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    A brief look at local equity values

    The December inflation data was released on Wednesday reflecting a year on year price gain of 6,3% up from 5,8% in November. This rise above the upper range of the current target of 6% is seen as a temporary blip.

    On Tuesday the Monetary policy left interest rates at 7%, which kept banks to hold their prime rates at 10,5%. There is a possibility that rates may still drop by a further 0,5% in the next few months.

    The extent of the 2009 rebound in valuations is seen on the chart below, which graphs the trailing price to earnings ratio of all the shares listed on the market.

    Chart 1 : SA Equities : Trailing PE ratio


    Source: Investec

    The long run average price paid per R1 of earnings is R11,50. The average since 1990 for R1 of company earnings is R14,38 and at current prices after the strong rebound in 2009, the average price being paid is close to R17 for that R1 of earnings.

    The most recent bull market in equities from early 2003 to early 2008 saw a starting point where weak company earnings were rated at low multiples. As company earnings started to improve in 2004, 2005 and 2006 at percentages above their longer term trend, so investors became increasingly willing to pay up for equity ownership.

    The result was a strong expansion in company earnings and an expansion in the prices that investors were prepared to pay for these earnings, resulting in a strong bull market for equities.

    The question now is have markets been shaken down substantially in the 2008 collapse so that the 2009 rebound is just the start of another multi year bull market?

    On a secular outlook it all comes back to earnings. We know that year on year company earnings on the JSE fell 23% to December, while share prices rose 32%.

    Because prices tend to move ahead of the actual earnings, there is a high possibility in 2010 that even as company earnings start to “normalise” again from their current levels, that this does not immediately translate into further price gains.

    It does appear that the current valuations on the market are looking for strong earnings growth to support the more expensive prices. Surveys are indicating that many institutional money managers are reducing exposure to local equities after the strong rally.

    The shorter term outlook for local prices however is less dependent on earnings and valuations and more keenly driven by cash flows. We know that the accommodative monetary policy in developed markets has resulted in foreign inflows into SA bonds and equities driving up prices. How long this persists at current inflows is impossible to predict.

    We are now at the end of the first month of 2010. The local JSE is down around 3,6% for the first month of 2010. This has brought down the trailing price to earnings from 17,6 times to the current 16,5 times.

    Don’t hesitate to contact us in order to discuss your investment planning, specific investments and how Seed can assist in investment management.

    Have a wonderful weekend.

    Kind regards

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

    Permalink2010-01-29, 17:17:21, by ian Email , Leave a comment

    First MPC Meeting of 2010

    Gill Marcus, the new Reserve Bank Governor, announced yesterday that interest rates would remain unchanged. The repo rate is currently 7% with the banks’ Prime lending rate being 10.5%.

    The consensus view of economists going into the 2 day meeting was that rates would remain unchanged, with some risk that rates would be dropped by 0.5%. What came out of the meeting was that the decision to leave rates unchanged wasn’t a unanimous decision.

    Earlier in the week the December inflation came out slightly below consensus at 6.3% compared to the expected 6.5%. The breach above the upper target was largely due to the base effects of the petrol price dropping appreciably in December 2008. Data out today indicated that the Producer Price Inflation (PPI) came in at 0.7% year on year, and is now up for the first time in eight months. This increase is an indication that the country is slowly emerging from the recession.

    Going through the statement of the MPC, it is evident that there are still risks to the growth of the economy, but that certain areas are turning the right way. Employment is an exception, but is typically a lagging indicator with an estimated 110 000 jobs shed in the third quarter of 2009. New car sales are showing some signs of growth, as consumer confidences begins to improve, but are still down 7.2% for 2009. Economic indicators appear to be heading in the right direction, but aren’t painting a picture of economic strength.

    Eskom has been in the news for all the wrong reasons over the last few years. Their proposed 45% tariff hike per year for three years has been revised to 35% per annum, and now there are strong calls for this rate to be dropped again to 25% per year for the next three years. The SARB has been using the 25% figure in their models and calculations for the last 12 months.

    Any allowance above 25% will put an upward shock on the inflation number, and could force the SARB to potentially look at increasing rates sooner rather than later. A tariff hike below 25% and a further weak economy may allow them to entertain the idea of dropping rates once more. The SARB is particularly concerned about second round effects of any increase in electricity, the knock on effect might be underestimated as they are particularly difficult to model accurately.

    Lower interest rates are supportive of asset prices, but would be factored in already. The change in rates going forward could very well have an impact on the returns of assets in the future.

    Take care,

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

    Permalink2010-01-28, 19:02:07, by ian Email , Leave a comment

    Global economics

    The US consumer confidence rose 2,3 points in January and with December also up, this is positive but off a very low base. Wells Fargo views the Consumer Confidence Index as a truth detector of economic conditions because it’s closer to actual conditions on the ground.

    The most important factor to consumers is the availability of jobs and here there has been little progress.

    Let’s look at the views expressed by Pimco on the global economy in their latest market outlook and from a discussion meeting with them this week.

    Their view has been for some time that the Old Normal has morphed into the New Normal as the 3 key tenets driving the old normal reversed.

    The 3 main drivers of the old normal were:

    • deregulation
    • globalisation and
    • increased leverage

    The New Normal started with the bankruptcy of Lehman Brothers on the 15 September 2008. From that date we have witnessed a global tightening in regulations, increased protectionism and deleveraging.

