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    Historical December returns

    The JSE, after some technical problems, opened up sharply, but then gave up some gains. Still for the day it was up 0,32% as global markets steadied after last weeks hiccup. This puts the JSE up around 2% for the month and 28% for the 11 months of 2009.

    This performance has been far ahead of predictions at the beginning of the year, but is indicative of how long run performance from equity prices can be lumpy.

    A technical analysis report from JP Morgan noted the ascending market, which in many respects has reached critical levels. The commentary went on to indicate that prices may break through the resistance levels or turn bearish and break down

    What then sparked my interest was the comment that they expect an interesting December.

    JSE All Share index

    Source : Sharenet

    Because December has lower liquidity and fewer trading days, price moves can be exaggerated. I decided to look back over the years and see what the average percentage move was in December.

    From December 1985 – the average percentage gain, excluding dividends, for the month of December has been 2,8%.

    This December average is more than double the average monthly performance of all months from December 1985 of 1,2% (excluding dividends) and gives an indication of what can happen to prices in times of lower liquidity.

    Over this time period, 16 Decembers produced positive months, with prices jumping 18% in December 1993, 13% in December 1999 and 11% in December 2001.

    Over the same period, 8 Decembers produced negative results with the worst being December 1987 – after the crash of October of that year, where prices fell a further 6%.

    Over the shorter period of time, nothing is certain when it comes to price movements, but the comment holds true – “we expect an interesting December”

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-30, 17:37:53, by ian Email , Leave a comment

    Market wrap

    Markets came under pressure this week from the debt repayment delay that Dubai World is looking to impose on its creditors, given that it is struggling to roll over a large part of the approximately $59 billion in debt. The news shook global markets yesterday and while the US was closed for their Thanksgiving holiday on Thursday, the negative sentiment continued into Friday.

    Emerging markets and most global markets pulled back strongly as investors around the world became very skittish and sold down positions.

    Commodity prices are down.

    Global markets came under pressure, but there has been a recovery and the FTSE100 is up 0,6%.

    The Hang Seng closed down 4,8%

    The Australian All Ordinaries was down 3%

    The US markets opened in negative territory having been closed yesterday.

    Locally the market opened in the red, but recouped some of the losses. It ended down 0,8% to 26808.

    Gold fell back as the dollar gained some ground- Bullion is trading at $1167/oz Gold shares fell 1,89%.

    A couple of possibly affected companies released announcements on any possible impact that they may suffer on defaults of payments from Dubai contacts.

    Murray and Roberts notes that it does not have exposure to Dubai World. It commented that it continues to progress final account settlements for the Dubai International Airport Terminal 3 and Concourse project 2 for the Dubai government. Murray and Roberts ended down just 20c to 4840c

    Group Five noted in a statement that it does not have exposure to Dubai World or its real estate subsidiary. The shares ended up 16c to 3690c

    The rapid decline in prices over the last couple of days on the Dubai announcement is indicative of just how nervous these markets are. There are many professional managers who don’t believe that the world economy is going to be plain sailing from here on out. There are going to be bumps along the way.

    Investors positioned with some offshore exposure, will have a cushion where the rand declines on global investor nervousness.

    Have a fantastic weekend

    Ian de Lange
    021 9144 966

    Permalink2009-11-27, 17:32:23, by ian Email , Leave a comment

    CPI Component Examination

    The inflation figure that is released by Stats SA every month is a composite of all goods and services purchased in South Africa. It gives an overall picture of the trend in prices and actual inflation can therefore vary greatly from person to person depending on where they live and what they spend their money on. Understanding this will go a long way to explaining why you might feel that your ‘personal inflation’ is different from the figure that is quoted.

    Most of the focus on the release by Stats SA is on CPI as it is a single figure that can be targeted and used by various stakeholders. What many people don’t know is that in compiling the CPI figure Stats SA calculates the inflation level of a broad array of goods and services in all regions. From here they weigh each area according to how prominent it is in the average person’s life to come to the CPI number. Interestingly they compute inflation rates for different income groups and for different regions (rural and urban, and all of the provinces).

    You can see how inflation has varied across a range of goods and services since October 2007, accounting for about two thirds of the inflation basket, in the chart below.

    It is interesting to note that the inflation level for some areas has remained fairly consistent, but other areas have seen large shifts. The dramatic fall in inflation for two key areas that account for around one third of the basket (Food and Transport) has played a large part in driving the overall inflation level down into the target range for the first time since February 2007.

    High commodity prices in 2008 pushed the cost of fuel and food production up, resulting in consumer pain. While these goods are still expensive (as a result of prior inflation) the year on year change (annual inflation rate) has fallen dramatically since their peaks last year.

    Housing and Utility inflation is another area where inflation has fallen as a result of the fall in interest rates, but this is the area that electricity falls under and it will therefore come under pressure in years to come should Eskom’s proposed tariff hikes become a reality.

    It is surprising that Education inflation remains above the target band even as the government looks to make it more affordable. This will mainly be a result of cost increases at the more expensive places of learning, with the cost of basic education probably not going up as much as this average.

    Health is an area that is currently above the band. The cost of health has historically risen quicker than overall inflation in developed countries as more and more resources are spent on populations that not only live more unhealthily than their predecessors but also longer than them. One of the primary reasons that older citizens generally have a higher inflation rate than the average population is that health costs form a larger percentage of their basket.

    It will be interesting to see how long inflation remains in its target range now that it is there.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2009-11-26, 17:19:21, by Mike Email , Leave a comment

    Investment manager change in outlook

    At this stage it appears that unless we see a dramatic pullback in the last few weeks of the year, the calendar year is likely to end with a solid return for equity investors.

    Annual percentage changes, especially in equity returns, often conceal the shorter term volatility. At this stage an investor into the JSE All Share index would be most satisfied with a 28,4% return on his local equity portfolio – the return of the JSE All Share index. But that same investor having invested into the local equity market on 1 January 2009 would have suffered a negative 15,2% just a few months later as the market continued heading south.

