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    Two Thirds of 2010 Gone!

    The local market traded sideways for most of the day today, but then raced up by about 1.3% from 15:00 to close up 0.4% for the day. This leaves the market down 3.6% for the month and it is now relatively flat year to date (down 0.05%). The rand has weakened slightly during the month (by around 0.66% to the US dollar) most likely as a result of the rolling strike actions by the various unions, most notably the public servants’ strike. Year to date we find the rand flat against the US dollar.

    Performance this year has been driven by the bond and property market on the back of foreign portfolio flows into South Africa and an inflation rate that has continued to surprise on the down side. The All Bond Index is up over 13% in 2010 while the SA Listed Property Index is up over 21% in the same period! Offshore assets have continued to disappoint, but continue to show better value than their local counterparts (with the exception of global – particularly developed market – debt).

    Gold has been a solid performer – the New Gold ETF is up over 9% as investor demand for this ‘safe haven’ commodity drives up the price.

    While benchmarking performance of asset classes and managers is an important part of the investment process, investors must be aware of how they interpret this data. It should be used as a process to show where you made good and bad decisions, rather than a process of where you should be making changes to your strategy. Investing is a long term game, and monthly benchmarking does provide its anomalies as explained below:

    Anomaly: For equity unit trust investors who compare their funds’ returns to the market on a monthly basis, a movement this large after 3pm (when most unit trusts are priced) can have quite an impact on a manager’s monthly relative performance. This month the market rally in the last 2 hours of trading will provide a headwind for August returns, but investors must remember that it will also be an initial tail wind in September as the performance in the last two hours of today gets incorporated into tomorrow’s price.

    Seed supports Eagle’s Nest Primary School, which is a school in Wallacedene (an informal settlement near Cape Town). Eric Simons and Gary Kirsten, two notable South Africans who have achieved success both as cricketers and as coaches, will be attending a Business Breakfast in support of Eagle’s Nest at Newlands Cricket Ground on 17 September. They will be sharing some of their experiences in the world of sport and how the lessons they have learned can be related to business. For more information on how you can join the Seed team at this event click on their invitation:
    or Facebook event:

    To access a range of fresh investment reports join Seed’s Facebook page by clicking here, or click here to follow us on Twitter.

    It is apparently the first day of Spring tomorrow, being the 1st of September, but it seems as if Cape Town as usual will be joining the rest of the country a little later in the year.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2010-08-31, 18:30:22, by Mike Email , Leave a comment

    The Power of Dividends

    We often find ourselves quoting and reproducing GMO’s work, and for good measure. GMO is a privately held investment management firm founded in 1977, headquartered in Boston, USA, with offices worldwide. Several key factors in GMO’s success are: discipline, value orientation, investment research, and constant innovation. These are factors that we at Seed identify with, and it is therefore natural that we find value in much of their work.

    As the company’s co-founder and chief strategist, Jeremy Grantham’s views are most often dissected, but James Montier, who forms part of the asset allocation team, is also an astute analyst. We find his views most thought provoking and he writes without fear or favour. His recent white paper on the importance of dividends is a case of point. I’ll take a few interesting pieces out of the report.

    Initial dividend yield and the growth in dividends accounts for nearly 80% of total return over five year periods (based on US data since 1871). The remaining 20% or so comes from a change in valuation (i.e. re-rating or de-rating of the PE multiple). Conversely over a one year period nearly 80% of total return is determined by the change in valuation and the remaining amount is explained by starting dividend yield and dividend growth.

    From the above chart it would logically flow that most investors would be concerned about dividends when making their investments. Unfortunately (or fortunately for those who follow this approach) many ‘investors’ are myopic in their focus on the next earnings figure for a company. As a result these ‘investors’ attempt to consistently profit from the change in valuation. This is an extremely difficult method to successfully follow as only those who can accurately predict next quarter/half earnings on a repeated basis AND who materially differ from the consensus number will profit from this method. The chart below show how the average holding period has dwindled dramatically over the last 50 odd years on the NYSE as investors take a shorter and shorter perspective.

    James Montier goes on to point out that, in the derivatives market, European dividends are currently priced for a depression, which means that they are cheap if the region doesn’t experience a depression over the next ten years or so. Investors taking a longer term view are able to look through the current noise.

    A further arrow in the ‘dividend quiver’ is that as companies are generally able to increase their prices in line with inflation, dividends are typically a good inflation hedge over a five year period. As inflation is probably the biggest enemy to a retirement portfolio, this characteristic is particularly attractive. The chart below shows how dividends and inflation move in line with one another.

    Ultimately investors who truly have a long time horizon need to make sure that their portfolio contains companies that are priced attractively (good initial dividend yield), and will show good longer term growth (good dividend growth). This can either be achieved through selecting the shares yourself or using a portfolio manager who follows these principles.

