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    Inflation and the long term gold price

    In previous months, inflation data has tended to surprise on the downside. I.e. monthly inflation has come in lower than analyst’s expectations. Today it was slightly higher than the consensus forecast. In March inflation rose by 1,2% against an expectation of 1%, and for the 12 months it rose 4,1% against a 4% consensus.

    Consumer inflation

    This inflation data had very little to no impact on either the equity market or the bond market.

    The bond market break even inflation is running at around 6%. i.e. nominal bonds are pricing in inflation at the top end of the Reserve Bank’s inflation target. i.e. they are expecting a rise in inflation and interest rates to start being hiked later this year or beginning of 2012

    Over 30 years, inflation in South Africa has run at just less than 10% per annum.

    Gold

    Gold bullion has continued to move up to new highs in most currency terms. Gold is quoted in US dollars. The price has now moved through the $1500/oz level.

    The chart below reflects that although the rand is firm against the US dollar, in rand terms the price is now at R10190/oz. Against a backdrop of ongoing monetary stimulus, in general a lack of real interest rates, high inflationary expectations and downgrades to US debt outlook, the demand for gold has kept the price moving up steadily, especially over the last 10 years.

    Looking back into history - gold in March 1971 traded at $38,87/oz and R27,65/oz. Over the 40 years the compounded growth in rands has been 15,9% to its current level. Over 30 years from near its peak the annual compounded return reduces to 11,45%.

    If inflation was running at 10% over the last 30 years, then gold from its higher prices in early 1980’s has achieved annualised returns of only slightly ahead of inflation.

    But over the last 10 years from its lower levels, gold, both in rand terms and in dollar terms has moved up very strongly.

    With commodity assets becoming more common among investors as a means of achieving portfolio diversification, commodity assets under management have more than doubled between 2008 and 2010 to nearly US$380 billion - according to a recent World Gold Council report.

    Gold is still relatively small in most commodity indices from 3% in the S&P Goldman Sachs Commodity Index to 7% in the Dow Jones UBS Commodity Index.

    It is estimated that 168,300 tonnes of gold have been mined over the course of human history. 50% of this exists in the form of jewellery. Gold used in technology and dentistry and other fabrication accounts for 12%. Gold held in investments and official holdings (financial or investable) represent 36% of all above ground gold, or approximately 60,400 tonnes of gold.

    Using the 2010 average price of $1224/oz, the size of financial gold holdings is equivalent to $2,4 trillion. The report puts this into context saying that this is larger than any single European sovereign debt market. But it does not represent any countries’ liability.

    Total above ground stocks of gold in tonnes as of 2010

    Naturally now one knows where this price can move to. Longer term the returns from gold should be ahead of inflation, but probably behind that of more riskier investments such as equities.

    In a diversified portfolio we would advocate holding a portion of gold, and in the Seed Flexible Fund we have continued to hold a small allocation of just less than 5%.

    Kind Regards

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

    Permalink2011-04-20, 17:11:02, by ian Email , Leave a comment

    US equity and bond market

    This week we had rating agency Standard and Poor revise its outlook on the United States sovereign credit rating of AAA from “stable” to “negative”. This had an immediate negative impact on the world equity markets – but the shock seems to have been short lived.

    The rating report cited rising budget deficits and US debt levels – the US debt position is hardly new and so there are some question marks as to why this has been done at this stage.

    The question though is if these same credit rating agencies could not be trusted in the credit crisis, why do so many investors continue to place such a high emphasis on them now.

    Barry Ritholz of the Big Picture puts it succinctly saying “Who Cares. It’s not that I disagree with their assessment — I do not — but I pay it little heed. It was much more important to me as an investor that PIMCO’s Bill Gross was out of Treasuries a month ago (and indeed, is short) than what S&P says. That was all any bond investor needed to know — no ratings agency necessary.”

    In February we commented on the fact that the US 10 year Treasury yield had moved back up through the 3,5% level, which according to BCA Research was an important technical signal, highlighting the fact that the macro picture is increasingly turning against the bond market.

    US Bonds

    There has been a lot of debate about what the US Federal Reserve will do when its current $600 billion in bond purchases comes to an end in June. At this stage it does not appear that it will be extended, but the Federal Reserve does have around $17 billion a month that is maturing from mortgage debt and reports indicate that the Fed will probably use this to keep buying US treasuries and so continue to support the US bond market in an ongoing attempt to keep a lid on rising yields.