    As we pointed out last week, the end of 2008 and throughout 2009 there has been a high correlation between the South Africa market and global developed markets.

    At the same time this high correlation extends to the fact that the US dollar is weak, which in turn helps push up the price of a range of metal prices in US dollar terms, which in turn has helped push up the JSE with its resource bias.

    Investment manager outlook

    On a quarterly basis, the investment research team from Glacier interview 8 of the large local investment managers and collate their views. One of the questions posed is:

    Which general valuation condition best describes the current SA equity market?

    The change in views from the 1st quarter of 2009 to the 4th quarter is instructive:

    Source : Glacier research data

    Clearly the major view at the beginning of 2009 was correct. As pointed out above, a negative 15% in the first quarter has translated into a 28% gain some 8 months later.

    Now these same managers are more conservative with the same 62% that thought the market undervalued in the 1st quarter of the year, believe that it is fairly valued.

    Despite the improvement in the economy, the lower values, indicate that investors should be reducing their exposure.

    For Seed's weekly more detailed report, please click here

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-25, 18:30:47, by ian Email , Leave a comment

    Has the recession ended?

    South Africa released official quarter 3 GDP statistics today. These tend to be a lagging indicator, but encouragingly reflected growth for the quarter at an annual 0,9%, after shrinking for the previous 3 quarters. There was a rebasing and a revision of data, and this reflected that GDP for 2008 was revised upwards from 3,1% to 3,7%.

    The 0,9% means that the country is technically out of a recession.

    The rebasing from 2000 to 2005 is a common and necessary practice. In rand terms the size of the economy at the end of 2008 was stated at R2 284 billion. i.e. R2,3 trillion.

    In US dollar terms this is approximately $300 billion, which compares to the US at $14,2 trillion and China at $4,3 trillion. The graph below reflects the relative sizes.

    Tiger Brands is a company with a history that goes back to 1921 and listed on the JSE in 1944. It owns a number of well known food brands. The results to September reflected turnover up 8% to R20,4 billion, operating income up 24% to R3,1 billion and profit for the year from continuing operations up 43% to R2,479 billion.

    Headline EPS from continuing operations gained 20% to 1382c

    The share price gained 1,9% to 16300c giving it a market cap of R30,9 billion.

    Adcock Ingram was unbundled from Tiger Brands a year back. It also reported its annual results as a separate listed company. The company provides branded and generic medicines, consumables and hospital and medical equipment. Turnover increased 21% to R4,1 billion with net profit for the year up 19% to R789m. Headline EPS gained 16,1% to 450c

    The shares gained 4% to R52,49. It has been a steady gainer since listing at the end of August 2008 from R30. The company has a market cap of R9 billion

    Kelly Group, which is in employment recruiting business, released their annual results with revenue essentially flat at R2,2 billion, but profit before tax down 38% to R82,7million. Headline EPS declined by 40% to 61,7 cents.

    The company felt the impact of the global and local recession with the second half of the year declining substantially. The company operates under a number of brands, including Kelly, PAG, Accountants on Call. Frontline, Renwick, Executive Secretary Appointments etc.

    The company listed in April 2007. The price floundered from R10 down to R3 before recovering slightly to the current 497c.

    Global markets are all down for the day following yesterday’s gains.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-24, 17:33:01, by ian Email , Leave a comment

    A firm start to the week

    Global markets continued their upward momentum on Monday – the JSE All Share index gained 1,8% with the bulk of this gain coming in the last one and half hours of trading. Most global markets ended or are trading much firmer on the day with the UK’s FTSE100 index also up 2% on the day.

    Gold bullion surged up to new nominal highs touching $1174 at one stage, now trading at $1170/oz.

    Despite SA production of gold steadily decreasing, a firmer price will still typically have a positive impact on the rand. The firmer rand therefore resulted in gold in rand terms remaining neutral at R8753/oz.

    Silver has also moved up and is trading at $18,83/oz

    The two metals have a high correlation as is seen from the graph below.

    Source : Sharenet

    Newgold, the local listed ETF that tracks the price of gold bullion in rands listed an additional 400 000 debentures in respect of approximately 3920 fine ounces of gold. Newgold now has a market capitalisation of R14,9 billion.

    The price of Newgold moved up 1,34% to 8550c

    A few companies released results today for the year to September

    African Bank Investments released annual results to September. These reflected flat headline earnings of R1,8 billion. On a per share basis these declined by 11% to 225,2c. Dividends were also down 12% to 185c compared to 210 cents in 2008.

    The banking division –African Bank – performed well with headline earnings up 6% to R1,5 billion. The furniture division – Ellerines – reported headline earnings of R285 m – down 23% on previous 9 months.

    The share price gained 2,7% to 3016c.

    Netcare’s annual results saw group revenue up 6,9% to R23,2billion. The slight margin expansion saw operating profit up 9,8% to R3,7 billion. Headline EPS rose 27,2% to 78c. The share price gained 2% to 1225c

    Nampak is the largest packaging manufacturer in Africa, but it has struggled over the years. It produces packaging products from metal, glass, paper and plastics. Over the year to September it grew revenue by 6% to R19,5 billion but weaker margins saw trading profit fall by 26% to R1,1 billion.

    Then stripping out impairments of goodwill, plant property and investments, retrenchment costs, finance costs of R441m, profit for the year fell 60% to R204m. On a per share basis, this fell from 174c to 85c. In September 2001 EPS came in at 88,1c and so shareholders have not been rewarded in terms of improving earnings.

    The weak earnings have translated into a weak share price over time. The share price was R20 in 1999, falling to R10 in 2001, up to a high of R24 at the end of 2007 but now back to R16 – so not really going anywhere.

    The rand is trading at R7,46/dollar.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-23, 18:58:44, by ian Email , Leave a comment

    Ultra low interest rates

    In his latest missive, Pimco boss, Bill Gross bemoans the 0,01% per annum that US money market funds are paying investors. With over $4 trillion sitting in money market funds, there are many investors that are basically receiving zero percent return, which is the modern day equivalent of hiding money under a mattress.

