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• Economic and market outlook • Local and global equities
IN THIS CLIENT NEWSLETTER
NOVEMBER 2015
PROSPERITY
PROSPERITYPROSPERITY
“There are two kinds of people who lose money: those who know nothing and those who know everything.”– Henry Kaufman
At Private Client Securities we do not have a crystal ball, but we do have a sound and rational framework through which we assess the landscape and investment opportunities and risks. We constantly guard against the distractions caused by event noise and we keep our eye on the long-term view. To quote from our newsletter exactly 12 months ago: “Currently the investment world is in no less turmoil than any other period. Commodity prices, including oil which makes up the bulk of traded commodities, are still falling and recession and deflation looms large in many parts of the world. Yet, we have recovery under way in the US and consumers benefitting from lower commodity prices and low interest rates. Stimulus measures by China and the European Union may still lead to recovery there. A through-the-cycle view of investments is important if we want to avoid being trapped by the current events. Commodities will recover, but more pain lies ahead.”
What has changed form 12 months ago? And what has remained the same?
We are in a very similar position to a year ago, but there is now more clarity around the extent of the slowdown in China and the recovery in the US economy has taken us to the brink of what may be the first US interest rate increase since 2006. Locally, the SA economy has unfortunately been sliding backwards over the past year and our credit rating has been downgraded to just one level above speculative grade.
When we look at markets, we have had a year of ups and downs. The JSE All Share, S&P 500 and MSCI World Indices were all down around 15% from peak to trough over the last 12 months. Yet, these indices are now at very similar levels compared to a year ago, as shown in the table below.
Panic is the enemy of successful investing. Having a long-term strategy and a sound decision framework for navigating the risks and opportunities that markets inevitably throw up is the key to creating wealth. Our Private Client Portfolio Managers are well-equipped and experienced in this regard and act as responsible stewards for your investment portfolios.
It has been another successful year for our business. Our model portfolios have delivered on expectations and are well positioned for the year ahead. We wish you well over the festive holiday season and look forward to continuing our relationship with you in 2016.
ECONOMIC & MARKET OVERVIEW A strong US jobs report substantially increased the chance that the US Federal Reserve would increase interest rates in December for the first time in several years. The US unemployment rate has fallen to 5%, the lowest level since the recession. The question now shifts from “when” the first rate hike will be, to “how many” lie in store. Meanwhile, the European Central Bank hinted that it would be increasing monetary stimulus in order to fight off persistently low inflation, even though the growth outlook for Europe has on balance improved.
The divergent outlook for monetary policy in the US and Europe (and Japan) once again saw the US dollar rally, placing renewed downward pressure on emerging market currencies and commodity prices. Japan’s economy entered its fourth technical recession in five years, illustrating how easy it is for growth to turn negative in a low-inflation economy.
Locally, StatsSA reported that the economy avoided a technical recession by 0.7% growth in the third quarter. However, the economy remains weak with a muted outlook as the rebound in the manufacturing sector in the third quarter could be short-lived. The mining and agricultural sectors suffered deep contractions, but financial services, retail and wholesale trade held up.
Despite the muted outlook for the local economy and inflation (at 4.7%) remaining well within the 3% - 6% target, the South African Reserve Bank (SARB) increased the repo rate by 0.25%. The SARB is focused on the risks that inflation could be worse than expected, given the weak rand, upward pressure on food prices due to the worst drought in years, and Eskom’s request for an additional above-inflation tariff increase.
Following a positive month in October, global markets relinquished some of their gains in November. The MSCI World Index was marginally lower (-0.7% US$) and the MSCI Emerging Market Index fell (4.0% US$) during the month. The US’ S&P500 (+0.1%) and Europe’s FTSE100 (+0.2) ended November largely unchanged, while Japan’s Nikkei 225 gained 3.5%. Locally, the All Share Index was down 3.9%, with industrials (-1.2%), resources (-20.7%) and financials (-3.4%) all ending the month lower.
02
30 Nov 2014 High Low 30 Nov 2015
ALSI 49 911 55 355 46 530 51 607
S&P500 2 067 2 134 1 867 2 080
MSCI World 1 739 1 814 1 545 1 694
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03
LOCAL EQUITIESVODACOMVodacom reported a solid set of interim results in November. Headline earnings per share was up by 6%, driven by revenue growth and good cost control, and dividends per share grew by 5.3% to 395cps. Group revenue grew 6.4%, driven by a data revenue increase of 33.4% (which represents 31% of group revenue). The operator announced that it had invested R6.2 billion in SA to cater for data growth. This follows a R5.8 billion investment in 2014. Vodacom’s balance sheet remains strong, with free cash flow up 78% as cash flow and its net debt to equity declining 10% to 75%. We recently added Vodacom to our local Core Model Portfolio. Vodacom has invested aggressively in enhancing the quality of its network and driven cost management to enhance margins. As a result, it remains the quality operator in South Africa and is well positioned to benefit from the improved capacity and revenue generation from a high quality infrastructure. In the current weak global growth environment, Vodacom offers good return prospects and on a one-year view, we expect 9% EPS growth
and a solid dividend yield of 5.5%
MONDIMondi, the top-performing stock this year among the world’s 10 biggest packaging makers, sees some of its biggest growth opportunities in food pouches that preserve everyday items from pasta sauce to dog food. The company is among the few businesses able to produce the multi-layer barrier material used to make the pouches. These products require fewer raw materials and keep food fresher for longer than other packaging types. More than 75% of Mondi’s revenue is from packaging and the company is seeking to expand further in the industry. Consumer products, which include pouches, packs and bags, currently account for 15% of the company’s sales and offer the best chance for growth as demand for food covering tends to be more resilient to economic trends than industrial products. Mondi currently operates in more than 30 countries. Earlier this year, the company said that it expects to spend more than €500 million a year over the next two years as it invests
to modernise and expand facilities, and is reviewing additional projects.
