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    The Big Roll-Over

    For those who analyze JSE market breadth (advance/decline data as opposed to price action), the most interesting times are almost always when major troughs or peaks are forming, for it is during these times that the data under the skin of the JSE start telling the real story. Have a look at our DELTA-10 Breadth chart below, which measures the number of JSE shares on a daily basis that are trading above their close 10 days prior.

    Marker-1 shows where this metric rose from a depressed level of 102 (25% of JSE) to over 165 (40% of JSE) in a matter of 5 days, a sure clue a bottom had just been formed. It then continued to power up to 265 shares (63% of JSE) and then at Marker-2 we were given the first sign things were weakening when the index failed to print a new high with the JSE. From this point onward, the JSE started "rolling over". But looking at the daily share price, there was no hint of weakness - but day by day, more and more JSE shares failed to print closes higher than 10-days prior. With more and more shares tipping over the top and falling out the race, the rise of the JSE was supported by fewer and fewer shares,the burden on these remaining large-caps resulting in higher volatility of the JSE.

    Normally when this index falls below 190 after a strong run, the JSE succumbs to gravity, but this time the JSE was surprisingly resilient despite the plummeting breadth. The laws of the markets dictate that either breadth must improve or the JSE will give way to gravity. The longer the divergence, the harder the fall.

    Great market peaks are also characterized by a drop-off in aggregate demand (white line)...

    ...with a concomitant rise in aggregate selling pressure...


    ...eventually aggregate selling pressure exceeds demand and gravity takes over

    One other interesting breadth indicator is our McClellan Funds Flow oscillator that measures liquidity in the market through advancing/declining volume. When there is a net liquidity outflow, as demarcated when the indicator falls below zero, we normally warn traders to close their index futures long trades with many also using it to open shorts:

    The JSE has been surprisingly resilient despite the indicator plummeting sharply below zero.

    There is no guarantee of course that this will all lead to a serious correction,or even a mild one, but the risks now are undeniably higher than if you had taken up long positions 30 or 40 days ago. Frankly, it would be desirable for some form of correction to normalize things and set the stage for another advance. But exuberance sometimes knows no bounds and a continued rise in the face of weakening underlying breadth will surely classify as market froth.

    Dwaine van Vuuren

    Permalink2010-10-29, 17:10:17, by dwaine Email , Leave a comment

    Investment risks

    When it comes to investments, there are a range of risks to consider. We have touched on some of these forms risks from time to time and today consider 3 specific investment risks.

    Most, but not all, investors have a possible actuarial risk to their investments. This is the risk that they require a certain capital base at retirement, but that their ultimate investment value falls short of this.

    Investment risk is the risk that the overall investment strategy and specific investments don’t meet the long term objective. For example in order to meet your long term capital asset base at retirement, your advisor has calculated that you require a compounded annual return of say 9,5%. The risk is falling short of this longer term requirement.

    3 factors that will impact on investment risk include

    • Business risk
    • Valuation risk
    • Liquidity risk

    Lets look at these in turn

    Business risk

    This is the risk that the business or investment made fails. The very nature of any business or loan is that it is subject to the possibility of outright or partial failure. This can be through increased competition, change in regulatory environment, insolvency, or a downturn in the economic environment etc.

    Certain businesses have lower risk than others. Some of the factrors to consider include:

    • The type of business. Commodity type businesses have higher risk
    • The financial structure of the business. Highly geared businesses carry higher risk
    • Barriers to entry. The easier competition can take away market share the higher the risk.

    Valuation risk

    Once the business risk is considered, then the next important risk that an investor will incur is valuation risk – this is the risk of overpaying for the business and hence not achieving an adequate return on your initial investment.

    Unlike business risk the valuation risk is a far more controllable risk. An investor can set the entry price and avoid buying until such time as the price is right.

    Very often a wonderful business becomes available but the price may be too expensive. An investor that overpays – even for a good business, can and often does end up making a poor investment (despite buying into a quality business).

