property companies they try and maintain a loan to value ratio of 45%. As values come down, so this ratio worsens. Each property company has specific debt covenants, which in part dictate maximum levels of loan to value ratios.


    These companies have been top of the list for shorting. i.e. investors looking to sell short financial shares have sold the property companies short as proxies.

    While the values of the underlying properties has and will continue to drop, the price of the real estate investment trust will trade at a discount. Prospect of capital raising will maintain the high discount.

    The historical yield, once hovering around 2,5% has shot up to 8,8%. The price is back in rand terms to its August 2000 level. The price will be attractive far sooner than the UK property market bottoms.

    Kind regards

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

    Permalink2009-02-03, 17:27:33, by ian Email , Leave a comment

    The week ahead

    The first month of 2009 gave an indication of the difficulties facing global markets. Assets continued to come under pressure. The economic data continues to make for grim reading. The increased currency volatility has made doing business across borders extremely difficult and a number of companies have reported large currency losses.

    This week sees three main central bankers announce on interest rates. South Africa is also set to get its second drop in rates this cycle.

    Some of the reports due out this week:

    US employment statistics at the end of the week is an area that many investors will continue to focus on. With the consumer, the single biggest driver of the US economy, the employment numbers will be an ongoing indication of the strength of the beleaguered and battered man in the street.

    The US Labour Department will release the unemployment number on Friday.

    Today the US consumer spending for December was released. It was the sixth consecutive monthly drop coming in at down 1%. Income levels are down and unemployment numbers are rising, putting the average consumer under immense pressure. Demand for goods is down substantially.

    Interest rates

    The Bank of England is likely to lower their base rate by a further 0,5% to 1,0% on Thursday.

    The ECB – European Central Bank is likely to hold their rates at the 2% level.

    The Reserve Bank of Australia has its meeting tomorrow. It is likely to lower its current 4,25% by 1%.

    Locally, the Reserve Bank has its first monetary policy meeting for 2009 this week. They will lower interest rates, but the question now is will it be 0,5%, 1% or an outside chance of 1,5%?

    The wildly fluctuating currencies are causing major problems for multinationals. As the Japanese Yen firms against all currencies, the Japanese exporters are struggling. Toyota is set to announce its third quarter results by the end of the week and will give an update for its March year end. It is expected to report a loss for the first time since 1963.

    Exporters want to see the government devalue their currency, so that they become more competitive.

    Even hedging is costly because of the higher volatility

    While most economies are battling with a deflationary problem, our friends to the North, Zimbabwe, continue to suffer with a tad too much, i.e. hyperinflation. The loss of confidence in the paper printed by government used to serve as a mechanism for trade, erodes on a daily basis. From today the central bank tried to stem the devaluation in the purchasing power by lopping off 12 zeros.

    It won’t help. They estimate that money supply growth is up 658 billion percent in December. That’s a lot of printing!

    Reports indicated that the IMF has upped their estimate of how much the US banks require to recapitalise their balance sheets. This estimate has climbed from $500billion, to $1,4 trillion in October to a current $2,2 trillion

    Governments find themselves wanting to throw capital at the problem. At the same time many are calling for the problem banks to be left to go under in some form of orderly fashion.

    What we will be watching for as economic data and company data is released is how prices and currencies react. There is still a sense that price have not fully discounted all the bad news coming through – but this can change very quickly.

    Kind regards

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

    Permalink2009-02-02, 18:11:48, by ian Email , Leave a comment