    Click here to access our Facebook page and let us know if you take dividend yield and growth into account when selecting your shares/portfolio manager.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2010-08-26, 17:27:49, by Mike Email , Leave a comment

    Inflation Surprises Again!

    It was around this time, two years ago, that pretty much everyone who attempted to forecast inflation came up with a number that understated the actual inflation rate. Oil prices had just peaked and the price of food had just been going one way. Consumers were on their knees as the felt the pain of high inflation.

    We now find ourselves in a position where inflation has fallen into the SARB’s target range of 3% - 6%, transport and food inflation are muted, electricity has been pushing inflation up and while the current wage negotiations won’t impact the current figures, any real wage increases will push inflation up in months to come. In these relatively benign conditions we find that those professionals forecasting inflation are generally overstating the actual numbers.

    While the quantum has been quite surprising, the fact that the forecasters are trailing the actual numbers is nothing new. Many studies have been conducted over the years that show that forecasters generally lag whatever variable that are attempting to forecast, be they company earnings, share price, inflation, etc. Unfortunately we don’t have the data for local inflation to display.

    Stats SA today announced that inflation for the twelve months to 31 July 2010 came in at 3.7%, a full 0.3% below analyst expectations. A main contributor to the surprise was an acute fall in the restaurants and hotel index as a result in a fall in hotel prices post the 2010 FIFA World Cup.

    Below is a chart with the long term inflation rate, it has averaged 10.4% over this period, but over the last decade has averaged a more ‘normal’ 6.3%. Inflation only consistently fell below 10% in the early 1990’s when then Reserve Bank Governor, Chris Stals, broke the back of inflation.

    Low inflation is typically accompanied by low interest rates, which tends to be good for the economy. You will therefore see that countries around the world target an inflation rate between around 2% and 5%. At the moment there is a problem globally in that interest rates and inflation are nearly at 0%, but the economies aren’t responding. While low interest rates are conducive to economic growth, consistently negative inflation (that hasn’t been generated as a product of improved efficiencies) has exactly the opposite effect. This is why governments around the world are trying to stimulate their economies (and by extension inflation rates) by engaging in extremely loose monetary policy.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2010-08-25, 19:01:01, by Mike Email , Leave a comment

    Retirement Questions

    Last week I went to the Sanlam Benchmark Symposium presentation. It is an annual presentation where Sanlam communicates their research findings to the pension fund industry in South Africa. They conduct a broad research every year across many stand alone pension/provident funds as well umbrella pension/provident funds.

    According to their research the average member contributes 11.3% of his/her salary towards retirement, 1.9% towards death benefits, and 1.3% towards disability cover.

    One of the most shocking statistics that was thrown around was that 60% of today’s 20 year olds in South Africa will not live beyond the age of 60. We as a community have lots to do in this regard.

    Then, also interestingly, 65% of members belonging to a pension or provident fund invest in the default option. One should be concerned about this because it shows that many people in SA are either not informed about investments or not interested. Investing is one of those things that you just need to understand whether you like it or not. After all, you do spend most of your time accumulating some sort of nest egg.

    Let’s look at some of the questions you should be asking yourself when you are far from retirement, close to retirement, at retirement, and in retirement.

    I trust that these questions will provide a starting point for you when taking a closer look at your current investments and investment strategy.

    I always enjoy the quote by Richard Cushing:
    “It wasn't raining when Noah built the Ark.”

    Have you started building your ark?

    Kind regards,

    Vincent Heys
    021 9144 966

    Permalink2010-08-24, 15:29:02, by Mike Email , Leave a comment

    Where there’s Smoke there’s Fire

    The smoke seen and reported towards the end of July turned out to be more than just smoke, and today there was an announcement that HSBC has made a proposal to Old Mutual to gain a controlling stake in Nedbank. There are always rumours in the market of potential suitors for various companies, and Nedbank is no exception. Many rumours in the past have come to nought, but Old Mutual today announced that it had given HSBC a period of exclusivity to perform a due diligence.

    Characteristics of Nedbank that are conducive to takeover bids include the following:
    • Controlling shareholder has a majority stake: When negotiating to make a purchase of a stake in a listed company it is generally easier to negotiate with one party with one agenda, than having to negotiate with a multitude of smaller shareholders who all have their own agendas.
    • Controlling shareholder realigning business direction/requiring a capital injection: When the majority shareholder is keen to hang onto an asset it can be nearly impossible to make a successful bid, but where the major shareholder is open to offers it can make it easier to negotiate a reasonable price for the deal. A shareholder looking to exit will generally be happy to sell at fair value or a slight premium, while one looking to hang onto the asset will typically demand an excessive premium, if they decide to put the asset on the market.
    • Well understood business with a simple/streamlined product offering: Nedbank’s business model is fairly straight forward. It is a bank with an emerging market footprint. Businesses with a focused strategy are often preferred to assets with a diverse income stream unless the acquirer is in the business of spinning off the various business units at a profit.
    • Exposure to emerging markets: The growth of banking companies is highly dependent on growth and business activity in the economy in which it participates. Developed markets are expected to face slow economic growth with low activity over the coming years, while emerging markets provide banks with high growth high activity markets, with potentially larger margins as competition isn’t as fierce as it is in developed markets.