    Their new normal is an environment that looks like this:

    • reduced consumption and increased savings rates
    • de-leveraging
    • re-regulation and de-globalisation
    • 4-5% nominal GDP growth
    • cyclically low interest rates with potentially higher secular rates
    • cyclically low inflation with potentially higher secular inflation

    Some points from two separate studies quoted by Pimco, which analysed past financial crisis over decades and even centuries, are telling:

    • The legacy of a banking crisis is greater public indebtedness. On average a country’s outstanding debt nearly doubles within 3 years following the crisis.
    • On average once a country’s public debt exceeds 90% of GDP, its economic growth rate slows by 1%.
    • Typically deleveraging begins 2 years after the beginning of the crisis and lasts for six to seven years.
    • Initial conditions are important. With many developed countries displaying high levels of public debt and running excessive budget deficits manoeuvrability is reduced.

    On the tightening of regulations, just last week US president Obama threw the global banking industry into turmoil, when he made the call for a ban on banks running their own proprietary trading, hedge funds and private equity.

    Following the 1929 financial crisis, the US ushered in what was known as the Glass-Steagall Act, which separated commercial and investment banking. This remained law until 1999, but could now effectively be introduced again.

    How does this translate into an investment outlook?

    US fund manager GMO, who in the main appears to agree with the views expressed by Pimco are concerned about the ongoing stimulus provided by central banks and specifically the US Federal Reserve, saying “Over stimulus was painful in the 2000 break and extremely painful in 2008, but the Fed soldiers on with its failed strategy like Field Marshal Haig in World War I (“The machine gun is a much over-rated Weapon.”)

    The dilemma then is that while global assets are generally on the expensive side, given the ongoing loose monetary policy there is a high probability that they continue to get more expensive.

    Across the various stocks and bonds that they provide a forecast for, their view is that US high quality stocks will provide the best real return. “For the longer term, the outperformance of high quality U.S. blue chips compared with the rest of U.S. stocks is, in my opinion, nearly certain” (which phrase we at GMO traditionally define as more than a 90% probability).”

    Kind regards

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

    Permalink2010-01-27, 19:42:25, by ian Email , Leave a comment

    Some points from US fund manager GMO

    This week Jeremy Grantham who heads up US fund managers GMO released his quarterly report. As a firm that takes long term views on the expected returns from various asset allocations, they have been very successful and so their statements carry some weight.

    At the end of December 1999 they had a 10 year forecast of real returns across 11 identifiable asset classes from emerging market equities, debt, US small caps, the S&P500 etc. The actual 10 year compounded real returns across these 11 asset classes came exceptionally close with the actual ranking having a correlation of 93,6%. Their calculation of the probability of picking the same or better rank order randomly would be 1:550 000.

    As an example they had as number 1 asset class performer, US real estate giving a 10% real return per annum. Their second rank was emerging market equities with a 7,8% annual real return. The actual rank over the 10 years saw Emerging market equities at number 1 with 8,1% real return and US real estate at number 3 with a 7,4% compounded return.

    They predicted that the S&P500 would give investors a negative 1,9% and ranked it 11/11 on their list. The ranking was spot on with the compounded real return a negative 3,5%.

    His commentary raises concerns at the actions of the US Federal Reserve, saying that with low interest rates and rapid money growth, the economy responds reluctantly but asset prices respond enthusiastically. He notes that the Federal Reserve was reckless in facilitating rapid asset booms in the tech and housing bubbles, now “…. The Fed is unwittingly willing to risk a third speculative phase, which is supremely dangerous this time because its arsenal now is almost empty.”

    GMO lists some of the lessons that they learned in the past decade:

    • The Fed wields even more financial influence than we thought.

    • Low rates have a more powerful effect on driving financial assets than on driving the economy.

    • The Fed is capable of being extremely out of touch with the real world – “what housing bubble?” – plus more doctrinaire – “no, the low rates had no effect on housing” – than anyone could have imagined.

    • Congress is nearly dysfunctional, primarily controlled by large corporations, and hamstrung by the supermajority now routinely required in the Senate.

    • Government administrations can be incompetent for long periods.

    • Poor leadership can really damage a country’s hard-won reputation in a mere 10 years.

    • Obama is not a miracle worker!

    • The leadership of major corporations can be very lacking in insight and competence on a fairly routine basis.

    • The two time-tested investment tools, value (P/E ratios and P/B ratios) and price momentum, are now much more heavily used and not so reliable as they once were, say from 1977 to 1997.

    • Asset classes really are more inefficiently priced than individual stocks on average, and therefore offer greater opportunities for adding value and reducing risk.

    • Developed countries, including the U.S., are past their prime compared with developing countries: it is indeed a new world order.

    • Education and training are the keys to increasing wealth on a sustainable basis and the U.S. is in danger of losing its once large edge here.

    • We all live on an island, which can be overexploited and turned into a barren Easter Island if we are not careful. Resources are finite and biodiversity is fragile, and both must be protected. Carbon emissions are the single greatest threat.

    • Being a global policeman is expensive, and somewhere between difficult and impossible.

    • The Fed learns no lessons!

    Regards

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

    Permalink2010-01-26, 18:47:14, by ian Email , Leave a comment

    Local and global bonds

    Bonds have typically provided a steadier positive return to investors, but this was not the case in 2009, where the local All Bond index produced a negative 1% total return. Clearly a very poor performance compared to the return on the JSE All Share index of 32,1%.

    Is there a place for bonds, especially where a Financial Times headline says, “Investors flock to Greek Bond Issue.”

    What is so special about bonds being issued by a country that has a ballooning budget deficit and debt that saw orders for the bonds running at 20 billion euros?