    Asset allocation in this market

    GMO’s James Montier made the comment about the lack of value across most asset classes around the world in a recent report, saying, “This dearth of assets offering a margin of safety raises a conundrum for the asset allocation professional: what does one do in a world where nothing is cheap? Personally, I’d seek to raise cash. This is obvious not for its thoroughly uninspiring near-zero yield, but because it acts as dry powder – a store of value to deploy when the opportunity set offered by Mr. Market once again becomes more appealing.”

    He put out this chart, which is a long term chart comparing yields on US bonds to yields on US equities. Looking at yields is one of the best ways to compare one asset class against another. From there an investor can adjust, compensating for the riskiness of the income stream.

    The anomaly cited is the assertion that bond yields have been falling from high levels in the early 1980’s. The argument goes that the dispersion in yields that we are seeing now is more of a reversion to normal levels. i.e. looking back over 30 years, shares appear relatively cheap against bonds – but on a longer term basis, this is perhaps where yields should be trading.

    Long term chart of relationship between bond and equity yields


    Source: GMO

    S&P 500 earnings

    The chart below reflects the extremely sharp drop off in earnings reported by the 500 largest companies and the equally sharp reversion of these earnings to the end of 2010 back to the long term upward trend. These are 12 months earnings per share – constant March 2011 dollars.


    Source : Standard and Poor and Robert Shiller

    Companies are starting to report their first quarter numbers. Again it appears that these are coming in firmly – despite now off a much higher base.

    Kind regards

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

    Permalink2011-04-19, 17:26:31, by ian Email , Leave a comment

    Stock markets as businesses and their indices

    Over the years there have been a plethora of stock market indices that have been formulated, published and indeed even marketed. There are many uses for these indices, including benchmarking of a portfolio’s performance against an average, having a starting point from which to construct the portfolio and in the case of ETF’s (exchange traded funds) even creating a product in which investors can invest.

    Over the years numerous indices have been created, each one slightly different from the next. World indices include companies from around the world, usually with a weighting to the relative sizes of the exchanges in each of the countries represented.

    Because most major countries have at least one exchange, which lists the largest companies trading in that area, the most common indices are the country specific indices. Included here would be the likes of :

    • the FTSE/JSE Top 40. This index commenced in 2002 and includes the top 40 companies on the JSE by market capitalisation.

    • The FTSE 100. This index was developed with a base of 1000 as at January 1984. It is a capitalisation weighted index of the 100 most highly capitalised companies traded on the London Stock Exchange.

    • The DAX. This is an index of the 30 major German companies trading on the Frankfurt Stock Exchange.

    • The Nikkei 225, or more commonly called the Nikkei is a market index for the Tokyo Stock Exchange calculated on a price weighted basis since 1950.

    • S&P500 is a free float market capitalisation index published since 1957 of the prices of 500 large cap shares which are actively traded in the United States on either the New York Stock Exchange or the Nasdaq.

    Stock exchanges themselves are substantial businesses. Locally the JSE, which was previously run as a mutual business, incorporated as the JSE Ltd and listed its business on its own exchange. It currently has a market capitalisation of R5,6 billion.

    Globally we are seeing merger activity and attempts to do major cross border mergers in an attempt to crate bigger and bigger global exchanges.

    The London Stock Exchange (LSE) is currently proposing a merger with Canada’s TMX Group - which owns the Toronto and Montreal exchanges. The LSE has a market capitalisation of GBP 2,36 billion. If this deal goes ahead the combined value of this merger will be in the region of $6,9 billion.

    The world’s second and third biggest in terms of revenue, Deutsche Borse and NYSE Euronext announced that they were in advanced merger talks. This will create the world’s second most valuable stock exchange group with a combined value of around $24 billion.

    Singapore Exchange made a bid of A$8,4 billion for the Australia stock exchange, the ASX. But this has been rejected by the Australian government.

    Nasdaq is attempting to upset the NYSE deal with Deutsche Borse and itself buy out the New York Stock Exchange (NYSE). Nasdaq is the largest electronics screen based equity securities trading market in the US and is the second largest in the world in terms of market capitalisation. But this is going to be a difficult deal to get through antitrust regulations and has not been welcomed by the NYSE.