    Possible pitfalls in the bid by HSBC for Nedbank:
    • There could be regulatory resistance: The Reserve Bank and Finance Ministry could protest against the sale of a key South African asset particularly considering ABSA’s sale of a majority stake to UK listed Barclays and Standard Banks sale of 20% to the Industrial and Commercial Bank of China. This could be overcome if Nedbank’s acquirer agreed to certain conditions relating to the management of the company.
    • A rival bid: Rival bids are common in the merger and acquisition business. In the case of the Nedbank deal there were rumours that Standard Charter was interested in making an offer. HSBC does have a period of exclusivity to perform its due diligence, but this doesn’t preclude another competitor from making an offer in the interim.

    This deal won’t be sealed overnight, but as HSBC gets further down its due diligence you can be sure that the share price will move to reflect the increasing or decreasing certainty that a deal will be done. Nedbank and Old Mutual reacted positively to the news today. They were up 6% and 3.9% respectively. Nedbank has been a poor performer over the past 10 years, and can now be found in the portfolios of several astute value managers as it is trading at attractive valuation metrics.

    Tell us what you think of this development by clicking through to our Facebook page.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2010-08-23, 18:40:54, by Mike Email , Leave a comment

    Weak Economies

    It is a bit of an anomaly that in a country where unemployment is so high, workers go on extended strikes demanding wage hikes way in excess of inflation even though there hasn’t been a marked increase in productivity. Other parts of the world faced with weak economic growth and stretched government finances have seen workers taking reduced packages and shorter hours.

    It was interesting to hear that Jacob Zuma today threatened to fire striking workers. He mentioned that he was within the law in this regard. Obviously workers that haven’t been striking peacefully have brought about this type of statement.

    Hopefully we are nearing the end of the striking season, as it not only slows down economic growth, but also affects the image of the country. The car industry is a case in point. Vehicle exporters have agreements to export a set number of vehicles on a monthly/annual basis. Extended strikes jeopardise the companies’ ability to meet their agreements, which can put them in breach of contract, which in the worst case scenario will result in them losing future contracts. Contracts lost equals jobs lost, and workers therefore need to be careful that their striking doesn’t jeopardise their employment. Getting your desired pay raise is of little consequence if you lose your job at the end of the year.

    Over in the US, the jobless claims hit a new nine month high of 500 000 claims. There has been much talk over whether the US will experience a double dip recession or not. Increased unemployment in a country that is highly reliant on its consumers doesn’t bode well for economic growth going forward.

    Obama is currently trying his level best to pass legislation that will make it easier for small business owners to get loans. Small businesses are the life blood of the economy in that they generate two out of every three jobs. In the absence of any stimulus to the economy the central bank has begun its stimulus spending again, increasing money supply by buying Treasury debt which should also keep interest rates low.

    Enjoy your weekend. Good luck to the Springboks tomorrow!

    Take care,

    Mike Browne
    021 9144 966

    Permalink2010-08-20, 16:50:04, by Mike Email , Leave a comment

    Truworths and Grindrod Results

    Company results continue to flow thick and fast at the moment, as many of the JSE listed companies with December and June year ends get their interim and final results out. Listed companies have 3 months to report their financials after half year and year end, and most do so within 2 months.

    Briefly looking at two of the companies to release their results today:

    Truworths – Final Results

    Truworths is a fairly recognisable brand in South Africa, as it is one of the larger clothing retailers. Other brands that form part of the Truworths Group are Daniel Hechter, YDE, Identity, and UZZI. Some of the highlights in their results include:
    • Turnover up 11%
    • Operating margin at 34% (unchanged from 2009 – 33.8%)
    • Final dividend up 18%
    • Bad debts down to 9.8% from 11.9%
    • Cash on balance sheet: R1.32bn

    The Group turnover was up 11%, but this can be mainly attributed to trading space growth of 6% and product inflation of 4%, which means that on a like for like basis there wasn’t much real growth in turnover. With the operating margin only slightly up, the group was able to increase their trading profit by 20% by controlling costs.

    Truworths’ outlook for the 2011 financial year is positive as inflation and interest rates are at low levels, while wage growth has been generally been well in excess of inflation, leading to real income growth.

    The share was down 0.4% on the day.