    A graph presented by Pimco indicates that money has more recently been moving out of the save, but no return environment. The natural inclination for investors is generally to be risk seeking when presented with 0% in nominal terms, but this does not always hold true.

    US Money market funds

    Source : Pimco

    But as investors start to move up the risk spectrum and away from 0% cash returns, there is clearly the possibility for negative returns. This is the conundrum that many investors face – not being adequately compensated on their savings in money market and potentially not being compensated for the risk of investing into shares, bonds, property, etc.

    Along the same lines, an article in US based Barrons also noted that US Treasury bills were once again trading at ultra low interest rates with the yield on the 2 year Treasury note falling to 0,669% - which is almost back to where it was in December 2008 at 0,657%.

    In June this rate was at 1,4% and a month ago at 1%, so the yield has come down very sharply. The 12 month rate is at 0,25% implying a 12 month rate one year from now of 1,15%.

    The question being asked is if US shares are trading at 13 months highs with the Dow at over 10 000, the S&P500 hovering around 1100, and an economic pickup, why are investors still seemingly satisfied with these exceptionally low yields, willing to lock up money for two years for the paltry return of less than two-thirds of 1%.

    The rationale is that the expectation for an increase in interest rates any time soon is unlikely. This expectation has also been confirmed by various speeches of the Federal Reserve, who do not want to scare the market.

    For his part Bill Gross has identified the 5% - 6% yields on utility companies as attractive alternatives compared to money in the bank at near 0%.

    Have a fantastic weekend

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-20, 17:27:23, by ian Email , Leave a comment

    Emerging Markets

    Emerging markets are generally either loved or feared by investors. The difference in emotion is generally a result of the investor’s past experience. Emerging markets are typically more volatile than their developed market counterparts and as a result are more prone to boom and bust cycles.

    If correctly harnessed, the inclusion of emerging market assets in your portfolio can greatly enhance your return profile. The caveat is that one is able to stomach the higher volatility and that the investment isn’t made blindly.

    Taking a closer look at actual returns from the developed market (denoted as World Equity) versus emerging markets one can see that over both the last 10 and 20 years emerging markets have outperformed. Over 15 years, however, and particularly the 10 years between the end of 1994 and 2004 developed markets produced superior returns.

    20 Years (18 November 1989 – 18 November 2009)

    15 Years (18 November 1994 – 18 November 2009

    10 Years (18 November 1994 – 18 November 2004)

    10 Years (18 November 1999 – 18 November 2009)

    Making an offshore investment can therefore be quite daunting. The investment should clearly not be made lightly. A couple pointers would be to speak to your investment consultant about where the value currently lies and then to ensure that the mandate of the manager who manages your offshore equities is broad enough to allocate capital across both developed and emerging market exchanges.

    Interestingly, at the moment research indicates that there’s value both in developed markets and emerging markets. The value isn’t everywhere, but rather in pockets of each of these markets. In developed markets high quality shares haven’t rallied as much as lower quality companies and are therefore relatively more attractive on valuations. Their business models are also typically more robust than the more cyclical companies. Some emerging markets were particularly hard hit by the global market sell off (Russia was down over 70% in USD in 2008) and despite the strong rallies experienced this year are still well off their highs. Nigeria, for instance, hasn’t had much of a rally this year and is still 68% of its high and 32% down year to date.

    Asset allocation is important, but investors should be careful not to lump all assets in one asset class together. As you can see there can be massive discrepancies in returns within equity markets.

    We have recently started a new weekly email newsletter service that covers a market report, a look at retirement and investment planning, the global economy, and a summary of performance of several indicators including markets locally and globally, commodities, and currencies. Click here to sign up to receive this report weekly in your mailbox.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2009-11-19, 16:48:40, by Mike Email , Leave a comment

    The value of relative trades

    When viewing the equity market, it is apparent that there is a high degree of correlation with global markets. This can be viewed as both positive and negative – positive in the sense that the South African market and its listed shares are considered part of the global economy. Negative if one takes the view that there is the potential for global fund manager herding. If or when they decide to take profits or move back to a “safe haven” foreigners will once again become net sellers of local equities.

    The graph below reflects the US Standard and Poor 500 index in green and the JSE All Share index in red

    Source: Sharenet, Market Tracker

    Few local managers anticipated the extent to which prices would rebound up from their March lows.

    As mentioned the gains on risk assets have been driven by global fund managers seeking out higher returns given the near zero returns on euro, dollar and sterling cash. Emerging markets have been the natural recipients of these cash flows.

    2009 has seen a net R71,5 billion into equities and a net R18,7 billion into bonds from foreigners. This compares to an outflow of R63 billion in the same period last year.

    While global investors remain risk seeking, the rand, local bonds and local shares will remain firm. Trying to anticipate exactly how long this strong cash flow will continue or when it will slow is near impossible.

    To this end, valuations play far less a role in the shorter period of time. The historical price to earnings ratio of the JSE as a whole has moved up to 15,8 times as company earnings have come off and prices have moved up. On this basis the market is not cheap – but we know that over any short period of time expensive can get more expensive.

    When the market gets more and more expensive a less risky approach is to look at relative values.

    Relative values

    Listening to a range of local hedge funds provide some insight into their strategies, it is clear that while most of the long short managers have increased their net exposure to the market to take into account the upward momentum, there is a higher degree of confidence in relative value trades.

    A relative value trade is one where there is a potential for a gap to open or close between two share prices. A hedge fund manager will tend to concentrate more time and effort on these relationships and so tend to place less reliance on the direction of the actual share prices.

    There are many examples and variations of relative value, but as an example one that may be attractive is that between PPC (Pretoria Portland Cement) and Cashbuild. A value manager may analyse PPC and decide that the operating margins are too high and should decline over time, putting pressure on future profitability and hence the price. At the same time a major buyer of the PPC product is Cashbuild which operates nearly 200 outlets across Southern Africa. The same value manager may therefore find value in a Cashbuild which could over time see an expansion of its margins, naturally positive for the share price.