    The reason for the substantial interest in this five year syndicated bond is the juicy interest rate – in foreign terms. The article maintained that the coupon interest is expected to be in the order of 6,12%. This is apparently some 3,8% higher than the equivalent German bonds and at these levels a record spread.

    Where investors identify a riskier issuer of bonds, they will want to be compensated for the additional risk of lending money by way of a higher starting interest rate. The fact is that countries running excessive deficits and high debt levels will need to compensate investors by way of higher interest rates and this is exactly what we are seeing in Greece at the moment.

    According to a Standard Bank G10 fixed income research Greece is facing a total debt issuance of some 53 billion euros this year and EU officials are not that excited about Greece’s deficit reduction plans.

    According to this report given the precarious state of Greece’s financial position, even a spread of 3% over German bonds is not necessarily a ceiling and they say that “we could easily envisage spreads doubling from these levels, with similar pressure on other markets.”

    The Standard Bank view is that outside of the G10 core, “… monetary policy is a more straightforward affair for Australia, Canada, New Zealand and Scandinavia.”

    In other words they are saying that these countries have a better grip on their finances and this will come through in the pricing of bonds.

    Locally the benchmark government bond is the R157. For the last half of 2009 the yield on this bond traded in a range between 8,3% and 8,45%. This year the yield has weakened and is now trading at 8,57%. Remember that there is an inverse relationship been price and yield, so that where yields climb, existing investors sustain a decline in prices.

    While the issuance may have already be factored into local yields, local bonds still don’t appear to be offering very good value.

    Kind regards

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

    Permalink2010-01-25, 17:35:44, by ian Email , Leave a comment

    Due Diligence – Part 2

    Yesterday we covered the ideological aspects of manager selection:
    • Long term time horizon
    • Value bias
    • Capital protection

    On a practical side of things some of operational aspects that we take note of during our due diligence are:

    • Company ownership: We have seen over the last couple years with the large global banks, that aren’t run by owners, that there is a lack of responsibility in the companies overall well being. Managers are there to maximise their income. Where the firm is owner managed, the owner’s incentives are more closely aligned with those of the investor. There are different risks when investing with an owner managed business, but asking the right questions and doing the correct research can help to mitigate these risks.
    • Staff turnover: It makes sense that you would prefer to invest with a team (because ultimately you are investing in someone else’s ability) that is stable, and isn’t having to constantly deal with staff departures and training up new members. Humans generally operate best in stable environments. Note here that having a stable team doesn’t mean that there can’t be vigorous debate around investment ideas – this should be encouraged, but that there should be little or no staff turnover.
    • Assets under management: Here it is vitally important that the manager is large enough to be profitable. You don’t want your manager worrying about going concern issues. At the same time you don’t want your manager to merely be an asset gatherer, where all they concern themselves with is profit. A manager that is willing to cap their business at a reasonable size, and then follow through when they reach that level is generally a manager that is confident that performance will do the talking for them.

    Once we are satisfied that the manager has a philosophy and process that we are comfortable with, and that they have operational qualities that we admire, we’ll then ensure that they are practicing what they preach by doing some quantitative work.

    This quantitative work is mainly numerically driven and in essence seeks to verify that what the managers says he does, is what he ends up doing. If he’s a value manager we want to see that the shares that he’s holding fulfil our value criteria. If he says he doesn’t sell his shares often we will ensure that he isn’t buying and selling on a monthly basis.

    There are many aspects of the investment process that you need to research before you can have a fair degree of confidence that the manager is going to a) give you superior performance and b) manage the money in the way manner you expect. Knowing what questions to ask and how to verify those answers is a crucial skill in the investment process. The more knowledgeable you are on the subject the better your chance at making the correct decision.

    The initial work is undoubtedly the most important work, but continual meetings and monitoring is required. Take a look at Seed’s investment beliefs by clicking here.

    Take care,

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

    Permalink2010-01-22, 16:28:39, by Mike Email , Leave a comment

    Due Diligence

    At the beginning of the year it is perhaps prudent to revisit the need for investors to perform a thorough due diligence before making investment decisions. It is, in fact, a wise idea to perform due diligence procedures on most of your major decisions. Just as you won’t just book an appointment for a serious surgical operation with the first doctor that you walk past, so one shouldn’t necessarily put a large sum of money down on the first investment opportunity that presents itself.

    In investments the due diligence process is typically comprised of quantitative and qualitative analysis. Arguably the more important part of the analysis, when choosing managers or consultants, is the qualitative portion. Quantitative work is then conducted in order to verify the qualitative analysis.

    Essentially what an investor needs to do when choosing someone to assist them with their investments, be it a manager or consultant, is to find out how the manager will manage your investments, and then you need to back that up by ensuring that this is how he has managed investments in the past, i.e. he practices what he preaches.

    It’s all very well that you want a manager who has a sound philosophy and process, and invests according to said philosophy and process, but you need to firstly decide what a sound philosophy and process is.

    We contend that there are three important tenets when investing. They are:

    • It is important that both you, as the investor, and the manager/consultant that you appoint have a long term time horizon. Investors often search for instant gratification, or the next quick buck, instead of taking a step back and looking at the big picture with a long term view. Making a quick buck might be lucrative over the short term, but if you don’t have your long term goals in mind (i.e. a comfortable retirement) you will most likely fall short of that goal “Failing to aim is aiming to fail”. It can be difficult not to partake in the latest fad while all those around are making the quick buck, but a robust strategy will help you stay the course.