    Grindrod – Interim Results

    Over the past decade or so Africa’s biggest shipping group, Grindrod, has raised its public profile in this country. Grindrod is one of the few listed companies with their head office in Durban and, other than its shipping business, has interests in logistics and financial services. Some of the highlights in their results include:
    • Revenue up 20% (Financial Services up 78% off a low base)
    • Attributable income down 10%
    • Interim dividend down 10% (from 30c to 27c)
    • Cash on balance sheet: R700mn

    Operating in the shipping industry over the last few years hasn’t been an easy task. Shipping is a highly cyclical industry and a global recession followed by generally muted recovery isn’t conducive to good results. Grindrod faced further headwinds over this period as the rand strengthened against most major currencies. The interim dividend was cut in line with the results, but the company did have over R700mn on its balance sheet at year end. With a debt to equity ratio of 18.7% the company isn’t overleveraged, which is important in a cyclical company when times are tough.

    The share was up 0.1% on the day.

    To generate an investment decision an investor needs to take both the financial health of the company and its share price into consideration before deciding to buy or sell. Just because a company is struggling doesn’t mean that it isn’t a good investment and vice versa.

    Click here to let us know on our Facebook page what characteristics are important for you when investing.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2010-08-19, 18:49:56, by Mike Email , Leave a comment

    Sector Rotation

    It is often the case that laymen and professional investors alike, when discussing the performance of the stock market, refer to the performance of the All Share Index (ALSI), which is a return based on the market cap weighted performance of the local bourse’s constituents, as a proxy for the return of all shares/sectors. While this is often the case – typically in trending markets – there are occasions when this assumption can turn out to be way off the mark.

    As a little exercise we had a look back at the returns of a variety of indices going back three years. For the purposes of this report the returns of the ALSI, Financial Index, and Resource Index were used as they illustrate the point most clearly. The table below shows the annualised returns from each of these indices over this period:

    31 July 07 - 31 July 10
    All Share Index 2.5%
    Financial Index 0.3%
    Resource Index -1.4%

    One can be forgiven for thinking that the performance of these different indices tracked one another over this period. The truth can’t be further from the truth. The Financial Index peaked in October 2007, and then started to fall as the consequences of the global financial and credit crises started to become apparent. While this happened the Resource Index continued to race up as demand for commodities appeared as if it would never end, which pushed commodity prices to record highs. This divergence was so marked that from 31 July 2007 to 30 June 2008 the Financial Index was down 28% and the Resource Index was up 38%!

    By mid 2008 most of the bad news had been priced into the financial shares, but not in the resource shares. With the crises taking hold in mid 2008, the prospect of a rapidly slowing global economy saw the price of many commodities falling by over 50%. Resources fell nearly 50% in just four months, while the financials’ held their own! From this point (November 2008) the indices have followed a similar path, and as shown in the table above have ended the three year period in line with each other.

    In the chart below we look at the performance of the three indices. In addition to this we plot the returns of two investors: both invest in the ALSI until 30 June 2008, the one then switches into the Financial Index (that has performed poorly) and the other into the robustly performing Resource Index.

    It is clear that we have the benefit of hindsight and that very few, if any, investors would be able to get the timing spot on, but the performance of underlying sectors can dramatically alter the performance of your portfolio. There are some pointers that we can take from this analysis:

    • If you have made an investment based on solid research (i.e. invested into financials in early 2008) don’t change strategy (switch to resources) purely because you have underperformed for a period. Investors who had the courage of conviction to stay the course in their financial shares end up with similar performance over the investment period displayed.
    • Making bold (large) calls on your portfolio can dramatically alter the outcome of your performance (good or bad). Have solid reasons for making any changes backed by fundamental research. Switching into an asset class/sector/any investment “Because it has done well” is not a good reason to make the change.
    • Diversifying your portfolio can reduce the likelihood that you will make a really bad decision based on emotion.

    Click here to let us know on our Facebook page if sector rotation is part of your investment strategy.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2010-08-17, 18:02:51, by Mike Email , Leave a comment

    Strike Season

    South Africa is currently in the middle of the annual strike season. Every year employees, lead by their unions, attempt to ‘negotiate’ better wages with their employers. Strikes occur when a deal can’t get agreed upon. This isn’t something that’s new, and in my opinion this year’s striking hasn’t been materially better or worse than previous years. South Africans should also be aware that striking (and the associated violence) isn’t unique to our land. While the associated violence is to be strongly condemned, the act of striking under a ‘no work, no pay’ principle is part of any employee’s rights.

    Striking is also typically associated with developing (or third world) countries, and while this is true in general as a result of lower standards of living, poorer education, and higher poverty levels in these countries, highly developed first world countries, with socialist leanings, also experience their share of strikes. Paris, for instance, was full of strikers (particularly in the public transport sector) right as the Rugby World Cup was coming to a conclusion, making it really difficult for spectators to get to their matches. Greece has also seen its fair share of strikes (and riots) this year.