    Liquidity risk

    A third risk to an investor is that of liquidity. In order to realise the capital inherent in an investment, it must be on sold to another party. Sometimes the buyer can be the original seller, but often not. Where an investor is forced to sell an investment, then liquidity becomes an area of concern.

    Even where a market is made between buyers and sellers for example on the JSE, liquidity is not guaranteed. And at times where an investor is a forced seller, the price may be depressed with few buyers.

    Conclusion

    Investment risks cannot be fully eliminated. An investor needs to take steps to mitigate these risks and indeed use for his advantage. For example an investor that can accept high risk with low liquidity, can invest the bulk of his portfolio into private equity, but then he will look to be adequately rewarded over time for taking on the additional risk.

    Another investor that cannot afford to take on that type of excessive risk, or has liquidity constraints will have to include lower performing investments such as money market, listed property etc.

    Ultimately all investors take on a certain degree of risk - but this needs to be assessed both initially and on an ongoing basis and then reduced through proper diversification and risk management.

    Kind regards

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

    Permalink2010-10-25, 17:04:45, by ian Email , Leave a comment

    Is stock-picking an investment dying art?

    With the JSE up some 62% in spectacular fashion since the March 2009 low’s, you would be correct in assuming stock-pickers from the mid to large-cap universe would need to pull out all the stops to beat the indices.

    In fact, to make the stock-pickers’ challenge even harder, the private investor can go one better than following the ALSH index with a SATRIX40 (or equivalent) Exchange Traded Fund (ETF) and opt for a thematic (“fundamental stock-picking”) ETF such as the SATRIX DIVI+ that picks its constituents based on their “dividend paying credentials”. These high dividend-yield (Dogs of the Dow) type strategies work exceptionally well following brutal bear markets and the SATRIX DIVI+ is without a doubt the darling of the index/ETF follower’s fan-clubs right now. Onother popular ETF using "fundamental stock picking criteria" is the RAFI family designed by Research Affiliates (also available through SATRIX and others.)

    Does this mean individual stock picking for non-speculative purposes is dead? Just buy the ETF’s and follow the indices and you can’t go wrong! They are cheap, easy to buy and sell, available for a variety of styles and JSE sectors and are simple to understand without having to do copious amounts of research. Even Warren Buffet suggests ETF’s are the place for self-directed investors to start.

    It is true that self-directed investors dabbling part-time in the markets are better off with ETF’s, but we counter that for the more tenacious private investor, stock picking can reap rich rewards both financially and intellectually.

    There is one timeless stock-picking strategy that most private investors are unaware of. It’s called “Follow the earnings”. We all know stock prices depend on company earnings, so this should be no surprise. But what many people do not realise is how powerful CONSISTANCY of earnings growth, say over the last 10 reporting periods, is as a predictor for future share gains.

    Let us assume in March 2009 you had received our “all clear” signals telling us it was time to get into equities again (or you figured it out through some other means). Assume you screened the JSE for liquid companies of ANY size that had shown consistent (always positive) earnings-per-share (EPS) growth for at least the last 5 years for BOTH their last 5 sets of interims and 5 sets of finals.

    You would have been amazed to find only 10 main-board shares meeting those strict criteria! In fact the 10 shares hail from various sectors and market-caps (none were small caps) and would have formed a nicely diversified, liquid portfolio. Assume you then bought those 10 shares in equal parts to create your own thematic “Fundamental ETF” we will dubb “EPS-5”. How do you think you would have stacked up versus say a SATRIX-40 (tracking the TOP-40 index) and the venerable SATRIX-DIVI? The results are shown below:

    The stock-pickers’ 10-shares would have delivered a stunning 144% capital growth, superior dividends and less drawdowns. For the first 10 months of the post-crash recovery, it maintained pace with the SATRIX-40 and SATRIX-DIVI index since everything usually rebounds sharply and is very closely correlated during the first 10-11 months of a new post-crash bull market. But after December 2009, when the market took its first "breather", is when the stock-picker's portfolio credentials started to shine, as market participants started being more selective in their buying and the shares were delivering superior earnings.