    By buying Cashbuild and selling PPC, an investor is not concerned about the overall market direction, but merely that the gap between the prices opens up to his benefit.

    Over the last 2 years and 12 months, such a relative trade would have worked very well. The graph depicts that from the same starting price, PPC has underperformed Cashbuild. The relative trade would have captured most of this differential.

    Source : Sharenet, Market Tracker

    The ongoing momentum in commodities, share prices and the rand may well continue until the end of the year, but as mentioned last week this does provide opportunity for reducing net exposure and looking for alternatives such as relative value trades.

    Don’t hesitate to contact us if you would like to discuss any aspect to your investment planning.

    Kind regards
    Ian de Lange
    021 9144 966

    Permalink2009-11-18, 16:17:11, by ian Email , Leave a comment

    The weak US dollar

    Yesterday the US dollar fell to a 15 month low relative to a basket of currencies. Today it is off these lows, but while the weak dollar has proved to be beneficial for US exporters as it allows them to report higher and higher profits in US dollar terms, it is proving to be a bind for most other countries.

    As the world’s main reserve currency and the biggest trading partner of most countries, its ongoing weakness is proving difficult for many countries around the world that rely on exports. US exporters however are naturally benefitting from the weakness and the weaker dollar has moved in lockstep with the S&P500 over the past 2 years.

    Source : Schroders

    Most investors have a view on the direction and fate of the US dollar: These are some of the comments from the global Standard Bank fixed income research:

    • More and more central banks around the world are being forced to intervene to support the greenback, and more and more policymakers warn that the combination of near zero US policy rates and a falling dollar runs the risk that new speculative bubbles will form.

    • The euro / dollar exchange rate appears to be heading for 1.60 in their view. It is currently 1 euro = 1,4846 dollars. European policymakers will become more and more concerned about US policies.

    • Commodity related currencies such as the Australian and Canadian dollar should continue to strengthen. Their view is that the Aussie dollar is heading for parity with the US dollar. It is currently at 1 US dollar = 1,077 Australian dollars.

    • The Chinese who run a fairly fixed exchange rate relative to the dollar, have made their concerns known on the US running its ultra low interest rates.

    • Despite global concern with the US dollar weakness, there has been very little comment from the US. They have stated that they are likely to continue with their low interest arte policy for the foreseeable future.

    The weaker US dollar clearly benefits the US in 2 ways according to the report. Firstly the US Fed is trying to devalue the dollar internally against goods and services, so as to prevent deflation taking a grip. I.e. it wants to stimulate inflation.

    Secondly US officials want to see global currency flexibility and would prefer the Chinese renminbi to move from its fixed rate to a floating rate. The report goes on to ask the question, “If we can assume that the global debate is now starting to move in this direction the key is, who blinks first? Will the US support the dollar, or will fixed rate countries adopt currency flexibility? We believe that there’s unlikely to be any near-term capitulation from either side.”

    The current exchange rate – maintained in a very tight band – is 1 US dollar = 6,8265 Chinese Yuan. This level has been in place since July 2008

    A Schroder’s report has the Chinese renminbi undervalued by 48% against the US dollar on a purchasing power parity basis.

    By pegging its currency to the US dollar, China has locked in a competitive advantage, which underpins its trade surplus. When viewed against the currencies of major trading partners such as China, Brazil, Russia, India and oil producer Saudi Arabia, the dollar still remains firm.

    Obama is in China and called on the Chinese to make good on their commitment to allow the renminbi to appreciate, but there does not appear to be any immediate moves to relax this peg and let the Chinese currency appreciate. The result is soaring Chinese foreign exchange reserves to $2,3 trillion.

    It’s definitely an area that we will continue to monitor.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-17, 18:49:34, by ian Email , Leave a comment

    Gold continues its steady march

    Gold in US dollar terms is trading at new highs. This appears to be a function of both dollar weakness and a general demand for bullion itself. Bullion touched a high of $1132.95/oz. It fell back slightly and is trading at $1130/oz.

    The rand firmed against the dollar, but the stronger bullion price helped moved gold shares up 2,46% on the day.

    Some positive factors for gold generally include:

    India Central Bank purchased 200 tons of gold for $6,7 billion at the beginning of the month from the IMF. While this had no impact on newly mined gold – i.e. just a transfer of ownership between one long term holder and another long term holder, the trade seemed to have an impact on the price.

    The trade seemed to be a signal to the market that central banks, for many years net sellers of their gold hoard, have started tuning net buyers.

    The average price paid was in the order of $1045/oz. At current spot this trade has seen an increase of some 8% in a couple of weeks.

    Having peaked in 1980 in nominal terms, the price of gold fell to $280 at the end of 1999. Central bankers at that stage signed a 5 year agreement restricting their total sales to 400 tons annually. This agreement, originally known as the Washington accord, was resigned in 2004, restricting sales to 450 tons per annum. The third central bank gold agreement was signed in August this year, limiting sales to 400 tons per annum. The IMF was not a signatory to this agreement.

    It is estimated that gold in storage above ground is in the region of 160 000 tons. Annual mined gold is in the order of only 2500 tons per annum. The vast supply of above ground tonnage compared to the newly mined gold has meant that investors have placed a high weighting on central bank activity, rather than annual demand and supply.

    Looking back 10 years when central banks started to divest from their gold holdings and increase their foreign exchange exposure, it’s clear that their timing could hardly have been worse. A price of $300/oz has compounded at 14% per annum in dollar terms to its current price.

    Because the natural annual off take exceeds annual supply of new gold, a swing in central bank activity may have a geared impact on the price.

    Gold price

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-16, 17:18:26, by ian Email , Leave a comment

    A bullish Ken Fisher

    Ken Fisher, founder and chief investment officer of US based fund manager, Fisher Investments makes some interesting points in regular newsletters that he publishes. He invariably has an optimistic slant on the reports that he puts out.