    In years where the economy and company profits are growing strongly, there is perhaps less resistance to workers’ demands with companies and government able to pay up to keep up productivity. When these institutions are under strain and workers are demanding significantly above inflation wage increases (without improved productivity) the workers can expect tougher negotiations.

    Locally, the latest public sector ‘negotiations’ have been grabbing the headlines recently. The union demands are for a wage hike that’s more than double current inflation, as well as a doubling of their housing allowance. At the moment the government are offering a 7% wage increase and a 40% increase in their housing allowance. Time will tell where the parties eventually agree.

    There are undoubtedly pro’s and con’s of the striking process. Taking advantage of an uneducated labour force can’t be condoned, but at the same time unrealistic demands and expectations (fuelled by the unions) isn’t right either. In a country with a massive unemployment problem there is also the question of whether we should be targeting higher employment levels at a lower wage per employee, or lower employment at a higher wage per employee? It is unrealistic, especially in tough economic times, to expect employment and wage levels to grow strongly at the same time.

    What are your views on striking? Click here to have your say and vote on our Facebook poll.

    Enjoy your weekend.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2010-08-13, 16:01:00, by Mike Email , Leave a comment

    Renminbi Revaluation

    It is always difficult to keep up with the multitude of news and information that lands on your desk, but after a while you realise where the good sources of information come from. Reports from these sources typically get read as soon as they arrive, but if you are too busy when they arrive you make sure that they get filed for later consumption.

    One of the global managers that we make sure we track is Sarasin, with their Chief Investment Officer (CIO) and Managing Partner being the well respected Guy Monson. Sarasin’s Quarter 3 – 2010 report came out on 22 July, but I only managed to get around to reading it today. Fortunately Sarasin invests with a long term horizon, so being 1 month late doesn’t have much impact on the relevance of the report.

    The report starts off with the People’s Bank of China quote,

    “In view of the recent economic situation and financial market developments at home and abroad, and the Balance of Payments (BoP) situation in China, the People’s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.” – 19 June 2010

    After this announcement the Renminbi ( RMB ) – official name of the Chinese currency, also known as the Yuan – strengthened versus the US dollar (USD) as indicated in the chart below. Note the historical USD peg before the revaluation.

    The US has been engaging China for many years now about its exchange rate. The US felt that the Chinese were keeping their exchange rate artificially weak in order to support their exports – which form a large part of the Chinese economy. By allowing the RMB to strengthen, the Chinese have made other countries’ goods more attractive, on a relative basis, and helps these countries’ (including the US) economies. Conversely RMB strength will put pressure on China’s economy as the USD price of their goods increases.

    With this background in mind, the one sentence from Guy Monson that really resonated with me was as follows,

    (Speaking about the strengthening Renminbi) “Over time the advantages are clear; it will tend to be reflationary for the global economy and deflationary for China (which should benefit both), it will reduce trade friction and rebalance global demand.”

    The stronger RMB will lead to inflation in the countries that are major importers of Chinese goods (mainly western consumer driven countries). Generally this would be cause for concern, but at the moment these economies are struggling with weak economies and near deflation and so some inflation will be a welcome relief. At the same time, reduced demand for Chinese products will not only put pressure on the Chinese economy (thereby cooling an overheating economy – inflation is now over their 3% target) but it could also be the catalyst for a transition in the Chinese economy from being hugely reliant on exports to becoming a more consumer driven economy. These are both positive factors in the long run.

    Sarasin are playing this theme by investing in short term Asian bonds – to benefit from potential flows into these economies – and in what they deem ‘Nifty Fifty’ stocks. Nifty Fifty stocks are global companies (typically listed on Developed Market exchanges) that are export driven and cash rich. The valuations of these companies are attractive and they benefit from growing demand of their product in Emerging, particularly Asian, countries.

    Take care,

    Mike Browne
    ‘Like’ Seed
    021 9144 966

    Permalink2010-08-12, 17:33:25, by Mike Email , Leave a comment

    global markets trade in a sideways pattern

    Global markets have generally moved in a sideways pattern this year. This is clearly evidenced by the major global indices trading up or down one or two percent for the year to date.

    The chart below is the MSCI world index.

    The general sideways pattern in global markets over the last year is clearly seen in the chart.

    This often follows a pattern of gains, which we saw post the 2008 major market decline.

    The MSCI All World index is a free float index, market capitalisation weighted index that is designed to measure the equity performance of both developed and emerging markets.

    As at end of May, it consisted of 45 country indices comprising 24 developed and 21 emerging market country indices.

    The chart below shows, using a common starting point, the performance of the emerging markets, world and the JSE. The outperformance of the JSE in rand terms is clearly seen.