    Taking a look at the big picture and not trying to make a quick buck feeds into our second tenet:

    • Valuation should be the cornerstone of including any investment in your portfolio. Before making your investment do what the father of value investing, Benjamin Graham, recommended. Warren Buffett quoted him, “Investing is most intelligent when it is most businesslike”. You need to ensure that the asset that you are investing into has an intrinsic value, and that you aren’t just buying it on the premise that you can sell it on at a profit. While buying to sell can prove profitable in the short run, it has a history of leading investors to the edge of the cliff when asset bubbles burst.

    By having a value bias you reduce the risk of breaching our third tenet:

    • Capital protection is vital to wealth creation. We’re not talking about protecting the nominal value of your investments on a daily basis, but rather to avoid permanent capital loss by investing in those asset classes that show the most value, and by diversifying your assets across asset classes, regions, and managers. Not all risks can be mitigated, but identifying the major ones can dramatically reduce the risk in your portfolio.

    It is no coincidence that all three principles complement one another, and it is important that your manager doesn’t have conflicting beliefs. We have covered the ideological part of the type of manager that we are and seek. Tomorrow we will continue with a look at the operational side of the due diligence and the need for quantitative work. Take a closer look at Seed’s beliefs by clicking here.

    Take care,

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

    Permalink2010-01-21, 19:08:51, by Mike Email , Leave a comment

    Investors are Confident

    Markets around the world have seen it all over the last 24 months. Economies have also been in flux. Yesterday Ian wrote about the global economy and today I will take a look at some market indicators, which as he mentioned can often not conform to one another.

    Returns in the first half of 2008 were mixed as financial shares faltered with the system beginning to show some cracks, but resource shares roared up on the back of sky rocketing commodity prices. From around the middle of 2008 until the beginning of March 2009 we saw almost all shares being hammered in the global recession. Apparently only 3% of shares ended this period in the green! But as global stimulus measures started to take hold we saw an almighty rebound from the beginning of March until the end of the year.

    What’s the likely outlook for the next two years?

    For starters investors are becoming more and more confident as the markets rise. Apparently they are paying little heed to the fact that much of this rebound can be attributed to extremely loose monetary policy employed by many governments that can’t be sustained forever. If policy tightens (as a result of inflation increasing and economies rebounding quicker than expected) then the financial institutions need to open their taps to help stimulate the markets.

    Research out of Bank of America Merrill Lynch indicates that investors are taking on above average risk for the first time since 2006. Key indicators in this survey are cash balances of fund managers, which continue to fall as their weighting to growth assets increases, the number of investors protecting themselves against market correction, which continues to drop, and more investors becoming bullish on company growth prospects.

    As growth becomes the ‘consensus outlook’ one must become more wary of any blips on the road ahead. Some successful contrarian managers have already reduced the risk of their books.

    Finally, a graphical illustration of this increase in confidence can be seen in the level of the VIX, which is now below its 20 year average, indicating that investors are comfortable investing in the market.

    The VIX is often referred to as the ‘fear index’, but it could full well be called the ‘greed index’ when it gets to levels that are too low. Higher levels on the index relate to greater panic in the market, and incidentally what often turn out to be the best buying points in the market. Lower levels indicate investor comfort, and expectations that returns will continue to be attractive.

    It is at times like these that investors need to be wary of what they invest into and why they make the investment. Have they done their research (there are still many sound investment opportunities) or are they afraid of missing out on more gains?

    Take care,

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

    Permalink2010-01-20, 19:18:29, by Mike Email , Leave a comment

    Will the global economy expand in 2010

    The economic group of Wells Fargo Securities asks this question against a backdrop that saw global financial markets seizing in the latter part of 2008 as Lehman Brothers failed and the global economy fell into its deepest recession in decades. By the first quarter of 2009, industrial production in the 30 countries that make up the OECD – Organisation for Economic Cooperation and Development had plunged more than 15% from year-earlier levels. This was dramatic.

    It was exceptionally bad, but it could have been far worse. Let’s look at the recap and some of the points made by Wells Fargo.

    Some of the major steps taken by the world’s major countries included recapitalisations of financial institutions, loan guarantees and increased deposit insurance.

    Then central banks slashed interest rates to record low levels and starting printing, euphemistically called, “quantitative easing” in order to provide as much stimulus as possible.

    They note that there are signs that the medicine is having its desired effect and that growth is starting to return to most countries.

    Some of the points that they make about the global economy:

    • OECD industrial production is up the up – but still below its February 2008 peak.

    • Year on year GDP growth in China rebounded to a very strong 9% in the third quarter of 2009.

    • Japan, Korea and Taiwan are showing positive growth rates

    • Wells Fargo raised their estimate of the US 4th quarter annual GDP to 5,6%. Still they note that final demand remains weak and hence impacts on employment.

    • Their estimate is that on a purchasing power basis, global GDP probably contracted by 1% in 2009 and they are projecting a 3,6% growth rate in 2010 before accelerating to 4% in 2011. This is still lower than the nearly 5% growth rate in 2004 – 2007.

    • Inflation should still not be a problem until the global economy truly recovers, despite the unprecedented stimulus.

    • The US dollar should appreciate modestly against major currencies, but not necessarily against “commodity” and emerging market currencies.


    Source : Wells Fargo Securities

    This generally upbeat outlook appears positive and it is, but as always we always need to distinguish between economic outlook and the outlook for asset prices. They may correlate and often they do, but many times over periods of say 12 – 24 months they don’t and it’s this non conformity that often causes confusion.