    Typically these exchange businesses have been successful. They tend to have few competitors in their specific region or country, but with the world becoming smaller from an ease of access perspective and companies more and more multinational, they themselves are having to create bigger scale to firstly retain and secondly to grow their business.

    Kind regards

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

    Permalink2011-04-18, 17:27:33, by ian Email , Leave a comment

    New Listings

    Yesterday Ian wrote about global commodity company Glencore looking to list. As he mentioned, businessmen (and their investment bankers) are no fools when it comes to understanding the true long term value of their business versus the price that the investment community would place on their company.

    Today saw the listing of the Investec Property Fund on the JSE. This is a portfolio of some 29 properties with an initial NAV of R1.7bn and includes industrial, retail, and office properties primarily situated in Gauteng. Some well known buildings outside of Gauteng include the Investec Offices in Umhlanga Rocks, just north of Durban, and Woolworths’ head office in Longmarket Street, Cape Town.

    The share price in the private placement ranged from R9.50 – R10.60 a share and it listed at R10.80, now trading at R10.44. Clearly there is appetite for more property listings with Old Mutual also indicating that they are looking to list a R12bn property fund later in the year. With property being such a stellar performer over the past decade or so in South Africa it does make sense to list some of these assets now. Below is a chart of the performance of listed property vs listed equity since the beginning of 2000.

    Many investors enjoy the thrill of participating in an IPO (Initial Public Offering) as it provides for a good story around the braai. What these investors often forget to do is calculate a fair value for the IPO and compare it to the price that it is coming to the market at. Ultimately any investment is buying a share in a company, so it therefore makes sense that you have an idea of how much the company is worth to ensure that you don’t over pay for the asset.

    I haven’t had a look specifically at the Investec offering, but potential investors would need to ask themselves a few questions (not an exhaustive list) including:
    • What’s the initial yield on my investment? – compare to yields of other property investments
    • What’s the quality of their property portfolio? – compare to quality of other property investments
    • What’s the outlook for property in South Africa? – compare to outlook of other assets
    • Why did Investec choose to list this portfolio now?
    • Is there anything I’m missing out here?

    At Seed, we know that investors should be extra cautious with new listings. There will no doubt be times when new listings come on at attractive prices and have attractive growth prospects, but most of the time we prefer companies and management teams with good long track records that are, for some reason or another, currently unloved by the market.

    What’s your take on the property market (both listed and direct) in South Africa? Share your views on our Facebook Fan page by clicking here and commenting under this post.

    Take care,

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

    Permalink2011-04-14, 17:12:21, by Mike Email , Leave a comment

    Listing of major mining company Glencore

    Commodity prices have moved up very steeply over the last two years. At the same time diversified miners that have access to these commodities have escalated in value. It i at these times that investment bankers encourage unlisted companies to take their companies public in order to maximise the value raised.

    Essentially an IPO or initial public offering is a partial sale of the business from existing shareholders to institutional and private demand. When investment bankers gauge that demand from institutional investors will be strong, they encourage specific private companies to come to the market.

    A potentially large new IPO was announced last week - Swiss based Glencore is looking to float some of its equity via an IPO. The indicative numbers are that Glencore will be valued at around $60 billion and will look to list around 20% of its equity – i.e. raise some $12 billion.

    Glencore describes itself as “one of the world's leading integrated producers and marketers of commodities that industries around the world need. Glencore has worldwide activities in the production, sourcing, processing, refining, transporting, storage, financing and supply of metals and minerals, energy products and agricultural products.”

    In an article in the FT, the CEO of Glencore, Ivan Glasenberg said ““The interest from the cornerstones was a lot stronger than we envisaged. Markets are in our favor, too. We have a strong commodities market.”

    Clearly the current market for this type of business has moved to that of a sellers’ market, which is exactly why Glencore management are looking to capitalise on the current demand, raising the maximum amount of cash for giving up the least amount of shares.
    Glencore was founded in 1974, originally as the notorious Marc Rich and Co in Switzerland, headed by commodity trader Marc Rich.

