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    2012 Market Recap

    With 2012 slowly winding to a close, it is time to look back at “The Year that Was”. While 2012 hasn’t quite closed out, we can get a good sense of where the good (and bad) places to invest were. So, which sector outperformed the rest?

    Below is a table with the returns of the different asset classes for the year until the end of November. The returns are total returns in rands.

    Industrial stocks have been the place to be invested during 2012. Taste has returned 106% for the year until the end of November, Woolworths 87% and Mr Price 69% over the same period. Industrial companies have been the darlings of local and offshore investors and have had a great run during 2012.

    How has 2012 compared to previous years? The graph below shows the cumulative returns of the ALSI for each of the last 5 years.

    The performance of 2012 is currently second only to 2009. In 2009 we saw the market rebound after the market crash and returned 32% for the year. 2012 has been a very favourable year return wise. South African equity markets have been in much demand over the last couple of years; the cumulative return from 1 Jan 2005 to 30 Nov 2012 was 52%. South Africa only experienced one negative year and that was 2008.

    In general, 2012 has been a positive experience for investors and that is despite the general sluggishness in the global environment and indeed also the very poor economic environment in South Africa. What 2013 will bring is still up in the air.

    To all of our loyal readers we hope that you have joyful holiday period with family and friends.

    Best regards,

    Gerbrandt Kruger

    021 914 4966

    Permalink2012-12-19, 12:33:22, by Mike Email , Leave a comment

    What is Driving up the Local Equity Market?

    Over this last year and in November the JSE has powered up to new highs. For sure the gains have only come from a certain section of the market – as we noted last month Industrials and Financials are driving the market to new highs.

    November ended the month on a new high and this has again continued into December. The local JSE has now made new highs in August, September, October, November and now also in December.

    Ultimately we believe that a company generating higher and higher profitability will be represented by a share price that moves up over time. But over the last 12 months earnings growth on JSE listed companies has slowed from an annual growth of 30% in July to just 4.8% in November. Clearly there are other factors driving prices up.

    One US based fund manager, Ken Fisher, who very often goes against the prevailing trend has a firm view that the only determinant of prices is supply and demand. In the long term there is an almost unlimited supply of shares, but in the shorter term up to say two years the supply of shares is relatively stable because new share issues and major merger and acquisitions take some time to conclude.

    The demand side for equities can be categorised into fundamental and non-fundamental factors. Fundamental drivers include economic activity and corporate profitability. Non fundamental drivers include sentiment and liquidity. All of these are important drivers of demand but at different times have differing influences on prices.

    The chart below gives a just one possible reason for the on-going demand for local equities and especially selected industrials and financials despite earnings growth falling back – i.e. the requirement for yield from investors in a global environment that is providing very few opportunities. For a period of time investors are prepared to bid up prices because on a relative basis they are attractive.

    When priced relative to bonds, there have only been 3 periods of time in the last 10 years when local investments were as attractive – in the period 2002/2003, in the period from September 2008 and now more recently in June to September.

    Therefore despite the more elevated share prices and the new monthly highs, liquidity driven demand for yield has continued to be a driver of share prices. This chart indicates that there is still relatively good value in local equities when compared to a bond alternative.

    Kind regards,

    Ian de Lange

    021 914 4966

    Permalink2012-12-13, 10:35:13, by Mike Email , Leave a comment