    Two years ago the rand was trading at R7,70/dollar. After depreciating, it has recovered very firmly to its current R7,29/dollar.

    A long period of virtually “treading water” can be very frustrating for investors. But with investing, patience is often required through longer periods where flat returns are sustained, as long as there is reasonable value.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2010-08-11, 17:17:10, by ian Email , Leave a comment

    Will there be further US monetary policy easing?

    Unlike in South Africa where 2 days are required for deliberations on interest rate policy, the committee of the US Federal Reserve began its meeting at 8:00am and will release a statement at 2:15pm Washington time.

    The general thinking is that it this committee will be unlikely to announce an aggressive easing in monetary policy, but a likely tweak to future easing.

    The last reduced interest rates to the ultra low zero to 0,25% in December 2008, where they have continued to hold them. In March and at their last meeting in June 2009, they reiterated their statement that they would continue to keep borrowing costs exceptionally low for an extended period of time.

    Investors will be looking for a reiteration of this commitment to keep rates “low for long.”

    One report said that what could be on the cards is a possible re-investing of funds into maturing mortgage bonds. In order to revive the ailing economy, the central bank has lowered the cost of borrowing, but where this is close to zero, which is the case, it can also come in as a buyer of debt, in order to keep liquidity levels high.

    The chart below reflects the central bank interest rates in blue - near the 0% level, and the dollar index, a trade weighted index of the US dollar.

    It reflects the last time that the Federal Reserve re-started monetary easing – the US dollar fell further. This is a possibility should we see aggressive monetary policy easing coming through from the US today.

    The risk is that the recent declines in the dollar could be relatively small, should the US Federal Reserve get more aggressive in its monetary policy easing.

    The rand was last trading at R7,25/dollar.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2010-08-10, 17:12:51, by ian Email , Leave a comment

    Saving in a retirement annuity or an investment plan?

    It is a common question asked by many people saving towards retirement and as with anything there are no simple answers when it comes to making a decision. Here are a few pointers that could assist you making a decision. Please note that it is most likely not an exhaustive list but could assist you.

    Retirement annuity


    1. The contributions you make into the retirement annuity fund are tax deductable up to a cap of 15% of your non-pensionable salary. Depending on your tax level, it could mean that for every R1 000 contribution you make towards your retirement fund the net amount coming from your pay slip could only be R600. This is quite a large saving.
    2. The full investment will grow tax free.
    3. There are definite estate planning advantages with a retirement annuity.


    1. Your investment is locked in until you are 55 years old. You may cash the fund in but you will be heavily taxed.
    2. Your investment landscape is reduced and it should follow the Prudential Guidelines stipulated by the Financial Services Board.
    3. The full income you will drawdown as a pension will be taxed as income tax.
    4. Your investment could be transferred to another country if you emigrate but then again you will be heavily taxed.

    Investment plan


    1. Your investment can be accessed at any point in time.
    2. You have complete flexibility in terms of where and how you want to invest the portfolio, whether it is a property, share portfolio, unit trust, art, etc.
    3. The income you will drawdown as a pension will be taxed free.


    1. You can only make contributions into your investment plan with after tax money.
    2. Your investment will attract income tax on interest and rental income and capital gains tax on any growth on investments.

    To illustrate the likely difference in the outcome I have set out an example below.

    I assumed the following:

    • The investor is 30% rate tax payer at the moment and once he/she retires becomes a 15% rate tax payer because he/she will earn less income after retirement.
    • The investor is 20 years away from retirement and will save R50 000 p.a. (after tax money) into his/her investment plan or could save R71 000 p.a. (before tax) into a retirement annuity.
    • The investment portfolio simply consists of 50% equities and 50% cash.
    • The equity portion will grow by 10% p.a. plus pay a 3% dividend per year.
    • The cash portion will increase by 8% p.a.
    • Therefore, in a retirement annuity (where the investments grow tax free) the average return will be 50% x 13% + 50% x 8% = 10.5% p.a.
    • However, in an investment plan the return will be 50% x 10% x (1 – Capital Gains Tax) 50% x 3% + 50% x 8% x (1 – Income Tax) = + 9.3% p.a. The return is slightly higher after retirement as his/her tax rate will most likely be lower. Let’s assume 9.9% p.a. after retirement.
    • At retirement, in 20 years time, the investor would like to draw down R180 000 net of tax.
    • Therefore, he/she will drawdown R180 000 from the investment plan.
    • However, he/she will need to drawdown R213 000 from the retirement annuity in order to have R180 000 net of tax available.

    So what is the likely end result?

    After 20 years the fund value in the retirement annuity is R4.5m while the investment plan is R2.7m. From year 20 the investor starts drawing an income. The investment plan is reducing in value while the retirement annuity increases. This is purely as a result of the different tax regimes between the retirement annuity and normal investment plan. Obviously there are tax benefits for higher tax payers to make use of an endowment policy instead of an investment plan that could also provide a better outcome.