    He opines that “The global economy is showing signs of recovery and is in better shape than most appreciate. Inflation concerns, high unemployment, consumer debt, protectionist whims, commercial and residential real estate woes and other worries persist but are not new and shouldn’t hold enough new shockpower to terminate the new bull in our opinion.”

    An important feature of the current V action of the market is that categories that fell the most in the latter part of the bear market have tended to bounce back quickest.

    The chart reflects performance for the 6 months prior to March 2009 from worst to best US sector on the lower half of the chart. The upper section reflects how these have done since March to the end of quarter 3. There is almost perfect symmetry in the performance of the sectors.

    i.e. what fell the most sharply was the quickest to bounce back up. The gains have been led by sentiment and liquidity and not necessarily fundamentals.

    Source : Fisher Investments

    Fisher notes that even with the “monstrous move up, stocks still look cheap.”

    He looks at the earnings yields of stocks relative to the bond yield. This is not necessarily a forecasting tool, but gives an indication of how far stocks can rise to reach parity with long term bond yields.

    Source : Fisher Investments

    Their opinion is that while the road ahead will have some volatility there is still some way to go in the current recovery.

    Have a fantastic weekend.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-13, 17:47:29, by ian Email , Leave a comment

    Economic Growth and Market Returns

    A question that I’m sure most investment professionals get asked at least once in their lifetime, but most likely more often goes along the lines of, “Surely it’s quite straight forward to decide when to invest into the stock market (and in effect buy a share of a company)? When the economy is growing strongly companies will be able to grow their earnings and their share price will therefore go up. But when the economy is contracting their margins will be put under pressure, and so their share price should fall. Is this not so?”

    On the face of it this line of reasoning sounds valid, why should it be anyway else?

    The research, provided by respected independent Canadian research house BCA, indicates otherwise, at least in the US over 12 month periods. The following graph was presented by Coronation earlier in the week at one of their presentations and makes for some interesting viewing.

    As the graph shows, when US economic growth has been poor the AVERAGE real return of the S&P500 over the next 12 months has been excellent. At the high end we can see that when US economic growth has been exceptionally high the subsequent AVERAGE 1 year real return of the S&P500 has been poor. In the middle returns going forward have been variable.

    The reason for this is that investors move the markets and they react to how they expect markets will perform in the future. Markets are therefore forward looking, and typically lead economic data by around 6 months. In this way when economic data is poor the level of the market is low (just after a crash for instance). Prospects can only get better and shares prices therefore re-rate up to reflect the improving news. At the same time at the top of the market news can only get worse and astute investors therefore sell out of the market before the economic news starts to turn causing disappointing returns going forward.

    The anomaly to the data comes when GDP growth is between 3% and 5% is most probably that this is when the economy is in a sweet spot with some growth beforehand, but also a further period of growth to come (i.e. middle part of a bull market).

    Be aware that as with any analysis of the past is that it is the past. These trends may not follow into the future. Also beware that these are averages. There will be periods that deviate from the trend. Also note that these are one year time horizons. At Seed we believe that equity investors should have a time horizon of AT LEAST 5 years, but preferably more.

    We have recently started a new weekly email newsletter service that covers a market report, a look at retirement and investment planning, the global economy, and a summary of performance of several indicators including markets locally and globally, commodities, and currencies. Click here to sign up to receive this report weekly in your mailbox.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2009-11-12, 17:16:34, by Mike Email , Leave a comment

    Monthly returns

    What a difference a few months can make when looking back at 12 month returns.At the end of August, investors were looking back over a 12 month period when the local equity market had lost 6,8%. Most investors were naturally questioning the merit of having been exposed to risk assets when money in the bank produced a positive 10,66%.

    Now 2 months later, the 12 month history is vastly different. The local equity market has returned a very respectable 29,2% for the 12 months to the end of October, while a money market investment would have produced 9,78%.

    One may ask the inevitable question, “how is it possible for the 12 month return on my local equities to move so dramatically over the space of a couple of months.”

    The reality is that when an investor steps away from the smoother returns of cash, which are always positive, in nominal terms at least, then your capital is subject to volatile price movements.

    The graph below indicates just how volatile the 12 month return can be when compared to the steadiness of cash and also the lower volatility of bonds. The data going back to the start of 1960 shows that 12 month returns can move from a negative 40% to a positive 60% and more.

    Source : Coronation

    While most investors understand that this shorter term volatility starts to reduce as the investment time period is lengthened to 3 years and 5 years and further out, the question investors ask is “should I be subjecting my capital to this “risk””

    We would answer the question as follows. Not unless you were being potentially rewarded for taking the risk. But for any longer term investor, if the valuations indicated that you are likely to be rewarded the effect of the compounding over a longer period of time cannot be ignored.

    So with local equities now up 50% from its lows, is there still value in the market?

    Let’s look at the alternative an investor has between local equities and money market.

    History indicates than an investor should expect to receive a 2% to 2,5% real rate of return on money market (i.e. return after inflation but before tax). At the same time, local and global listed equities have tended to give investors an 8% per annum real rate of return.

    Investors should be enthusiastic about an asset class if it is priced to perform in excess of its long run return and vice versa. So where do we stand now relatively to history?

    Money market rates are around 7,1%. Current and implied inflation is running at 6,1%, leaving a prospective 1% real rate of return. Not terribly exciting in anyone’s book.

    Our quantitative model indicates that off an adjusted price earnings multiple of 14,5 times, the prospective real return over the next 5 years should average approximately 5,2%.

    Both asset classes are therefore valued at less than their historical range.

    Source: Seed Investments

    Our analysis indicates that there is value, but clearly far less than a few months back. The momentum in global markets may continue to take prices up in the shorter term, but we would take this opportunity to lighten exposure slightly.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-11, 16:28:09, by ian Email , Leave a comment

    Local market update

    Despite the very strong close on global markets on Monday, the JSE ended up only slightly firmer at 26 375 – a gain of just 31 points. Financials bounced up 1,29%. The market breadth is strong with 208 shares up against 149 shares down.