    Regards

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

    Permalink2010-01-19, 20:15:46, by ian Email , Leave a comment

    Divergent Returns

    Reflecting back on 2009 we can see that the different asset classes returned widely varying returns over the period. Over time it is natural that different assets will perform well or poorly at different times as they all have their own unique attributes. Sure, there will be times when most asset classes perform well, and again when most don’t do too well, but there is usually at least one asset class that produces real (inflation beating) returns over any rolling 12 month period.

    Source: SIM

    The above chart shows the returns of selected asset classes for each calendar year in the ‘noughties’. You will notice that not once does inflation head the chart, although it does sit near the bottom quite often. The casual observer might therefore point out that it is relatively simple to earn a decent real return. This observer would need to be aware of two points in particular.

    The first is that these returns are all quoted before tax and other costs, all gains are taxed in the hands of the investor, with the tax rate on income gains (bonds and cash) typically being higher than the tax rate on capital gains. Return to the investor would therefore typically be below those quoted above.

    The second point is that the investor would need to avoid being heavily invested in an asset class when there’s significant value destruction. This happened in 2002 to those investors who invested in offshore equities and were hammered both by weakening markets and a strengthening rand, and again in 2008 when all risk assets suffered. Capital protection (i.e. avoiding severe reduction in value) is crucial to staying ahead of inflation over the long term.

    It is clear that local growth assets (i.e. real estate and equity) have spent most of the time near the top of the pile, but that ‘Balanced’ (which is a combination of local asset classes and 15% offshore) is more consistently near the top of the pile.

    We do not know the exact order that these assets will fill in years to come, but solid research can improve the probability of getting a good idea. We then use balanced funds (of varying risk profiles) to ease the ride.

    Take care,

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

    Permalink2010-01-18, 18:21:13, by Mike Email , Leave a comment

    Looking East

    Yesterday we took a look at how Europe is doing, but it churlish not to take a look to the East as well. The graph below neatly (I think) encapsulates the changing of the guard.

    Source: Visio Capital

    Just last night we were discussing around the dinner table how various businesses and indeed industries (textiles to name just one) in South Africa are under threat from the East. Many businesses have been liquidated as a result of the rise in China and some industries are slowly disappearing. As mentioned yesterday China is now the world’s largest exporter, exporting goods to the value of around US $ 1.2 trillion (i.e. $ 1 200 000 000 000) in 2009 alone!

    A large portion of the exporters are poor quality, but there’s no doubt that as China continues to industrialise the quality of goods will improve. Right now they are more interested in gaining entry into new markets and increasing their share of the pie.

    In the past there were sayings like ‘Jap crap’, and I recall many people refusing to buy any electronics out of Korea unless they were sold at bargain basement prices. Nowadays these countries are market leaders in many industries and their products are often sold at a premium, and I have no doubt that it will be the same with China in due course.

    Companies and industries under threat in SA need to look at their business model and decide whether they can compete with China, or perhaps alter their model to remain in business. If the company can’t do this and isn’t protected by the government (although even the efficacy of government protection is debateable) there is a large likelihood that they will eventually be forced out of business.

    South Africa can ill afford job losses so government and private industry alike needs to look at developing those labour intensive industries where SA has a competitive advantage to maximise job creation. Ultimately cheaper goods for South African consumers (whether produced locally or abroad) is good for the local consumer.

    It won’t be easy, but if the government can balance job creation and inflation moderation (through importing more competitively priced goods) then they will have done a good job. It is clear that China is a waking giant and it would be foolish for South Africa to ignore this giant.

    Enjoy your weekend.

    Take care,

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

    Permalink2010-01-15, 17:05:20, by Mike Email , Leave a comment

    A Look at Europe

    Many eyes follow the news out of the US purely as it is still has the largest economy in the world, and also because Americans are well versed in getting the rest of the world to know about what’s happening in their country. South Africa’s biggest trading block is, however, Europe. So while each country’s contribution is smaller than the likes of the US and China, as a collective they are very important.

    The depth of the recession in Europe will have been exacerbated by the depth of the recession in Germany, Europe’s largest economy. Preliminary numbers out of Germany indicate that the economy had its deepest recession since World War II contracting by 5% in 2009. This figure was down from 2007 and 2008 growth of 2.5% and 1.3% respectively. The export dependant country had a tough time as world trade froze for much of the year. Exports fell by some 14.7% and companies also spent less in an attempt to remain solvent. One victim of the downturn in exports was Germany’s spot as the number 1 exporting country in the world. China’s better than expected rebound in exports in December helped to push Germany to number 2 (China grew exports by around 17% in December).

    With Europe’s largest economy still recovering it was unsurprising that the European Central Bank ( ECB ) decided today to keep interest rates at an all time low of 1%. This has been their decision at each meeting since they last dropped rates in May last year. Of the four ‘major’ developed economies (US, UK, Europe, Japan) Europe has the highest interest rate, but they have dropped them by 3.25% in an attempt to boost the economies of the Euro countries. The ECB is expected to keep rates low for a while as they project that the underlying Euro economy will only grow by 0.8% this year, and 1.2% in 2011 which isn’t quick enough to start to raise rates. Inflation too remains low (which allows them to keep interest rates low) and the projection there is for 1.3% in 2010 and 1.4% next year.

    One of Europe’s ‘problem children’ Italy announced that industrial output had edged up 0.2% in November and October’s number was revised up from 0.5% to 0.7%. This compared to Germany and France’s 0.7% and 1.1% increase respectively. Italy continues to battle along, but at least is moving in a positive direction. In the UK, industrial production improved by a measly 0.4% during November, slightly ahead of expectations. The year on year decline in output has improved from a low of -14% up to -6% but is still some 14% off its high reached in 2008.

