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    Seed Weekly - Let's Recap on 2015

    We’ve had a roller coaster year when looking at global news which has inevitably been followed by volatility in most markets.
    The major highs and lows for 2015 were:

    • Twelve Killed in Terrorist Attack at Newspaper in Paris (7 Jan)
    • German Jetliner Carrying 150 Passengers Crashes (24 Mar)
    • Australia win Cricket World Cup (29 Mar)
    • The Duchess of Cambridge Gives Birth to a Girl (2 May)
    • Cruise Ship Capsizes on River in China (1 Jun)
    • Germany Backs Third Bailout for Greece (19 Aug)
    • New Pre-Human Species Is Revealed Homo Naledi (10 Sep)
    • China Ends One-Child Policy After Decades (29 Oct)
    • Russian Airliner Crashes in Egypt – investigation shows bombed by ISIS (31 Oct)
    • New Zealand defend Rugby World Cup (31 Oct)
    • Three Coordinated Attacks by ISIS Kill 130 in Paris (13 Nov)
    • At least 27 Are Killed in Mali Hotel Attack (20 Nov)
    • Russian Warplane Is Shot Down in Turkey (24 Nov)

    The bloody civil war in Syria, which has given rise to ISIS fanatics, dominated headlines continuously with world leaders including President Obama, Francois Hollande of France as well as Vladimir Putin of Russia all vowing for the fight against terrorism and ISIS.

    In the first six months the US market was relatively stable, showing solid month on month returns. With any small pull back in the market investors saw buying opportunities which pushed prices higher. The first major pullback happened in August when there was a big sell off after the Chinese market collapse.

    Looking ahead the big news from US will be the announcement from the Feds chair Janet Yellen to or not to raise interest rates. This will be the first rate hike since pre financial crisis (2008) and it is highly expected after no rate hike happened in September. With US firms creating jobs at a rapid pace and GDP expanding it has become clear that they believe consumers and investors can withstand a modest increase.

    Year to date for the broad US markets performance is relatively flat with the S&P 500 up 0.2%*.

    China had a massive rally mid-year followed by a spectacular collapse. Enthusiastic individual investors inflated the stock market with investments in stocks often bought with borrowed money. This exceeded the rate of their economic growth as well as the profits of the companies invested in. As markets came to realise this, investors faced margin calls and started selling off stocks. Despite government intervention (closing the markets on certain days) the Shanghai stock market fell around 30% in three weeks with the biggest fall happening on Monday 24 August. This was known as “Black Monday” around the globe, with most markets being affected.

    The graph below illustrates price volatility in the Chinese market (red line) relative to the JSE All Share (orange line) for the last year:

    Shanghai CSI 300 Year to date return is 6.6%*.

    Europe is looking to expand their quantitative easing of monetary policy. European equities mostly outperformed their developed market peers and it seems that investors remained stoic amid global security concerns. The broad based recovery remains on track with the ECB still boosting its stimulus package.
    Year to date returns: German DAX gained 3.4%* with the STOXX All Europe up 5.1%* but the UK FTSE 100 is down 6.0%*.

    Below is a table from BCA giving their recommended regional allocation to equity for the next 3 – 12 month investment horizon. It is very clear that, according to BCA, one needs to steer clear of all Emerging Markets (a rating of 1 is minimum with 5 being maximum.) Very noticeable is the fact that, of all the EM countries, South Africa is the least attractive.

    The year to date return of the MSCI Emerging Markets index makes for ugly reading, down 17.6%* while the MSCI African index is down 22.5%*.

    On the local front, the Rand weakened over the last two weeks to some of its worst levels ever. Two global ratings agencies downgraded SA’s debt to just above junk status. Statements from Standard & Poor’s and Fitch listed similar reasons for the country’s economic woes: government policies that are denting business confidence and state funding that will strain the budget of Zuma’s administration.

    Adding insult to injury was the sacking of finance minister Nene only to be replaced by an unknown in David Van Rooyen. Zuma then decided to recall Pravin Gordhan to the position leaving Van Rooyen on the job for only four days. This “blunder’’ by Zuma cost SA equity markets around R 171bn.

    The rand has depreciated to the US dollar by more than 30% this year alone and reached its weakest level of R16.04 before strengthening somewhat after announcement of Gordhan being reinstated as finance minister. Currently ZARUSD sits at R15.13.

    No major news from Eskom’s side in 2015 with regards to the power supply, but analysts warned that having no load shedding might be only delaying the inevitable and that we could still face serious power outages for as long as the next three to five years.

    On the agricultural side El Nino is affecting the SA farmers as there are severe droughts and water restrictions have been implemented in all major cities in SA.