    The surprising thing (and this is not just isolated to this test case), is that consistent earnings growth, being the best-known predictor for capital growth of a share, is sometimes also a better predictor for superior future dividends than historical dividend yields/track records, with the stock-pickers’ portfolio yielding 9.97% dividend yield (not re-invested) versus the SATRIX-40’s 3.56% and the SATRIX DIVI’s impressive 8.28%

    Make no mistake, ETF’s such as SATRIX-DIVI, PTXSPY (listed property), GLD (New Gold) and the like are important parts of any investor’s diversified portfolio, but so are some individual share-picks using proven techniques such as this one. Finally, the satisfaction of seeing your own well thought-out stock picks beat an index or ETF is priceless! You can see the names of many of these consistent earnings growers in our latest training video for our JSE Share Watchlist (JSW) offering, which is purpose-built for stock picking and timing of purchases, for both investors and traders.

    Dwaine van Vuuren

    Permalink2010-10-22, 17:35:10, by dwaine Email , Leave a comment

    Emerging versus Developing

    Emerging Markets (EM) are currently all the rage in the investment world. Billions of investment dollars are pouring into this asset class as investors seek to capture their share of the investment return that this asset class has produced over the past 10 years. Unfortunately, however, investing doesn’t always work like that.

    You can’t just invest into an asset that has done spectacularly over an extended period, and expect it to carry on doing the same. There needs to be fundamental reasons for making the investment. The chart below shows the performance of the ALSI and EM versus the Developed Markets (DM) – all based in US dollars – over the past 10 years. These markets have outperformed the MSCI World by some 400% and 200% respectively over this period!

    To the casual investor they’ll probably say that this was down to superior economic growth in this region. While he’d be right that these economies produced strong economic growth over the past decade, the performance of these markets can’t purely be ascribed to economic growth. The chart below shows the different growth rates of EM and DM countries since the end of 2000.

    Investing is always about what price you pay for the specific asset that you buy. Buying a portfolio of good quality assets at extremely expensive prices is not as wise as buying a portfolio of poor quality assets at extremely cheap prices. Ideally one would buy good quality assets at extremely cheap prices, but this opportunity doesn’t come around that often.

    Taking a look at the 5 years immediately prior to the above charts we can see in the charts below that while the EM economies grew faster than their DM counterparts, the performance relative to the DM was extremely poor. The EM composite underperformed the DM composite buy some 87%, the ALSI fared slightly better but still underperformed by 80%!

    Good entry points into EM equities included the beginning of the decade, and also at the end of 2008 as EM equities were sold off more aggressively than DM equities. Despite the fact that EM economies are expected to grow much faster than DM economies over the next 5 years (and beyond) – see chart below – we feel that from a valuation perspective developed markets are currently more attractive.

    High quality companies (with exposure to the rapidly growing EM economies) are currently trading at attractive levels in DM countries.

    If you have any comments on this report, or want to have a look at online investment articles that we find interesting become a fan on our Facebook page by clicking here and clicking the ‘Like’ button.

    Take care,

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

    Permalink2010-10-21, 17:37:23, by Mike Email , Leave a comment

    SA trade and capital accounts

    There are so many drivers of a currency relative to another that it is very difficult to predict an outcome over any shorter period of time.

    Included in some of the driving factors are the following

    • relative size of the economy to the rest of the world.
    • productivity and manufacturing production
    • global demand for a country’s goods, services and commodities.
    • necessity on imported goods and services.
    • political factors
    • government’s fiscal policy and its level of external government debt
    • relative attractiveness of interest rates and returns on investment assets
    • differential in inflation rates.
    • intervention by central banks

    These factors are always present, but from time to time, one or more of these factors dominate trading in the currency.

    In terms of a country’s external trading account with other countries, there are 2 main components - the current account and the financial account.

    The current account itself consists of 2 main components, firstly the trade balance, which is the differential in merchandise imports and exports. Added to this is the net payment for services, income and current transfers, in order to arrive at the balance on the current account.