    Don't hesitate to contact me in order to discuss your retirement planning.

    Have a fantastic long weekend

    Vincent Heys (Actuary)
    021 9144 966

    Permalink2010-08-06, 16:34:29, by ian Email , Leave a comment

    Gold as a Hedge?

    There is no doubt that gold is a precious metal. It has been afforded this status over centuries, and may well retain this status for centuries to come. It may come as a surprise to many people that gold is held in such esteem, particularly as there isn’t much industrial demand for the yellow metal. Demand has typically come from the jewellery market and central banks holding onto gold in their reserves. More recently investment demand has picked up.

    The lack of demand for gold in an industrial setting can be juxtaposed against other base metals that are used in a variety of industrial processes, and platinum that is heavily used by the auto industry in the production of catalytic converters.

    The ‘insurance value’ inherent in gold has made it attractive to investors that are concerned about ‘the next investment crisis’. When faced with a crisis, investors value the tangible nature of gold over other assets that are considered ‘paper assets’, i.e. a claim on an asset or stream of income. At the same time the lack of industrial use (unlike base metals and platinum) protects gold’s price from falling significantly due to lower demand. The price of platinum, for instance, will be negatively impacted by a fall in vehicle sales.

    While there isn’t a yield on gold (you don’t receive an income stream), it does retain its chemical properties well over time (doesn’t corrode, etc) and holders of gold are therefore able to store it for long periods without it deteriorating.

    The chart above shows the rand price of gold since the end of 1999 compared to the ALSI and inflation. Note how its performance has been able to keep pace with the ALSI, while at the same time exhibiting a low correlation.

    There are also some caveats that investors should be aware of when purchasing gold. The price of gold, like any asset, can and will experience fluctuations. Investors who bought the precious metal in the early 80’s when its price peaked around $850 will still, over nearly 30 years, have lost value in real terms.

    A second issue that investors need to be aware of is that, as mentioned, there is no yield on gold. Most assets produce some sort of income stream (dividends, rent, coupon payments, interest, etc) so by not producing a yield the only way for an investor to show a profit is for the price to rise. With interest rates at all time lows across the globe, this problem reduces somewhat, as the opportunity cost of not being in cash is very low.

    Investors should take all of the above into consideration before making an investment into gold. Naturally past performance can’t necessarily be projected into the future, but we have reason to believe that gold will continue to provide a natural hedge against the market going forward.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2010-08-05, 18:14:04, by Mike Email , Leave a comment

    Japanese bonds and commodiies

    Global markets were firm in July with the MSCI world equities gaining 8,1%. Emerging Markets within this world index were outright winners with MSCI Turkey up 16%, Brazil up 13,5% and Russia up 11,4%.

    China gained just 4,4%, relatively poor compared to the other Emerging Markets.

    In the Developed Markets the CAC 40 gained 12,7%, the FTSE100 up 12,1%, and the Dax up 9,6%. The US technology laden Nasdaq moved up 7,8% and the Dow Jones Industrial 7,2%. In the East the Hang Seng gained 4,8% and the Nikkei 3,8%.

    Japanese Bond Yields and currency

    A somewhat disturbing trend is the reports out this week that long term (10 year) Japanese government bond yields dropped below the 1% level for the first time in seven years.

    Lower yields mean capital gains for the owners of these bonds, but they point to an ongoing deflationary environment. The yield on the 10 year government bond fell to 0,995%, the lowest since August 2003.

    The yield is a reflection of many factors, including the risk to lend money to the government and inflationary expectations. Lower yields give an indication that inflation is not expected to pick up any time. Its also an indication of generally weak consumer demand. The lower yields have also come despite record levels of debt issuance to the market.

    At the same time the yen has been gaining ground against the US dollar. As in South Africa, falling government bond yields and a firmer currency are related. And as in South Africa the country, which relies on exports, would prefer a weaker and not a stronger currency.

    The yen rose to an 8 month high relative to the US dollar. This is getting close to a 15 year peak relative to the dollar, as is seen in the chart below.

    Long term chart of the yen/ US dollar.

    The chart below of the yield on the government 10 year bond, reflects the very tight band between 1% and 2% - and now dipping back below 1%.

    The Bank of Japan has kept interest rates at virtually zero for many years now. In mid July they again voted to keep the overnight call rate to 0,1%

    In their statement on monetary policy, the final point that they made was:

    “The Bank recognizes that Japan's economy faces the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability. To this end, the Bank will continue to consistently make contributions as central bank. In the conduct of monetary policy, the Bank will aim to maintain the extremely accommodative financial environment.”

    Commodity prices

    While inflation remains low to non existent in countries like Japan, commodity prices have been moving up steadily over the last few months.