    Coronation Fund Managers reported firm numbers to the end of September. This company has a high correlation with the level of the local and global markets. It reported assets under management up 24% to R155 billion, which resulted in diluted headline earnings up by the same percentage to 60,5c.

    The dividend was however only raised by 9% to 50c – still this represents a high payout of earnings. The strong turnaround in global markets in the second half of their financial year made for an excellent turnaround from 6 months back.

    There were some resignations during the year with non executive chairman, Gavan Ryan, one of the main founders retiring. The share price gained 3,1% to 825c. It has moved up in a geared fashion to the market from just over R4 in February of this year.

    Diamond operation, Trans Hex reported interim results to the end of September. Despite increased finance costs, it managed to turn a previous loss of 53c per share to a profit of 9,7c per share.

    Management attributed the turnaround to strong cost management and cash generation from operations. Diamond prices and demand dropped significantly during the second half of the previous financial year.

    The share price gained 2,5% to 410c. It has a market cap of R435m having moved up substantially from May when it traded at a price less than 150c.

    While a company like Coronation can release its full year end results to the end of September in just over a month, another company Vox Telecom, which has a year end at the end of August, is now only releasing a trading update.

    The JSE trading rules state – reiterated in the trading statement – that “a listed company is required to publish a trading statement as soon as it becomes aware, with a reasonable degree of certainty, that the financial results for the next period to be reported on are likely to vary by more than 20% from the previous corresponding period.”

    The inference is that some two and a half months after year end, management becomes aware of the results should be higher. The trading statement says headline EPS should be between 60% and 70% higher than the prior period.

    The shares gained 3c to 42c having declined from 85c in March.

    Medi Clinic reported its interims to the end of September. Revenue was up 12% to R8,3 billion. Operating profit gained 10% to R1,386 billion. Basic and headline EPS gained 15% to 59c a share.

    Cash flow is strong with the company converting 112% of earnings before interest, tax and depreciation into cash generated from operations.

    The share price fell 1,1% to 2250c. Over the long run, this has been an excellent and well run company. The big test over the future years will be its Swiss acquisition which it bought w years back for R17 billion

    Gold has remained steady at $1107/oz.

    The rand is exceptionally strong against a basket of currencies – trading at R7,37/dollar, R12,33/pound and R11,07/euro.

    Global markets are trading firmer.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-10, 17:53:14, by ian Email , Leave a comment

    Market Summary

    Generally local and global markets remained firm after the general consensus by the G20 to maintain its stimulus efforts. The dollar fell and gold moved up through the $1100/ oz level. The rand gained ground to R7,38/dollar. The controversy at Eskom continued with the resignation of Bobby Godsell and the reinstatement of Jacob Maroga as CEO. The All Share gained 1,59% and the financial index 2,4%

    A number of companies released interim results today

    Verimark, which has not had a glowing listing on the JSE, reported revenues up 21% to R129m, but a loss of R11,1m. on a per share basis the loss came in at 10,1 cents per share.

    There was some share activity and the price moved up 10c or 28% to 45cents, giving a market cap of R51million. Major shareholders, the Van Straaten Family Trust attempted to delist the company by acquiring minority shareholders at 50c, but this was blocked by the South Gauteng High court.

    Adcorp shares raced up 3,6% after announcing that in the recent arbitration process in the dispute regarding the suspension of senior employees, the process found in favour of the company.

    Furniture retailer and financial services business, Lewis reported interims to the end of September with revenues up 7,9% to R1,9 billion. Operating profit rose 4,3%, but net attributable profit fell 3,3% to R261,3m.

    The report indicated that the credit environment remained challenging with unemployment, retrenchments etc. The company was able to increase its finance charges as it extended its credit terms.

    Lewis increased its provision against debtors to 17,9% from 15,5%. The shares gained 3% to 5125c.

    Vodacom reported its first interims as a listed company. The customer base is still growing but at a far slower pace – up 11,7% to 28,2 million. This is due to the new regulations on new subscribers.

    For the 6 months earnings before interest, tax and depreciation came in at R9,3 billion up 8%, but operating profit fell from R6,4 billion to R3,5 billion, mainly due to a large impairment of R3,2 billion mainly attributable to its Gateway acquisition. . Headline EPS declined 12,4% to 219c

    Despite the weaker income statement, the company is a strong cash generator with cash from operations up 26% to R5,2 billion. The shares ended down 36c to 5205c

    Financial services company Cadiz reported headline earnings per share up 102% to 17,2 cents on operating profit up 95% to R48,5m

    The share price fell 3,3% to 290c – trading on a PE of 8,7 times and a dividend yield of 3,96%

    Anglo shares gained 3,1% to 30746c – a new 12 month high. The company announced that it had appointed Sir Philip Hampton as a non executive director.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-09, 17:36:32, by ian Email , Leave a comment

    High unemployment leads to weak demand

    After the sharp drop off in the latter part of 2008 and the first quarter of 2009, economies around the world saw a recovery predicated largely on massive government stimulus. The question now been asked is “the liquidity led liftoff running out of steam?” Given the release of the worse than expected US unemployment figures this may well be the case.

    The US unemployment rate jumped to an unexpected 10,2% in October as jobs continues to be cut. The last time the official level of unemployment hit this peak was in 1983.

    Source : dshort.com

    Independent Canadian research house BCA , who have been operating for 60 years have the following views.

    • With liquidity running out of steam, lower corporate sales growth in 2010 may hold markets back.

    • Data seems to indicate that the recovery so far has been led by government stimulus and not underlying private sector demand.

    • Bank lending is still declining in all major categories in the US and this ongoing credit crunch or reversal of leverage will put a strain on and remain a headwind for economic recovery.

    • Their view is that the stockmarket “… is increasingly at risk of a more meaningful pullback. Indeed, a larger correction would be healthy, as it would allow overbought conditions to unwind and help to ensure that Fed policy does not turn prematurely less simulative.”