    For many years now, South Africa has been running a current account deficit. A large component of this is the net services line.

    For the first 2 quarters of 2010, the trade numbers were positive, but these faltered in August where a trade deficit of R4,6bn was recorded.

    The chart below reflects the current account deficit as a function of the GDP, where it is clear that a large and steady net outflow is the net income payments.

    Source: SA Reserve Bank

    Funding of the shortfall

    The shortfall on the current account has been funded by inflows on the capital account or financial account.

    The composite numbers according to the Reserve Bank for the years 2005 to date are as follows:

    This aggregate number includes direct investment, portfolio investment and other. While 2008 recorded large portfolio outflows, these were negated by large direct investments.

    In many cases however it’s the net portfolio investments that have an immediate impact on the currency, while large direct investments can be neutralised by the Reserve Bank.

    Net foreign flows into SA Bond Market


    Source: Grindrod Bank

    It is very evident that the trade account deficit continues to be funded by the financial account, which largely comprises portfolio flows. Direct investment was recorded at R48,3 billion in 2009. For the first 2 quarters of 2010 there has been very little, but there are some larger deals in the pipeline, such as the foreign purchase of Didata and Massmart.

    Portfolio flows have been high, but for the last few weeks net investment into the bond market by foreigners has slowed.

    The net result of all of this is a rand trading at R6,91/dollar, R10,93/pound, R9,66/euro and R6,82/AUD.

    Kind regards

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

    Permalink2010-10-20, 17:08:22, by ian Email , Leave a comment

    China raises interest rates

    Global markets fell back on Tuesday. A factor was the surprise interest rate hike by China of its one year deposit and lending rates by 0,25%. Commodity prices fell, markets traded down and the dollar gained ground against other currencies.

    This was the first hike in interest rates by Chinese authorities in 3 years and suggests that the government is concerned about the massive lending, asset prices moving up and high inflation, which for August was interestingly at the same rate for South Africa, i.e. 3,5%

    The table below reflects Chinese official interest rates from 2000, just prior to the rate hike today.

    The 0,25% rate hike takes the lending rate from 5,56% and the one year deposit rate to 2,5%.

    China’s effective currency peg to the dollar and large trade surplus with the rest of the world has allowed it to amass growing foreign exchange reserves. In October 2006 China’s foreign exchange reserves exceeded $1 trillion for the first time. This grew to $2 trillion in April 2009 and in the latest September 2010 numbers released last week, reserves increased by their largest amount ever - $194 billion to $2,65 trillion.

    The rand lost ground against a strong dollar today. It was last at R6,98. The chart below reflects the US dollar index, which is the US dollar against a trade weighted basket of currencies.

    Global monetary policy is now a huge factor in global asset prices.

    Kind regards

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

    Permalink2010-10-19, 17:16:02, by ian Email , Leave a comment

    Is stock-picking an investment dying art?

    With the JSE up some 62% in spectacular fashion since the March 2009 low’s, you would be correct in assuming stock-pickers from the mid to large-cap universe would need to pull out all the stops to beat the indices.

    In fact, to make the stock-pickers’ challenge even harder, the private investor can go one better than following the ALSH index with a SATRIX40 (or equivalent) Exchange Traded Fund (ETF) and opt for a thematic (“fundamental stock-picking”) ETF such as the SATRIX DIVI+ that picks its constituents based on their “dividend paying credentials”. These high dividend-yield (Dogs of the Dow) type strategies work exceptionally well following brutal bear markets and the SATRIX DIVI+ is without a doubt the darling of the index/ETF follower’s fan-clubs right now. Onother popular ETF using "fundamental stock picking criteria" is the RAFI family designed by Research Affiliates (also available through SATRIX and others.)

    Does this mean individual stock picking for non-speculative purposes is dead? Just buy the ETF’s and follow the indices and you can’t go wrong! They are cheap, easy to buy and sell, available for a variety of styles and JSE sectors and are simple to understand without having to do copious amounts of research. Even Warren Buffet suggests ETF’s are the place for self-directed investors to start.