    Now valued at around $60 billion it is one of the world’s largest privately held companies and so the IPO will attract a lot of attention. Current shareholders are management and employees. It has its headquarters in Switzerland and has marketing operations in 50 offices across 40 countries.

    Its 3 main business groups are metals and minerals (aluminium, ferroalloys, cobalt and zinc etc), energy (oil and coal), and agriculture products (grains, oils, cotton).

    In 2010 the company reported turnover of $145 billion, net income of $3,8 billion and total assets of $79,8 billion.

    Some of the world’s largest mining companies include
    • BHP Billiton
    • Rio Tinto
    • Vale SA
    • Anglo American
    • Xstrata

    Glencore has a 34,5% stake in London listed Xstrata. This original Swiss company was transformed from 2001 when new management took over, headed by South African, Mick Davis. At that stage it had a market capitalisation of just$500million. Today with a market capitalisation of GBP45 billion, it describes itself as the world’s largest producer of export thermal coal, the largest producer of ferrochrome, and one of the top five producers of coking or metallurgical coal (used in steel making). Glencore CEO, also a South African, Glasenberg sits on the board of Xstrata.

    Chart of copper

    So time will only tell when the top of the current cycle will be for commodity prices. A major listing like this – if it comes through – gives some sign.

    Kind regards

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

    Permalink2011-04-13, 15:37:14, by ian Email , Leave a comment

    Construction awakening from deep coma?

    The construction sector has corrected by some 57% since its high on 31st October 2007. Since the bull market commenced from the March 2009 lows, the construction sector has gained a mere 6% versus 74% for the ALSH index. Since as recently as 7th January 2011, the construction sector has corrected some 27.5%. There is no doubt there are bargains to be had in this sector but as always the question is timing.

    The chart below shows various sectors' gains coming out of this recent "Great Trough" on 15th March 2011. We call this last trough a "Great Trough" as its magnitude in terms of breadth revival is a once-per-year class event from whence multi-month and even multi-year JSE gains typically commence. (For further details on this you can read our latest MarketViews posting.).

    Notice how the current recovery, at 18 trading days old, has the RETAIL (12.6% gains) and RESOURCE (9.75% gains) sectors outperforming the ALSH index (8.5% gains) consistently since we bottomed. This is the 2nd sequential great trough from which RETAIL has powered ahead of all other sectors, perhaps due to foreign interest and their consistent dividend track records. FINANCIALS have gained on par with the ALSH and everyone else has underperformed the ALSH in recovery. Only the ALT-X or small-cap sector has posted negative gains since the recovery, it is expected this sector will follow once the others become "fully priced".

    However, have a look at that blue CONM line for the construction and materials sector. It was a full 2 weeks late into the bottoming process, but look at how it is rocketing upward now. We have been observing a powerful volume and breadth-thrust within this sector, with the last week having demonstrated at least 80% of all shares in this sector posting gains each and every day. The evidence of a meaningful recovery seems strong. Given the market is a discounting mechanism, punters are betting that within 6-9 months this sector is going to experience a revival. Remember, when a bottom is formed, it is usually in the darkest hour, when the negativity is at its peak, and the light at the end of the tunnel is a slightly lighter shade of black than the previous day, when it would appear things can get no worse, and when most people won't touch the shares with a barge-pole. We believe we are past that point.

    There are 19 shares we track in this sector, and all but 6 are showing strong buy signals in our JSE Share Watchlist Program. From an investment point of view however, there are only 5 shares we consider worth your while from a fundamentals safety perspective. To get access to them all you need to do is sign-up for a demo account over at the Sharenet PowerStocks page.

    There are still seats available for our Port Elizabeth seminar this Saturday 16th April and we will be discussing the construction sector in detail among other promising shares on the JSE.

    Permalink2011-04-13, 11:21:46, by dwaine Email , Leave a comment

    Potential listing of major mining company

    Commodity prices have moved up very steeply over the last two years. At the same time diversified miners that have access to these commodities have escalated in value. It i at these times that investment bankers encourage unlisted companies to take their companies public in order to maximise the value raised.

    Essentially an IPO or initial public offering is a partial sale of the business from existing shareholders to institutional and private demand. When investment bankers gauge that demand from institutional investors will be strong, they encourage specific private companies to come to the market.