    UK based Sarasin and Partners have been noting the same theme of the liquidity pullback saying:

    • After unprecedented moves by central banks to flood the world economy with global liquidity, the first, albeit tentative, signs of a reversal of policy are starting to be felt.

    • But interestingly it has not been the US Fed or the Euro zone that is leading the process, but the Australia and Norwegian central banks that have starting increasing interest rates.

    Let’s look at recent Central Bank action

    So far central banks have come out with announcements generally as expected.

    The US Federal Reserve continued to promise to hold rates close to zero percent for “an extended period of time.” While there is no exact definition of a foreseeable time, at this stage it looks like they may only start to raise rates from late 2010.

    Government finances in the US and indeed across most countries are not in a pretty shape and providing the required liquidity is costly. The US government’s fiscal year ended on 30 September 2009 with a deficit of $1,417 trillion. The sheer scale of this one year negative puts a question mark as to possible damages.

    Source: Wells Fargo Securities

    The European central bank left rates unchanged at 1% but is slowly looking to exit providing this liquidity, saying this week that the offer of unlimited emergency one-year liquidity planned for December would be the last.

    The UK’s Bank of England will also start to slow its provision of liquidity by buying another GBP25 billion of gilts over the next 3 months. It left the key interest rate at 0,5%

    While it can be debated, Central banks have generally done what has been expected of them post the liquidity crunch of 2008. Now they are trying to ease back ever so gently without upsetting the asset markets in a world that is still looking for genuine demand.

    The high level of unemployment is a concern but this is very much a lagging indicator.

    Nevertheless after a strong rally on Thursday global markets pulled back on Friday. Gold continued to push up and is trading just shy of the $1100/oz level on late Friday, which helped push the gold shares up.

    Have a fantastic weekend

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-06, 16:58:31, by ian Email , Leave a comment

    Global Strategy Report

    We received Sarasin & Partners November Global Strategy Newsletter this morning. As always it made for interesting reading, so we thought we’d share some of their thoughts today. Sarasin is an asset manager that we rate highly who manages approximately GBP 8.6bn across the globe. Much of their success has been built on their thematic style of investing, where they look to invest in specific themes and then find companies that are attractively priced that fulfil the theme’s requirements. The Newsletter is penned by CIO Guy Monson and Chief Economist Subitha Subramaniam.

    After most of the world pretty much fell into recession (or at least saw growth severely pull back) at the same time, we are now seeing two speeds of recovery occurring. Massive monetary stimulus, particularly in the developed markets, has resulted in some significant asset price inflation. While the short term effects are most welcome, governments need to be aware that all the borrowing that they are doing today will put pressure on growth in the future when they begin paying back the ever mounting debt. As a result of the massive build up in debt we’ll probably see interest rates stay lower for longer in these countries to assist the economies.

    A lot of capital has been flowing into the US as emerging markets take up a large portion of US debt in an attempt to maintain their currency pegs at undervalued levels. Many emerging market countries (including South Africa) are dependant on the export sector, and maintaining a weak currency is key to keeping the export sector healthy. As much as there currently is capital flowing into the US, it will have to flow back into the emerging markets at some stage when the debt begins to be paid off. Artificially keeping a currency weak is not sustainable forever.

    As a result of this and other analysis, Sarasin has preserved the quality of their shares across their portfolios, despite recent strong performance by poor quality companies. Having a strong balance sheet will be vital to getting through the tough climate, and these companies are also trading at attractive prices. Typically these companies are being found in the developed market. An exception to this ‘quality’ rule is where governments are substantial shareholders in the company/industry.

    On the bond side emerging market bonds are favoured as these governments have strong balance sheets and low debt levels in relation to the G4 governments. These bonds are typically issued in currencies that have a high likelihood in appreciating and have higher yields than their developed market counterparts.

    These are generally points of view that we feel hold a lot of weight.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2009-11-05, 17:50:23, by Mike Email , Leave a comment

    Does news move the markets?

    There is a common misconception that news flow, be it positive, negative or indifferent has the ability to move markets. As an extension to this logic, sustained news flow in the form of economic data should be the cause of market price movement. The reality is often very different, which makes investing based on news and economic events, difficult to impossible.

    Following on from our article yesterday on the general inability to extrapolate trends, Robert Prechter went on to discuss how financial markets are not a matter of action and reaction.

    He concedes that in the world of physics, action is followed by reaction and that “most financial analysts, economists, historians, sociologists and futurists believe that society works the same way.” But this does not necessarily hold true for financial markets.

    A common misconception of action and reaction is the belief that that there is a strong causality between economic growth and stock market performance. While there may be for much of the time, the correlation does not always hold true. For example, the fourth quarter of 1987 saw the strongest GDP quarter in a 15 year span from 1984 to 1999, but this was also the biggest down quarter for that entire period.

    In 1973 and 1974 actual earnings of S&P500 companies rose, but the stock market had its biggest decline in over 40 years.

    He goes on to say that even if an investor knew certain information in advance, it’s not that easy to identify and profit from commonly held correlations. For example, “suppose you knew for certain that inflation would triple the money supply over the next 20 years. What would you predict for the gold price? Most analysts and investors are certain that inflation makes gold go up in price.”

    But from 1980 to 2004 US money supply tripled, but gold lost half its value.

    He goes on to give some examples of real news ahead of time and subsequent market action.

    • Transported to the 21 November 1963 you learn that the US president will be assassinated the next day. The natural inclination will be to short the market, in order to benefit from a decline.

    However the Dow Jones initially fell but by the close of the next trading day it was above where it was prior to the event.

    • Next you learn of the impending biggest electrical blackout in the history of North America. The logical thought process would be billions of dollars of lost production, people stranded, riots and damage. The market should be negatively impacted.

    The problem is that not only did the market fail to collapse, but it gapped up the next morning.

    • You learn about the 9/11 terrorist attack and decide to short the market. The event was so severe that the authorities closed the market for 4 trading days. The market opens down and remains down for just 6 days, but then moves up over the next 6 months.