    The CRB (Commodity Research Bureau) index tracks the prices of a range of commodities including, oil, natural gas, corn, wheat, coffee, cocoa, sugar, copper, cotton, live cattle, and precious metals.

    • Higher commodity prices have pushed up Australia’s monthly trade surplus to a record level.

    • Oil is pushing through the $81/barrel level

    • Wheat prices are at a 2 year high

    • Copper at a 3 month high

    • Sugar, cocoa, and coffee are rising and in some cases at multi decade highs.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2010-08-04, 17:02:48, by ian Email , Leave a comment

    Local equity market

    In July the JSE All Share index gained 8%

    • The Financial 15 led the charge up 11,2%
    • Industrial 25 index gained 9,71%
    • Resources 20 index up 5,93%
    • SA Property index up 6,74%
    • The bond market gained 4,1%

    The very strong gains in July followed the weaker May and June months. These recent gains are more realistically seen in the broader context of the overall market over a one year period in the chart below.

    The current market level at around 28 800 is closing in on the mid April peak of 29 565.

    Price chart of the FTSE / JSE All Share index

    General market positives

    • There is a recent turnaround in the Chinese equity market and with the MSCI China index being the biggest constituent in the MSCI Emerging market index at 17%, this is a factor driving up the performance of the emerging market index.
    • Commodity prices are generally firmer and this is positive for the local economy.
    • Global interest rates remain low, which continue to make emerging markets such as South Africa attractive.
    • Local companies are expected to release strong earnings growth off a low base, which while anticipated, still helps drive momentum.


    Despite the overall market still some 13% below its all time high in May 2008, the Industrial 25 index made a new all time high on the 2 August. The chart below gives a clear indication of how firm this component of the total market has been.

    From a common low base in March 2009, this index has more than doubled and continues to have a firm momentum as many of the sectors and companies within this broader sector find favour with investors.

    The Consumer Services Sector

    Within the broader Industrial sector of the JSE, the JSE consumer services sector has been one of the strongest performing sub sectors. This sub sector makes up 8,8% of the JSE All Share index.

    In turn it comprises:

    • Food and drug retailers – including Shoprite, Pick n Pay etc
    • General Retailers – the likes of Truworths, Woolworths, Massmart etc
    • Media – mostly Naspers.
    • Travel and Leisure – Sun International, Famous Brands and City Lodge etc

    Looking at the historical and 2011 consensus forward PE for these shares, gives an indication of how expensive they have got ahead of the release of their annual numbers.

    However once a certain momentum takes hold of an asset, there is often a tendency for that momentum to drive values to a level that is either too cheap or a level that is too expensive. Arguably, this sector is becoming too expensive – but we will have greater clarity in the next couple of months as many companies with June year ends release their results.

    Each investor should have a mechanism to identify when to overweight or underweight asset classes, sectors and specific shares in order to generate superior longer term gains.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2010-08-03, 15:37:43, by ian Email , Leave a comment

    Market update

    August has started where the market left off in July. Global equity markets were very firm in July. The S&P500 gained 6,9% and the Dow 7,1% in July. At the end of July it was down 1,2% for the 7 months, but is up firmly today. After today’s move the FTSE100 is close to flat for the year to date.

    The July gains brought the JSE All Share index to a positive 2,5% for the year to date, boosted by the gains on the first day of trading in August by a further 1,89%, taking the index to 28890. This is now 13% below its all time high.

    Over the last few weeks, there have been a number of shares trading at new 1 month highs. Today this list included Afrgri up 5,7% to 740c, Truworths up 1,85% to 5939c, property company Growthpoint up 1,5% to 1685c and Capitec up 20c to 12920c.

    The historical price to earnings ratio on the JSE is at 17 times, but this is expected to drop quickly as earnings come through in the next 2 months, with the end of June, being a popular year end for companies.

    According to one report, Nedbank Capital has the JSE is now trading on a consensus one year forward PE of 10,3 times. This does appear attractive when compared to the historical price to earnings ratio, but is in fact in line with the long term one year forward PE on the JSE of 10,5 times.

    We do know that in the shorter term however anything is possible - markets can and do move away from long term normalised valuations - but risk increases.


    Crude oil for September delivery gained 95 cents, or 1.2 percent, to $79.90 a barrel on the New York Mercantile Exchange, the highest price since May 6. Brent crude has been steadily rising since Dec 2008 as the chart indicates.

    For South Africans, it has been two years since we had to deal with high fuel prices. The strong rand over the last 18 months has cushioned the steadily rising dollar price of oil.

    The rand gained ground to R7,26/dollar today. It has been firm as foreigners continue to find local yields attractive.

    Kind regards

    Ian de Lange
    021 9144 966

    Permalink2010-08-02, 17:31:00, by ian Email , Leave a comment