    It is plain to see from many of the countries in Europe that while the recession might officially be over, output and GDP levels haven’t yet reached their highs and will most likely take a while before reaching them.

    While most European economies are struggling, bankers in London are complaining about the increase in their marginal tax rate from 40% to 50%. This increase will see, according to KPMG, bankers earning GBP 1 million a year paying an extra GBP 87,588 in taxes. These are big numbers!

    Take care,

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

    Permalink2010-01-14, 18:11:19, by Mike Email , Leave a comment

    Same Destination, Different Route

    I came across an interesting graph yesterday that showed the performance of the local equity market (as represented by the FTSE/JSE All Share) compared to the local bond market (ALBI) over the past 3 years. Interestingly these two very different assets classes have performed almost exactly the same over this discrete period with total returns of 6.53% pa and 6.48% pa respectively!

    Source: Investec, I-Net Bridge

    The route that they both took to reach this return could not be more different. The bond market return for the first year and a half was negative. An inflation rate that was getting out of control on the back of high commodity prices ate away at the capital value of the bonds, with the relatively low coupons not able to bring the total return into positive territory. Over this same period the resource heavy ALSI was powering away led by commodity shares.

    While financial and industrial shares had been struggling for some time the resource shares kept at it until the end of May 2008 when they joined the capitulation seen in world markets. The ALSI subsequently dropped by over 40% over the next 6 months and took until the beginning of March 2009 to begin any meaningful recovery.

    On the other hand bonds got a fillip in July 2008 when markets began to realise that commodity prices could fall and that inflation would begin to fall rapidly. They got a further boost towards the end of the year when it appeared as if ‘the world would end’ and all money rushed for safe haven assets – which includes government bonds. Bonds struggled again in 2009, posting a negative calendar year return for only the second time (-1%) ever while equities rebounded by over 50% from their lows in March 2009.

    As can be seen from the chart getting the asset allocation of your portfolio correct is an important step in your investment process.

    Take care,

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

    Permalink2010-01-13, 17:28:28, by Mike Email , Leave a comment

    Daily Equity Report Tuesday 23 January 2010

    2010/01/12 20:53:46
    The JSE closed off 1.02% at 28058 with value traded at R 13.33 billion. Declines led advances 216 to 137 with 79 shares unchanged out of 432 active. Mining closed off 1.85% at 35662, while Industrials were off 0.59% at 25510 and financials ended the day up 0.1% at 19419.

    The best performing sectors of the day were COAL MINING up 2.6% at 23788, FTSE/JSE All Africa ex SA 30 with S A Rand values up 2.2% at 57 and FTSE/JSE Alt X Index up 1.4% at 1077, while the worst were Forestry & Paper Index down 2.5% at 11289, FTSE/JSE RAFI ALLSHARE INDEX down 2.4% at 5699 and Health Care Equipment & Services Index down 2.4% at 33771.

    There were 6 new 12 month highs today, including Zeder which closed up 1.5% at 200, Masonite up 1.2% at 4250 and Arm up 0.8% at 18000.

    Of the major stocks Mtn was off 2.31% at 10550, Billiton lost 1.96% at 24829, Anglo moved down 2.85% at 33480, Implats was unchanged at 22250, Sasol was off 1.97% at 31175.

    Some of the top gainers included Telemastr up 11.11% at 200 , Ceramic up 10% at 11000 , some of the losing shares included Witsgold off 12.04% at 6685 and Metorex down 10.19% at 485

    The Dow was down 0.7% at 10587.96 and the S&P 500 down 1.2% at 1132.90 a few moments ago.

    Gold was off 1.9% at $ 1127.40/oz

    The rand was last trading at R 7.44 to the dollar, R 11.99 to the pound and R 10.78 to the Euro.

    Permalink2010-01-12, 20:55:10, by admin Email , Leave a comment

    Same Destination, Different Route

    I came across an interesting graph today that showed the performance of the local equity market (as represented by the FTSE/JSE All Share) compared to the local bond market (ALBI) over the past 3 years. Interestingly these two very different assets classes have performed almost exactly the same over this discrete period with total returns of 6.53% pa and 6.48% pa respectively!

    Source: Investec, I-Net Bridge

    The route that they both took to reach this return could not be more different. The bond market return for the first year and a half was negative. An inflation rate that was getting out of control on the back of high commodity prices ate away at the capital value of the bonds, with the relatively low coupons not able to bring the total return into positive territory. Over this same period the resource heavy ALSI was powering away led by commodity shares.

    While financial and industrial shares had been struggling for some time the resource shares kept at it until the end of May 2008 when they joined the capitulation seen in world markets. The ALSI subsequently dropped by over 40% over the next 6 months and took until the beginning of March 2009 to begin any meaningful recovery.

    On the other hand bonds got a fillip in July 2008 when markets began to realise that commodity prices could fall and that inflation would begin to fall rapidly. They got a further boost towards the end of the year when it appeared as if ‘the world would end’ and all money rushed for safe haven assets – which includes government bonds. Bonds struggled again in 2009, posting a negative calendar year return for only the second time (-1%) ever while equities rebounded by over 50% from their lows in March 2009.

    As can be seen from the chart getting the asset allocation of your portfolio correct is an important step in your investment process.