    A potentially large new IPO was announced last week - Swiss based Glencore is looking to float some of its equity via an IPO. The indicative numbers are that Glencore will be valued at around $60 billion and will look to list around 20% of its equity – i.e. raise some $12 billion.

    Glencore describes itself as “one of the world's leading integrated producers and marketers of commodities that industries around the world need. Glencore has worldwide activities in the production, sourcing, processing, refining, transporting, storage, financing and supply of metals and minerals, energy products and agricultural products.”
    In an article in the FT, the CEO of Glencore, Ivan Glasenberg said “The interest from the cornerstones was a lot stronger than we envisaged. Markets are in our favor, too. We have a strong commodities market.”

    Clearly the current market for this type of business has moved to that of a sellers’ market, which is exactly why Glencore management are looking to capitalise on the current demand, raising the maximum amount of cash for giving up the least amount of shares.
    Glencore was founded in 1974, originally as the notorious Marc Rich and Co in Switzerland, headed by commodity trader Marc Rich.

    Now valued at around $60 billion it is one of the world’s largest privately held companies and so the IPO will attract a lot of attention. Current shareholders are management and employees. It has its headquarters in Switzerland and has marketing operations in 50 offices across 40 countries.

    Its 3 main business groups are metals and minerals (aluminium, ferroalloys, cobalt and zinc etc), energy (oil and coal), and agriculture products (grains, oils, cotton).
    In 2010 the company reported turnover of $145 billion, net income of $3,8 billion and total assets of $79,8 billion.

    Some of the world’s largest mining companies include

    • BHP Billiton
    • Rio Tinto
    • Vale SA
    • Anglo American
    • Xstrata

    Glencore has a 34,5% stake in London listed Xstrata. This original Swiss company was transformed from 2001 when new management took over, headed by South African, Mick Davis. At that stage it had a market capitalisation of just$500million. Today with a market capitalisation of GBP45 billion, it describes itself as the world’s largest producer of export thermal coal, the largest producer of ferrochrome, and one of the top five producers of coking or metallurgical coal (used in steel making). Glencore CEO, also a South African, Glasenberg sits on the board of Xstrata.

    So time will only tell when the top of the current cycle will be for commodity prices, but a major listing like this starts to give some indication.

    Kind regards

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

    Permalink2011-04-12, 20:21:03, by ian Email , Leave a comment

    Rand Fair Value

    Talk to anyone who’s been investing for longer than 10 years and you will no doubt get to hear their views on the rand. The performance of their offshore investments over this period will no doubt heavily bias their views. Many investors got burned at the turn of the century mainly as a result of three factors:
    • Selling cheaply priced local assets (i.e. local equity market cheap)
    • Selling cheaply priced currency (i.e. rand at extremely weak levels versus most currencies)
    • Buying expensive foreign assets (i.e. ploughing money into the top of the tech boom in developed markets)

    This scarring often heavily influences investors’ decision making going forward. The poor returns were amplified because both asset returns AND currency movements worked against those investors with money in developed market equities over the past 10 years or so.

    One of investing good lessons is that you can’t change what’s happened in the past, and that all investment decisions should be based on future return expectations. Investors should therefore try, as best as possible, to forget previous successes and failures without forgetting the lessons learnt along the way.

    Another investment lesson is that performance is never in a straight line.

    Below is a chart of the ZAR v USD over the past 26 or so years. The black smoothed line is the value of 1 USD on Purchasing Power Parity (PPP) basis. The theory behind PPP is that over the long term currencies should move relative to one another based on the inflation differential, so that over time goods and services will have a similar cost across countries to avoid arbitrage of goods and services between countries. The chart clearly shows that this is the trend over time.

    Clearly there are some flaws with this process as different countries have different skill sets, there are transportation costs and import duties, etc. For this reason when looking at this method one needs to take a long term outlook (i.e. longer than 5 years) and only act when there is a sufficient margin of safety. Furthermore, investors should ensure that the assets that they are investing into in the foreign currency are fairly or attractively priced.

    On this chart it is clear that December 2001 wasn’t a great time to be expatriating ZAR, but what is also clear is that the ZAR can trade in cheap or expensive territory for an extended period. The ZAR stayed one standard deviation too strong for a decade from the end of 1986 to the end of 1996, but over this period still depreciated from R2.26 per USD to R4.68 per USD (7.6% per annum) as a result of the inflation differentials between the two countries.