    It is true that self-directed investors dabbling part-time in the markets are better off with ETF’s, but we counter that for the more tenacious private investor, stock picking can reap rich rewards both financially and intellectually.

    There is one timeless stock-picking strategy that most private investors are unaware of. It’s called “Follow the earnings”. We all know stock prices depend on company earnings, so this should be no surprise. But what many people do not realise is how powerful CONSISTANCY of earnings growth, say over the last 10 reporting periods, is as a predictor for future share gains.

    Let us assume in March 2009 you had received our “all clear” signals telling us it was time to get into equities again (or you figured it out through some other means). Assume you screened the JSE for liquid companies of ANY size that had shown consistent (always positive) earnings-per-share (EPS) growth for at least the last 5 years for BOTH their last 5 sets of interims and 5 sets of finals.

    You would have been amazed to find only 10 main-board shares meeting those strict criteria! In fact the 10 shares hail from various sectors and market-caps (none were small caps) and would have formed a nicely diversified, liquid portfolio. Assume you then bought those 10 shares in equal parts to create your own thematic “Fundamental ETF” we will dubb “EPS-5”. How do you think you would have stacked up versus say a SATRIX-40 (tracking the TOP-40 index) and the venerable SATRIX-DIVI? The results are shown below:

    The stock-pickers’ 10-shares would have delivered a stunning 144% capital growth, superior dividends and less drawdowns. For the first 10 months of the post-crash recovery, it maintained pace with the SATRIX-40 and SATRIX-DIVI index since everything usually rebounds sharply and is very closely correlated during the first 10-11 months of a new post-crash bull market. But after December 2009, when the market took its first "breather", is when the stock-picker's portfolio credentials started to shine, as market participants started being more selective in their buying and the shares were delivering superior earnings.

    The surprising thing (and this is not just isolated to this test case), is that consistent earnings growth, being the best-known predictor for capital growth of a share, is sometimes also a better predictor for superior future dividends than historical dividend yields/track records, with the stock-pickers’ portfolio yielding 9.97% dividend yield (not re-invested) versus the SATRIX-40’s 3.56% and the SATRIX DIVI’s impressive 8.28%

    Make no mistake, ETF’s such as SATRIX-DIVI, PTXSPY (listed property), GLD (New Gold) and the like are important parts of any investor’s diversified portfolio, but so are some individual share-picks using proven techniques such as this one. Finally, the satisfaction of seeing your own well thought-out stock picks beat an index or ETF is priceless! You can see the names of many of these consistent earnings growers in our latest training video for our JSE Share Watchlist (JSW) offering, which is purpose-built for stock picking and timing of purchases, for both investors and traders.

    Dwaine van Vuuren

    Permalink2010-10-18, 18:30:00, by dwaine Email , Leave a comment

    Gold NOT at All Time High... Yet

    That headline is more than enough to grab your attention, right? Many square inches of news, most noticeably in investment news publications, have been dedicated to a couple topics in the past few months. The first Ian has touched on – global currencies and a currency war, the second news item that we are informed about on an almost daily basis is that gold has hit a new all time high. This is, in fact, not quite true for South African investors.

    Since the beginning of the 21st century, gold has been an excellent investment, delivering double digit annual returns in pretty much any currency. Below is a chart of the performance of gold across a range of currencies (based to 100). Out of these currencies it is clear that the rand investor has done best as the rand weakened against the US dollar over this period. Sterling is pretty much on par, while the other currencies have appreciated against the US dollar (USD) and the returns in these currencies are therefore lower than in USD.

    Gold has been a great investment in any currency over this extended period but, like any investment, there are shorter periods where the performance hasn’t been as stellar. Gold hit its peak in rand (and Aussie dollar) at the end of February 2009, right at the bottom of the market when it appeared as if the world would end. At this point gold was at $952, but the rand was over R10 to the USD. From this point we’ve seen the rand firmly strengthen to its current levels at around R6.80 to the USD, while the USD price of gold has soared to $1375!