GLOBAL EQUITIESHONEYWELLHoneywell Aerospace has forecast that 9 200 new business jets will be delivered by manufacturers over the next decade, which it hopes will deliver a considerable windfall to the company. The projected value is US$270 billion, with 19% of the purchases expected to take place by the end of 2016; 17% in 2017; and 20% in 2018. The company has said that buyers for the business jets would mainly come from the BRIC countries. Honeywell contributes components to eight current business jet manufacturers including Airbus,
Boeing, Bombardier, Gulfstream; Textron Aviation and Pilatus.
CONTINENTAL Continental AG raised its outlook for the year on the back of third-quarter earnings, while confirming a sales forecast of over €39 billion. The automotive supplier said its EBIT margin is likely to be over 11% in 2015, above its previous forecast of around 11%. In addition, cash flow before acquisitions is likely to be above €2 billion, higher than the previously estimated €1.8 billion. The company’s 3Q2015 net profit came in at €635.7 million, significantly higher than the €495.1 million it reported in 3Q2014. In a statement, the company commented that steady growth in Europe and North America had compensated for both the slower growth in passenger-car production in China and the decline in industrial business.
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This document is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein. Old Mutual Wealth and its directors, officers and employees shall not be responsible and disclaims all liability for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of or which may be attributable, directly or indirectly, to the use of, or reliance upon any information contained in this document.
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CAPE TOWNCHRIS POTGIETERHead: Private Client SecuritiesTel: (021) 524 4582Cell: 082 827 [email protected]
ANIL THAKERSEEChief Investment OfficerTel: (021) 524 4526 Cell: 082 560 1468 [email protected]
OCKERT VAN NIEKERKHead: Trading and Advisory Tel: (021) 524 4899Cell: 083 445 [email protected]
DEREK ALTONPortfolio Manager Tel: (021) 524 5466Cell: 072 290 [email protected]
PAUL STEVENPortfolio ManagerTel: (021) 524 4572Cell: 076 719 [email protected]
MICHAEL TONKINPortfolio Manager Tel: (021) 524 4410Cell: 082 331 [email protected]
JOHANN VAN ZYLPortfolio Manager (Stellenbosch)Tel: (021) 861 4400Cell: 083 261 [email protected]
MICHELLE MATTHEWSClient Liaison OfficerTel: (021) 524 4421Cell: 083 979 [email protected]
MIKE SITHOLEPortfolio ManagerTel: (021) 524 4579Cell: 083 352 [email protected]
ROWANN PERUMALSAMYEquity Dealer Tel: (021) 524 5313 Cell: 072 204 [email protected]
MEGAN CUPIDOHead of Investor Services Tel: (021) 524 5112 Cell: 073 274 7413 [email protected]
DUBE TOICHHead of Business DevelopmentTel: (021) 524 4410 Cell: 074 5299 159 [email protected]
MOOSA HASSIMInvestment AnalystTel: (021) 524 4609Cell: 072 448 6369 [email protected]
AMISHA CHAVDA Client Relationship Manager Tel: (021) 524 5122 Cell: 082 760 [email protected]
JOHANNESBURGTREVOR O’CALLAGHANPortfolio ManagerTel: (011) 245 3801Cell: 083 660 [email protected]
GARY SMITHPortfolio ManagerTel: (011) 245 3802Cell: 082 464 [email protected]
DEAN GINSBERGPortfolio ManagerTel: (011) 245 3818Cell: 083 650 [email protected]
SUSAN BUYSClient Liaison OfficerTel: (011) 245 3805Cell: 082 599 [email protected]
LASCA JOUBERTSenior Administration SpecialistTel: (011) 245 3807Cell: 083 417 [email protected]
BRONWEN DE KLERKClient Liaison OfficerTel: (011) 245 3806Cell: 082 371 [email protected]
PRETORIAGREG POTGIETERPortfolio ManagerTel: (012) 369 7234Cell: 082 823 [email protected]
JACQUES THERONPortfolio ManagerTel: (012) 369 7235Cell: 082 495 [email protected]
COLLEEN OLIVIERClient Liaison OfficerTel: (011) 369 7236Cell: 076 978 [email protected]
DURBANHELMAR BREYTENBACHPortfolio ManagerTel: (031) 581 0773 Cell: 082 564 [email protected]
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