    An investor looking to take money offshore one would rather be taking it over now than at the end of 2001 or even 2008. At current levels there is a margin of safety built into return assumptions, one doesn’t need to forecast significant rand strength, and if the rand does trade back to fair value (currently sitting at R8.71) over the next 10 years (an extremely long period) then investors would gain real increase of 3.5% per annum to their USD returns, and 5.4% per annum should fair value be reached in 5 years. Should the ZAR stay strong, investors should only expect the inflation differential (likely to be around 3% per annum for the next 5 years or so).

    As always, investing is a long term pursuit (speculators operate over the shorter term). Being a long term investor doesn’t preclude you from transacting over shorter term periods should circumstances warrant (i.e. if the ZAR weakened to R10 to the USD overnight we’d be looking to repatriate offshore assets), but does require that you think for the longer term.

    To vote in our poll on where you think/want the ZAR to end the year vs the USD click through to our Facebook page and find the question on our Fan Page’s wall.

    Take care,

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

    Permalink2011-04-07, 17:28:29, by Mike Email , Leave a comment

    What will increased interest rates do to risk aversion?

    G10 countries are slowly but surely shifting into gear to raise interest rates. Low interest rates have been key to fuelling the global economy and to the lower risk aversion. Higher interest rates tend to increase risk aversion and are therefore typically negative for asset prices.

    Today China raised its interest rates again – the fourth increase in 5 months. They increased by 0,25% to help tame inflation.

    The European Central Bank is set to raise its interest rates this week. The general consensus is that rates will be hiked by 0,25% on Thursday from a record low 1%.

    A Standard Bank report says that the Bank of England (BoE) looks like it may be “dragged kicking and screaming to hike rates.”

    The US Federal Reserve still has some time to play with, but increasingly it is being pressured around the fringes of the Board of Governors, to increase interest rates and so tighten monetary policy.

    All three of the globes main central banks are now likely to be pushing in the same direction – but there is going to be a big discrepancy in the timing of these hikes.

    At this stage, the US Federal Reserve is not overly concerned that higher commodity prices will translate into higher core inflation. Ben Bernanke - the US Federal Reserve Chairman, said that as long as inflation expectations remain stable and well anchored, the increase in inflation caused by higher commodity prices will be transitory.

    An increase in risk aversion?

    The fixed income research team from Standard Bank does not believe that at this stage higher interest rates will spark increased risk aversion.

    Their reasoning is that this is only likely to happen should the US dollar enjoy a significant rally across the board. At this stage the weaker dollar is helping reserve accumulation, which in turn is helping global liquidity and so would offset any negative impact of higher interest rates.

    For the prospect of higher risk aversion to play out the US dollar would need to rally against the reserve accumulating currencies – i.e. The Asian currencies – not against the euro and sterling.

    On this basis they don’t think that higher US interest rates in time will negatively impact risk assets.

    Using similar logic, the thinking is that higher interest rates from the ECB – which is now the consensus - may likely weaken the US dollar against the main reserve accumulating currencies and so in this sense “higher rates may lead to stronger global liquidity, not weaker liquidity.”

    So far the prospect of firmer interest rates has not affected risk aversion.

    Kind regards

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

    Permalink2011-04-05, 17:23:57, by ian Email , Leave a comment

    Global returns across various countries

    It is always fascinating to look back at tables that rank performance across shares, various asset classes and even countries. Increasingly, South African investors are part of the global arena, despite the fact that over the last 10 years it has definitely not only felt safe, but been more rewarding having a local focus.

    The chart below reflects investor returns in equities across various countries in discrete calendar years.

    Ten countries were ranked in terms of the performance of their main stockmarket index for the particular year. Two broader categories were also included, namely emerging markets and developed markets.

    From time to time the equity markets in a particular country can have a run that lasts for 2 or 3 years, but in general there is no real pattern as to which country will outperform in any one calendar year. Investors will need to look at specific valuation metrics and even then this is not fool proof over relatively shorter periods of time.

    In terms of comparing emerging markets with developed markets however, there has been a fairly clear pattern over these last 10 years. Looking at this patchwork quilt it is evident that emerging markets have been the outright winner. In 4 of the 10 years, this category was ranked first and in another 4 it was ranked second.