    He then asks, “If news is irrelevant to markets, how can the media explain almost every day’s market action by the news? Answer. There is a lot of news every day. Commentators don’t write their cause and effect stories before the session starts but after it ends.”

    Even having knowledge in advance of large newsworthy events, is no guarantee of investment success.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-04, 16:52:16, by ian Email , Leave a comment

    Extrapolating current trends

    Robert Prechter is a technical market specialist who has been analysing the markets since 1975. In a report titled, “What really moves the market” he dispels the notion that it’s the “news” that moves the market. While explaining market movements by news events after the market gives an appearance of accuracy, it’s virtually impossible to predict beforehand. He starts off by looking at the folly of extrapolating trends.

    The article originally appeared in his June 2004 issue of the Elliot Wave Theorist.

    He first looks at how investors look at and then extrapolate trends by asking these questions.

    1. In 1950, a good computer cost $1m. In 1990 it cost $5000. Today it costs $1000. Question. What will a good computer cost 50 years from today?

    2. Democracy as a form of government has been spreading for centuries. In the 1940’s Japan changed from an empire to a democracy. IN the 1980’s the Russian Soviet system collapsed, and now the country holds multi party elections. In the 1990’s China adopted free market reforms. In March of this year (2004) Iraq a former dictatorship celebrated a new democratic constitution. Question: 50 years from today, will a larger or smaller percentage of the world’s population live under democracy?

    3. In the decade from 1983 to 1993 there were ten months of recession in the US. In the subsequent decade from 1993 to 2003, there were 8 months of recession. IN the first period expansion was underway 92 percent of the time; in the second period it was 93%. Question: What percentage of the time will expansion take place during the decade from 2003 to 2103?

    Most people extrapolated answers from the trends of the previous data. You expect cheaper computers, more democracy and economic expansion in the 90 – 95% range. People think that the momentum will remain constant unless acted on by an outside force.

    However he says that it is incorrect to rely on this law of conservation of momentum and for most people in most circumstances the proper answer to each of the questions is “I don’t know.”

    He continues saying that the most certain aspect of social history is dramatic change and to get a feel for how useless or even counterproductive extrapolation can be in social forecasting, consider these questions.

    1. It is 1886. Project the American railroad industry.
    2. It is 1970. Project the future of China.
    3. It is 1963. Project the cost of medical care in the US
    4. It is 1969. Project the US space program.
    5. It is AD 100. Project the future of the Roman civilisation.

    In 1886 you would have envisioned a future landscape combed with rail lines connecting every town and city and super fast trains would make cross country runs. You could eat, read or sleep along the way.

    But would anyone have predicted, indeed did predict that trains in 2004 would often be going slower than they did in 1886, that they would routinely jump the tracks, that they would be inefficient, and the equipment would be old and worn out?

    In 1970 the Communist party was entrenched in China. Over 35 million people had been slaughtered culminating in the Cultural Revolution in which Chinese youths helped exterminate people just because they were smart, successful or capitalist. Would anyone have imagined that China, in just over a single generation, would be out producing the US, which was then the world’s premier industrial giant?

    In 1963, medical care was cheap and accessible. Doctors made house calls for $20. Hospitals were so accommodating that new mothers typically stayed for a week or more before being sent home, and it was affordable. But just 40 years later pulls would sell for $2 apiece, a surgical procedure and a week in hospital could cost one third of the average annual salary, and people would have to take out expensive insurance policies just in case they got sick?

    In the space of just 30 years rockets had gone from the experimental stage to such sophistication that one of them took men to the moon and back. IN 1969 many people projected the US space program over the next 30 years to include colonies on the moon and trips to Mars. But in the 35 years since 1969, the space program has relentlessly regressed.

    In AD 100 would you have predicted that the most powerful culture in the world would be reduced to rubble in a bit over three centuries? If Rome had had a stock market, it would have gone essentially to zero.

    He concludes that you cannot use extrapolation under the physics paradigm to predict social trends, including macroeconomic, political and financial trends. The most certain aspect of social history in dramatic change.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-03, 17:27:15, by ian Email , Leave a comment

    Markets will be watching central banks

    While we saw the official numbers from the US reflecting positive quarterly GDP growth and an end to the recession, this is far from reality. Over the weekend a company in the US called CIT filed for bankruptcy. This gives an indication that the global real economy is still fragile.

    CIT Group was a major lender to small and medium sized businesses in the US with a history of just over 100 years. Over the weekend it filed for bankruptcy protection, which in terms of size is probably the fourth largest in the US history. It had around $70 billion in assets (loans to businesses) and $65 billion in debt.

    The financing company lent to over a million small businesses, which naturally has a wider impact as these businesses now need to source alternative financing.

    In addition to this bankruptcy, 9 banks in the US were closed last week Friday, the biggest one day closure rate since the crisis began.

    In the UK, two largely government owned banks, RBS and Lloyds are undergoing further restructuring. Royal Bank of Scotland is looking at additional asset sales. Government is still apparently set to inject a further GBP26 billion into the company which will take its stake to around 84%.

    Lloyds banking group is looking to raise GBP21 billion, including a large rights issue. The banks is 43,5% owned by the government.

    The chart of banks relative to the overall market in the UK since the start of the century indicates that they have started to underperform more recently from a run up for the past 12 months.

    The UK monetary policy committee meet this week Thursday. They should announce a further GBP50 billion in monetary easing. The market is starting to look past the current easing looking for clarity on the next moves. There is a concern that central banks may soon end their low interest rate policy and monetary easing and will be looking to start to hike rates sooner rather than later. This is going to vary from country to country though.

    Source : Ecowin and Standard Bank

    The local JSE fell 0,94% with the rand at R7,84/dollar and R12,84/pound

    The US market has opened firmer.

    Gold is trading at $1061/oz. Gold shares gained 2,2%

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2009-11-02, 17:31:36, by ian Email , Leave a comment