    South African investors and miners returns have therefore been sharply eroded by the strengthening rand. Despite the nearly 50% rise in the USD gold price, in rand terms it has fallen just over 2%. The chart below shows the divergence in returns in the two currencies since this point.

    From the first chart we can see that out of this selection of currencies, the Aussie dollar has been the strongest and the rand the weakest. It is interesting, then, that the performance of gold in these two currencies has had a high degree of correlation since the fall of Lehman Brothers and the onset of the crisis as we know it. As resource exporting countries we have been (rightly or wrongly) painted with the same brush as Australia. I don’t have the data for Canada, but assume that it would be in a similar position. The chart below shows how these two currencies have almost perfectly matched each other since the end of August 2008.

    The above chart also shows that the gold price in both currencies has not quite reached the highs of February 2009. It will be interesting to see whether this level gets breached in the next couple of months, or whether there will be sterner resistance.

    For more investment news and views click here to see our Facebook page.

    Take care,

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

    Permalink2010-10-14, 18:33:04, by Mike Email , Leave a comment

    Global trade finance

    Yesterday we touched very briefly on the hotly debated issue of global currencies and the pressure that this is causing.

    This chart below, from Der Spiegel clearly indicates the problem that has concerned Washington for some time, but is escalating.

    In 2009 the US racked up a $227 billion trading deficit with China. At the same time China recorded a $171,5 billion trading surplus with the European Union.

    Because China is still effectively pegging its currency to that of the US and not letting it appreciate naturally – as it would given the trade surplus – China is able to maintain its cheap exports into the US and to the EU.

    As American importers sell dollars to buy yuan, and in turn use these yuan to pay for the Chinese merchandise, so it puts upward pressure on the yuan relative to the dollar. In order to peg the rate, the PBOC has to buy dollars and sell yuan.

    A stronger currency for China would have an immediate and detrimental affect on its manufacturing and export business to both the US and to the EU – this is something that it cannot politically afford.

    The chart inset on the right is telling – China’s foreign currency reserves have skyrocketed over the last few years to around the $2,5 trillion level. To be sure much of the dollars received is sent straight back in lending to the US government – i.e. invested into Treasury bonds.

    The US has an annual gross domestic product of $14 trillion. The aggregate EU has a GDP of $16,5 trillion and China in nominal terms $5 trillion (but $9,1 trillion in purchasing power parity)

    For a decade from 1995 to 2005 the Peoples Bank of China (PBOC), maintained a fixed exchange rate of the yuan to the US dollar. It set the peg at 8,28 yuan per dollar. This peg was loosened on the 21 July 2005, but the level has been steadily managed to its current 6,67 yuan per dollar, which is still undervalued.

    Because market forces are not left to run their course, adverse consequences of intervention are escalating. The sheer scale of the interconnectedness makes any unwinding process potentially problematic.

    Kind regards

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

    Permalink2010-10-12, 16:55:01, by ian Email , Leave a comment

    Currency wars

    Into the third year of the global financial crisis and the many of the outcomes are still dominating discussions. A major headache for many countries is the flood of newly created money, which has played havoc with exchange rates.

    At the weekend IMF meeting, the US is calling the IMF to increase its surveillance of exchange rate policies and on reserve accumulation policies saying that excess reserve accumulation is leading to serious distortions in the global financial system.

    At the same time China continues to hold its currency down, not allowing it to naturally appreciate relative to its main export countries, with the premier saying that China's social order will be threatened if the yuan would rise by 20%. Their view is that the US is destabilising emerging economies by allowing ultra loose monetary policy which in turn is flooding the emerging world with money.

    Last week, Dominique Strauss-Kahn, head of the International Monetary Fund, warned of a currency war if countries manipulate their exchange rates to solve domestic problems. His comments echoed those of Brazil's finance minister, who said that exchange-rate conflict threatened the global financial system.

    It is difficult to identify which of the two major actions is having a more serve impact on global currencies.

    What no-one wants is for the currency issues to turn into a full scale trade problem, where countries begin to hike up trade tariffs in order to restrict imports.