    Some good news for SA is that the oil price is currently trading at $36 per barrel and as we are net importers of oil we should see some decline in the petrol price. The low oil price did have an effect on SA inflation as CPI sits at 4.8% (November 2015) compared to 5.8% a year ago.

    Our unemployment rate is unchanged at over 25%.

    Similarly to the global trends, local markets were very volatile with the Resource sector struggling the most, losing more than 40% of its value:

    Amidst all the doom and gloom at Seed we had a great year. On the fund side with the biggest news was that we launched a new fund in June – the Seed Income Fund.

    Our Multi Asset Funds (Seed Stable and Seed Balanced Fund) have performed ahead of many peers and the equity and bond markets. As multi managers we know that in these times of market jitters and increased volatility by sticking to our process and philosophy we will deliver consistent returns.

    As long term investors we are excited for what 2016 will bring and we want to make use of this opportunity to thank all our clients for their loyal support. Have a wonderful holiday and a blessed Christmas. We look forward to a 2016 where SA will hopefully bring back some gold medals in the Rio Summer Olympics.

    Kind regards,

    Renier Hugo

    *All returns as at 14 December unless otherwise indicated

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Seed is hiring: Visit the Seed Analytics LinkedIn profile to view vacancies.

    www.seedinvestments.co.za

    Permalink2015-12-17, 11:27:52, by Mike Email , Leave a comment

    Seed Weekly - Investment Greats – David Dreman

    David Dreman is considered one of the greatest contrarian investors of our age. Born in Canada in 1936, David went on to graduate from University in 1958, after which he worked as director of research for Rauscher Pierce, senior investment officer with Seligman, and senior editor of the Value Line Investment Service. In 1977, he founded his first investment firm, Dreman Value Management, and has ever since served as its president and chairman. Since its founding, the firm has consistently stayed true to the contrarian style of investing.

    Dreman is seen as a pioneer in the field of contrarian investment strategies and behavioural finance. Over the past 30 years, he has been at the forefront of research into contrarian value investing and behavioural finance, proving that over virtually every time period measured, stocks which were out of favour (as reflected by their price/earnings multiple), did significantly better than stocks considered to have more favourable outlooks. "I paraphrase Lord Rothschild: ‘The time to buy is when there's blood on the streets.'"

    It is reported that Dreman came to contrarian investing the hard way. In 1969, Dreman, a junior analyst at the time, was following the crowd as the shares of companies with negligible earnings skyrocketed. He is quoted as saying, "I invested in the stocks du jour and lost 75% of my net worth." As a result of that painful lesson of “following the herd”, he became fascinated with how psychology affects investor behaviour and became a contrarian investor. "Psychology is probably the most important factor in the market – and one that is least understood."

    "One of the big problems with growth investing is that we can't estimate earnings very well. I really want to buy growth at value prices. I always look at trailing earnings when I judge stocks."

    "I buy stocks when they are battered. I am strict with my discipline. I always buy stocks with low price-earnings ratios, low price-to-book value ratios and higher-than-average yield. Academic studies have shown that a strategy of buying out-of-favour stocks with low P/E, price-to-book and price-to-cash flow ratios outperforms the market pretty consistently over long periods of time."

    The Dreman fund family was eventually bought over by other companies. In 2009 his firm chose to hold on to banking stocks as they were crashing during the great financial crisis - in line with his contrarian value investing philosophy. As a result, his firm was removed from management of his flagship DWS Dreman High Return Equity Fund by the board of Deutsche Bank, citing weak performance.

    This “deep value” contrarian approach to value investing can result in a hefty debate. It should be said that the buyer must know what he is are buying and not simply buy stocks after their ratios – quality has proven to be an all important factor for mitigating risk of capital loss. "If you have good stocks and you really know them, you'll make money if you're patient over three years or more."

    David Dreman has written numerous books over his lifetime. His first book, "Contrarian Investment Strategy: The Psychology of Stock Market Success" (1980) is an investment classic. Other notable books include "The New Contrarian Investment Strategy" (1982) and "Contrarian Investment Strategies: The Next Generation (1998). He has also authored numerous scholarly investment articles in the Journal of Investing, Financial Analysts' Journal and The Journal of Financial Behaviour. Dreman has also written the highly respected "The Contrarian" column in Forbes magazine for some 22 years.

    Kind regards,

    Lourens Rabè

    Sources: Investopedia.com, Wikipedia.com, Dreman.com

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

    Seed is hiring: Visit the Seed Analytics LinkedIn profile to view vacancies.

    www.seedinvestments.co.za

    Permalink2015-12-01, 17:11:25, by Mike Email , Leave a comment