    Take care,

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

    Permalink2010-01-12, 18:22:35, by Mike Email , Leave a comment

    A Decade Completed

    The end of last year marked the end of the first decade in the 21st Century. Investors experienced almost every kind of emotion during the decade, from the heights of the Global TMT (Technology Media and Telecommunications) bubble that burst at the beginning of the decade, to Geopolitical events, to booming markets, the rise of China, and in the latter part of the decade the bursting of the real estate bubble and subsequent liquidity freeze.

    The first decade of the century was packed with events, and the second decade will probably experience events even more variable than the first as the world becomes smaller with improved communication. Whereas in the past news took a while to flow from one side of the globe to the other now we are constantly reminded that news transfer has become almost instantaneous. This affects the way that capital markets operate because the market participants react immediately when new ‘information’ is received, often before thorough analysis is conducted.

    During the last decade global developed markets struggled in general, but this was not the case in emerging markets, of which South Africa is one. The local ALSI returned 16.2% per annum over the decade which compares favourably to global equities which were only up 0.5% pa in rand (losing 1.3% pa in USD) and emerging market equities up 9.2% pa in rand or 7.3% in USD.

    Below is a chart of how the different South African asset classes performed during the decade. The return profile is how it should be with risky equities outperforming less risky bonds and cash, which in turn gave positive real returns for taxes and other expenses.

    In periods of distress it is natural that one battens down the hatches to survive, and while this is appropriate at some stages one needs to avoid retaining a myopic approach for too long a period. Putting your head in the sand is a sure way to miss out on new opportunities. In this regard parking your investment in cash can be a strategy that has some merits when growth assets are extremely expensive, but is the surest way to destroy real wealth over time.

    As we move into the new year, a new decade, and hopefully out of a recession, now is the time to be keeping your eye out for new opportunities. We don’t advocate a gung ho approach to investing or indeed other activities, but rather a more measured disciplined approach based on sound logic, reasoning, and research.

    The team at Seed Investments would like to wish you all the best for 2010.

    Take care,

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

    Permalink2010-01-11, 15:53:10, by Mike Email , Leave a comment

    Daily Equity Report Friday 8 January 2010

    2010/01/08
    The JSE closed up 0.89% at 28267 with value traded at R 8.75 billion. Advances led declines 236 to 105 with 70 shares unchanged out of 411 active. Mining closed up 1.2% at 35715, while Industrials were up 0.91% at 25928 and financials ended the day up 0.15% at 19535.

    The best performing sectors of the day were FTSE/JSE SHARIAH ALL up 46.5% at 3003, FTSE/JSE RAFI 40 up 26.3% at 5893 and FTSE/JSE AFRICA ALTX 15 up 5.9% at 348, while the worst were FTSE/JSE All Africa ex SA 30 with S A Rand values down 42.3% at 55, FTSE/JSE All Africa ex SA 30 with US$ values down 28.8% at 61 and FTSE/JSE All Africa 40 Index with S A Rand values down 19.4% at 70.

    There were 22 new 12 month highs today, including Trnshex which closed up 9.5% at 449, Cml up 8% at 950 and Mondiplcp up 5.6% at 4455.

    Of the major stocks Mtn gained 1.11% at 10930, Implats was up 3.17% at 21700, Anglo moved up 1.37% at 34000, Sasol ended up 1.19% at 30899, Stanbank lost 0.01% at 10299.

    Biggest gainers of the day where Brc up 15.79% at 110 , Sephaku up 14.29% at 400 , some of the losing shares included Ceramic off 13.79% at 10000 and Metmar down 4.88% at 370

    The Dow was off 0.2% at 10585.17 and the S&P 500 off 0.1% at 1140.51 a few moments ago.

    Gold was up 0.2% at $ 1132.85/oz

    The rand was last trading at R 7.36 to the dollar, R 11.73 to the pound and R 10.56 to the Euro.

    Permalink2010-01-08, 19:09:23, by admin Email , Leave a comment

    Daily Equity Report Thursday 7 January 2010

    The JSE closed down 0.22% at 28018 with value traded at R 9.67 billion. Declines led advances 168 to 156 with 83 shares unchanged out of 407 active. Mining closed up 0.14% at 35292, while Industrials were off 0.58% at 25695 and financials ended the day down 0.14% at 19507.

    The best performing sectors of the day were FTSE/JSE SHARIAH ALL up 45.1% at 2973, FTSE/JSE RAFI 40 up 25.1% at 5838 and Venture Capital up 3.2% at 71, while the worst were FTSE/JSE All Africa ex SA 30 with S A Rand values down 42.6% at 55, FTSE/JSE All Africa ex SA 30 with US$ values down 29% at 61 and FTSE/JSE All Africa 40 Index with S A Rand values down 19.8% at 70.

    There were 16 new 12 month highs today, including Eastplats which closed up 21.3% at 850, Ellies up 8.6% at 190 and Pallinght up 5.7% at 540.

    Of the major stocks Mtn was off 2.39% at 10810, Billiton moved up 0.71% at 24573, Anglo gained 0.42% at 33539, Implats moved down 1.71% at 21033, Sasol was off 0.56% at 30535.

    Best performers of the day were Eastplats up 21.26% at 850 , Anooraq up 15.71% at 810 , while the major losers were Compclear down 10.53% at 255 and Dorbyl down 9.77% at 360

    The Dow was off 0.1% at 10559.24 and the S&P 500 off 0.2% at 1135.27 a few moments ago.

    Gold was off 0.5% at $ 1133.17/oz

    The rand was last trading at R 7.37 to the dollar, R 11.74 to the pound and R 10.57 to the Euro.