    But at the same time, what is also not that clear is whether additional money creation in the form of a second round of quantitative easing from the US Federal Reserve, will boost aggregate demand and start moving asset prices up.

    Some of the recent currency positions:

    The Swiss franc traded to a new high relative to the US dollar. From a level of CHF 1,70 in 2002, the dollar has steadily weakened to CHF0,9555 last week.

    The Japanese yen traded at a 15 year high relative to the dollar. It was last trading at 81.99 yen to the dollar.

    China will only gradually let its currency appreciate relative to the US dollar, effectively managing a peg to the dollar. The dollar is trading at around CNY6.67

    The Australian dollar is trading close to parity with the US dollar – the strongest level since they ended exchange controls in 1983.

    Gold, not only a commodity, but more a currency of last resort, has been steadily climbing – in US dollar terms at least – to around $1350/oz, last at $1347/oz.

    The rand is at R6,87/dollar.

    As emerging markets have been huge buyers of US dollars to try and stabilise their appreciating currencies, so foreign exchange reserves have escalated. The Wall Street Journal reported that Asia forex reserves of 11 central banks, (excluding China) climbed to a record in September to $2,963 trillion. China reports quarterly – at the end of June it held $2,454 trillion.

    Clearly many countries are struggling with exchange rates and the implications on their local economies.

    Kind regards

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

    Permalink2010-10-11, 17:30:40, by ian Email , Leave a comment

    Tax considerations on investment vehicles

    The current generation will one day be known as the generation that invented unlimited choice.

    This creates a problem for many people because unlimited choice often distracts people from what they are supposed to do. How often has it happened to you that you sit in front of your computer and before you know it you have been sidetracked by another email or article on the web which had nothing to do with what you planned to do?

    Too much information can be our downfall if we are not disciplined in saying “No” to some “stuff” even if it is “good stuff”. The quality decision makers will be those that learn the art of being focused.

    This is so important when dealing with investments.

    We believe private clients should focus on the following key items:

    1. Investment objective of my assets e.g. I am targeting a return of CPI + 5% over a 5 year period.
    2. Asset allocation i.e. what should my allocation be to the different asset classes in order to secure my investment objective?
    3. Deciding on a portfolio manager. Who am I going to appoint to manage my portfolio or am I going to manage it myself?
    4. Investment vehicles … which vehicle provides adequate tax efficiency for me?

    Let’s look at the last point on this list today.

    One of the important factors for private client is to reduce their tax liability as far as possible and also to extend the payment of the tax into the future as far as possible.

    How could this be achieved?

    1. Direct share portfolios:
    Many private clients prefer their own share portfolio as a “hands-on” approach to managing their investments. It is an exciting structure because you have “your own” portfolio. However, from a tax point of view it is not ideal because capital gains tax is paid on every trade and if trades are too frequent the gains could become “income” by nature.

    2. Endowment policy:
    One option is to ring-fence the share portfolio or unit trust portfolio in an endowment policy. This way the capital gains are taxed at a 7.5% rate and income at a 20% rate. Some life companies offer better rates than these depending on their internal tax liability. These unit-linked endowment policies are very flexible and could reduce the tax liability significantly if one gets competitive tax rates.

    3. Unit trusts:
    Private clients sometimes dislike unit trusts because of their view that unit trusts offer “bad returns”. At the end of the day a unit trust is just an investment vehicle i.e. legal structure. The performance of the unit trust depends 100% on the underling investments in the unit trust. E.g. you could have a unit trust where the underlying holdings are only shares and the performance of the trust will be 100% linked to the return of the share portfolio. One advantage is that the investor only attracts a capital gain when the investor sells units from the unit trust and not when shares are bought and sold within the unit trust itself.

    4. Retirement annuities:
    Private clients sometimes dislike retirement annuities because of its high cost structures, penalties, and poor performance. However, these are generally comments about the old natured retirement annuities. Nowadays retirement annuities can be unit-linked. Therefore the retirement annuity is again just a legal structure. The investor can decide what underlying investments he wants to invest in. It can even be a share portfolio. However, tax wise a retirement annuity is an excellent vehicle.