    Global stockmarket returns


    Source: Morningstar and ICMA-RC

    We have discussed this decade long outperformance of emerging markets before. Essentially the strong relative outperformance against developed markets can be explained by the relative valuations of these 2 classifications at the start of the decade.

    Starting from a point where valuations in developed markets were expensive and valuations in emerging markets attractive, emerging markets have been the winner. Combine this with cheap money creation in more recent years and the ongoing search for yields and we have an environment where post the 2007/08 credit crisis, the more risky emerging markets continued to find favour with global investors.

    Many aspects of financial markets are cyclical and were this chart extend back by 10 years, it would paint a different picture to the one above.

    Kind regards

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

    Permalink2011-04-04, 17:12:07, by ian Email , Leave a comment

    Great Trough signals new advance

    Below is an extract from an alert sent to our subscribers on morning of Tuesday 22nd March (12 days ago). Since then the JSE has risen almost uninterrupted by 5.4%

    We are issuing a "Fosback Great Trough" alert. This system tracks an index made up from an exponential moving average of daily advance and decline data on the JSE and issues the alert when the index rises above 30 and then makes a peak. This is a very rare but deadly reliable signal for a new multi-month sustained advance on the market and has only been flagged 15 other times over the last 15 years (one signal per year average) as depicted below:

    This is the 3rd such signal we have seen since this bull market commenced in October 2008. It only picks up “Great Troughs” i.e. large corrections from whence sustained multi-month (even multi-year) gains commence. Every signal since 14/09/1998 has been solid with two “false signals” in Oct 97 and June 98. This gives it a historical accuracy of 86.6% (two duds, 15 signals excluding todays) with the last 12 signals in a row being successes.

    It is not a trading signal, since sometimes it can be a bit premature or late (by 1-2% either way), but for investors looking to “buy on the dips” it is perfect. You can buy instruments that track or approximate the JSE to play the signal, such as SATRIX40, SATRIX RESI etc. But since it marks potentially highly probable periods when a sustained rise is likely on the JSE it often signals investors to buy those favourite shares they have been hunting, on the premise that “a rising tide floats all boats”. Conducting your equities activities on or around these signals gives that extra margin of safety that your shares you buy have “tailwinds” as opposed to “headwinds”.

    Now great troughs by definition are formed in reaction to some negative event, be it geopolitical, bubbles bursting, terrorist attacks, financial crises etc. There needs to be a certain degree of pessimism, negativity or uncertainty to prevail to bring about these large corrections. Since it so closely approximates “ground zero” of these corrections, it is to be expected that on the day you see these signals they appear counter-intuitive. Without the luxury of hindsight, the signal on the hard right edge of the above chart looks far less obviously correct than those on the left! As such it is a “contrarian” signal – meaning when you see it, every instinct will be screaming at you the signal is wrong. And right now is no exception! Major geopolitical upheavals in the middle east and North Africa, crippling twin natural disasters in the world’s 3rd largest economy, nuclear contamination threats, inflation clouds building worldwide, debt contagion in Europe – all conspire to tell us we must be bloody mad to deploy funds into the market at this time. The point is this is exactly what everyone else is thinking and history tells us when everyone is thinking the same way in the markets, you are better off doing the opposite! By the time something looks “obviously safe” the major move is over and the smart money is getting out already!

    There are no guarantees this is not a false signal, but the odds are on our side. Provided you couple your actions on this signal with sound position sizing and risk management, and adequate diversification of well-chosen instruments (solid stocks shown to you by our JSW program) that are not overpriced then any potential downside should be limited, and certainly far smaller than the potential upside. As with many great troughs, bottoms can be choppy affairs before the wind finally fills our sails and ramps us forward, so do expect volatility to ensue. It might not occur and we zoom upwards, but you need to at least prepare yourself mentally for it to ensure when it arrives you don’t get cold feet and succumb to your “fight or flight” instincts.

    Regardless of if you are a short term trader or investor, we suggest you commence firing up your JSW Program and start picking up quality stocks it is recommending.For demo videos of how this is done go to our Video Training Library.

    PowerStocks Equity Research
    www.powerstocks.co.za

    Permalink2011-04-01, 15:04:18, by dwaine Email , Leave a comment