    Permalink2010-01-07, 17:51:25, by admin Email , Leave a comment

    Daily Equity Report Wednesday 6 January 2010

    2010/01/06

    The JSE closed up 0.29% at 28080 with value traded at R 4.63 billion. Advances led declines 160 to 123 with 75 shares unchanged out of 358 active. Mining closed up 0.88% at 35243, while Industrials were down 0.03% at 25845 and financials ended the day off 0.29% at 19534.

    The best performing sectors of the day were FTSE/JSE SHARIAH ALL up 45.3% at 2977, FTSE/JSE RAFI 40 up 25.4% at 5853 and Gold Mining up 2.5% at 2504, while the worst were FTSE/JSE All Africa ex SA 30 with S A Rand values down 43.6% at 54, FTSE/JSE All Africa ex SA 30 with US$ values down 29.9% at 60 and FTSE/JSE All Africa 40 Index with S A Rand values down 20.7% at 69.

    There were 14 new 12 month highs today, including Brait which closed up 5.1% at 2170, Masonite up 5% at 4200 and Metorex up 4.8% at 505.

    Of the major stocks Mtn lost 0.67% at 11075, Anglo ended up 1.15% at 33400, Naspersn was off 0.33% at 30100, Implats was off 1.83% at 21400, Billiton moved up 0.86% at 24400.

    Biggest gainers of the day where Cenrand up 15.63% at 185 , Amecor up 9.57% at 126 , some of the losing shares included Afro-c down 15.64% at 151 and Jasco down 5.41% at 175

    The Dow was down 0.1% at 10562.95 and the S&P 500 off 0.1% at 1135.07 a few moments ago.

    Gold was up 1.6% at $ 1134.20/oz

    The rand was last trading at R 7.30 to the dollar, R 11.65 to the pound and R 10.51 to the Euro.

    Permalink2010-01-06, 19:30:52, by admin Email , Leave a comment

    Daily Equity Report Tuesday 5 January 2010

    The JSE closed up 0.37% at 27999 with value traded at R 8.68 billion. Advances led declines 207 to 119 with 86 shares unchanged out of 412 active. Mining closed up 0.57% at 34936, while Industrials were down 0.37% at 25853 and financials ended the day up 1.41% at 19589.

    The best performing sectors of the day were FTSE/JSE SHARIAH ALL up 44.3% at 2957, FTSE/JSE RAFI 40 up 25.3% at 5845 and Venture Capital up 18.8% at 71, while the worst were FTSE/JSE All Africa ex SA 30 with S A Rand values down 44.4% at 53, FTSE/JSE All Africa ex SA 30 with US$ values down 30.9% at 59 and FTSE/JSE All Africa 40 Index with S A Rand values down 21.5% at 68.

    There were 27 new 12 month highs today, including Mvelares which closed up 7.4% at 5200, Northam up 6.4% at 5100 and Reunert up 4% at 6050 while there were 1 new lows of which Cenrand topped the list, down 13% at 160.

    Of the major stocks Mtn moved down 2.75% at 11150, Implats gained 3.07% at 21800, Anglo gained 0.52% at 33020, Sabmiller was off 2.4% at 21375, Sasol was up 0.71% at 30550.

    Best performers of the day were Lonafric up 24% at 155 , Village up 10.89% at 112 , while the major losers were Cenrand down 13.04% at 160 and Platmin down 8.34% at 1099

    The Dow was off 0.1% at 10575.57 and the S&P 500 up 0.3% at 1136.43 a few moments ago.

    Gold was up 0.1% at $ 1121.10/oz

    The rand was last trading at R 7.31 to the dollar, R 11.66 to the pound and R 10.52 to the Euro.

    Permalink2010-01-05, 19:53:09, by admin Email , Leave a comment

    Daily Equity Report Monday 4 January 2010

    2010/01/04
    The JSE closed up 0.83% at 27895 with value traded at R 2.92 billion. Declines led advances 162 to 157 with 63 shares unchanged out of 382 active. Mining closed up 2.18% at 34738, while Industrials were off 0.15% at 25949 and financials ended the day off 0.05% at 19316.

    The best performing sectors of the day were FTSE/JSE SHARIAH ALL up 44% at 2951, FTSE/JSE RAFI 40 up 24.3% at 5801 and Platinum Mining up 3.1% at 84, while the worst were FTSE/JSE All Africa ex SA 30 with S A Rand values down 44.7% at 53, FTSE/JSE All Africa ex SA 30 with US$ values down 31.1% at 59 and FTSE/JSE All Africa 40 Index with S A Rand values down 21.8% at 68.

    There were 9 new 12 month highs today, including Fortressb which closed up 14.5% at 190, Aquarius up 5.3% at 5050 and Bcx up 3.6% at 570.

    Of the major stocks Anglo was up 2.82% at 32850, Mtn ended down 2.76% at 11465, Billiton gained 1.96% at 24165, Gfields gained 1.4% at 9935, Naspersn was up 0.33% at 30100.

    Biggest gainers of the day where Fortressb up 14.46% at 190 , Arb up 7.69% at 210 , some of the losing shares included Comair off 11.67% at 265 and Ips off 10.59% at 152

    The Dow was up 1.4% at 10572.47 and the S&P 500 up 1.5% at 1131.38 a few moments ago.

    Gold was up 2.1% at $ 1122.15/oz

    The rand was last trading at R 7.29 to the dollar, R 11.71 to the pound and R 10.52 to the Euro.

    Permalink2010-01-04, 18:23:39, by admin Email , Leave a comment