    So if you ask many private clients the question: “Which vehicle they prefer?” they will most likely say the direct share portfolio and the least likely say retirement annuities and endowment policies. However, from a tax point of view (and net cost) there can be better solutions … even though at face value they don’t always appear so “attractive”.

    Have a fantastic weekend

    Kind regards

    Vincent Heys
    Vincent@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2010-10-08, 16:53:32, by ian Email , Leave a comment

    Volatility and long term returns

    The JSE gained 8,7% for September – which also happens to be its total return for the year to date.

    While an investor that commenced his investment on the JSE just one year back would be satisfied with a 12 month return of 21%, an investor that commenced 3 years back will be dissatisfied with a compounded annual total return of 2,2%.

    The question is why has 3 years produced such a poor result for patient investors? Even if the next 2 years give a compounded return of 25%, these investors will only receive a five year compounded 10,7% return.

    The answer lies in the fact that 3 years ago the market was expensive, rose to an even more expensive level in May 2008 and then fell sharply.

    The chart below reflects discrete annual nominal returns from 1960 to 2009. Over this period the average annual return was just shy of 20%. It is evident that while the majority of years have produced positive numbers, in nominal returns at least, there have been a very years with negative numbers.

    In 1970 the total decline on the JSE was 25,8% (after the receipt of dividends of 3,9%)

    Calendar 2008 was the second biggest decline of 25,7% (after dividends a net decline of 22,5%)


    Source : Old Mutual

    It’s this large downside volatility that takes time to recover from. But if history is anything to go by investors will over time be rewarded for taking on the additional risk.

    This is not to suggest a fixed allocation to equities, but to vary depending on the valuations. Today the JSE All Share moved through its mid April high and looks set to move higher. It is at expensive levels, but the sheer weight of monies can continue to drive it up further. The rand was last at R6,89/dollar. Gold is trading at close to $1340 and the gold index gained almost 2,5% on the day.

    Kind regards

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

    Permalink2010-10-05, 17:27:08, by ian Email , Leave a comment

    Local retail shares from a foreign perspective

    Global fund managers, Orbis highlighted the major price movements that South African retail shares have had over the last 9 years. Over this period of time, investors in local retailers have seen exceptional returns as prices have moved up dramatically.

    There has been a classic double whammy for investors over this time period.

    A double whammy is where company earnings move up AND there is an expansion in the valuations, providing exceptional returns.

    The table below reflects the increase in these selected retail investments.

    For example, Shoprite’s earnings have increased 9 times from 6.8 cents to 61.9 cents, while the valuation on these earnings has also expanded from 7,8 times to 22,9 times, moving the price up 27 times!

    Mr Price’s earnings expanded 7 times, but the price moved up 20 times. These exclude dividends.


    Source : Orbis, I Net Bridge

    These prices are in US cents translated at the prevailing exchange rates.

    December 2001 just happened to be a period of extreme weakness for the rand relative to foreign currencies.

    It was at this time that South African investors were scrambling to move funds offshore as the rand was at R12 to the US dollar and R17 to the pound. In other words the entry level for foreigners was, with the benefit of hindsight, extremely attractive.

    Over the past 10 years consumer spending improved as credit was extended from a relatively low base. This has subsequently contracted, but what continues to attract foreigners is the future emerging market growth in consumption.

    A lot of the exceptional return has to do with the low base. At the time with extreme rand weakness, it was not that obvious to both local and foreign investors that local retailers would do well over the next 9 years.

    From these more expensive levels, even with reasonable growth prospects, it is unlikely that the next 10 years will produce 20 to 27 times returns, despite the fact that these are very well run businesses.

    Vincent Heys is going to be in Jhb next week, Monday to Wednesday. If you are a financial advisor, looking to work more closely with Seed, please do not hesitate to contact us on Vincent@seedinvestments.co.za

    Kind regards

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

    Permalink2010-10-04, 16:58:03, by ian Email , Leave a comment