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A perspective on the probable and the possible. Presentations by Alec Hogg, Wayne McCurrie and Sam Houlie.
Citation preview
Taking stock – Davos 2010Alec Hogg
March 2010
Global power nexus
Icy reception for some
Major theme #1
Bank bashing
Sarkozy leads the charge in his official opening address
Implication
Banking shares appear to be high risk investment right now, but…
Major theme #2
Rise of China
Front and centre in every discussion; represented by rising star, Vice President Li Keqiang
Implication
Megatrend of power shift from West to East gaining momentum, aided by Crisis
Major theme #3
European problems mounting
Greek President George Papandreou trying his best but massive gap in credibility exists
Implication
Ancient problems of waste, corruption, state crowding, poor competitiveness in spotlight; Major realignment of currencies
Major theme #4
Climate change
Despite Copenhagen’s failure, political will created through voter concern at threat to mankind
Implication
Massive investment in alternatives to fossil fuels; realignment of costs to increase incentives for innovation
Major theme #5
African awakening
Continent attracting serious interest as an investment destination; IMF forecasts it is the third growth story after China and India
Verdict
South Africa the continental gateway, but Chinese won’t be the only competition for local firms
Looking ahead
Investment pointers
Bank bashing to hurt ST but re-rate sector long-term
China is re-writing rules for commoditised businesses
West’s structural problems to cause revaluation of subsidy distorted assets and currencies; but also lead to much increased competition globally
Climate change will unleash human potential to solve energy problems – challenge fossil fuel dominance
More info?
Subscribe to Boardroom Talk via www.moneyweb.co.za
Contact [email protected]
Follow daily updates via www.twitter/alechogg
“Friend” me at www.facebook/alechogg
Listen in nightly at 6pm on SAFM (104-107FM)
Thank you
Investment PerspectivesWayne McCurrie
March 2010
Navigating choppy waters: Staying the course through market uncertainty
It is tempting for nervous investors to make short-term moves out of uncertain markets and plan to re-enter when things are calmer
However, it is very difficult to time the moves out of and back into the market, and you could end up taking needless losses and missing out on significant gains
Navigating choppy waters: Staying the course through market uncertainty
Investors sell at the bottom – When Bad News prevails
And buy at the top – When Good News prevails
Therefore essential to have some sort of guidance as to what to expect from markets
Where we have been – where we are now – and where are we going to be in two years time
The Classic Investor Cycle
This is a really good investment
Temporary setbackI am a long term
investor
Why did I everbuy this ?
Look at lastyears good return
I must get out.Cash is King
Don’t worry the marketis consolidating
I really got badadvice
REVIVAL
EXCITEMENT
OPTIMISTIC
EUPHORIA
DOUBT
ANXIETY
DENIAL
FEAR
DEPRESSION
PANIC
CAPITULATEDESPERATE
DESPONDENT
DOUBT
OPTIMISTIC
What a goodchoice I made !!
FUND INFLOWS
FUND OUTFLOWS
I will not do thisagain !!MARKET CYCLE
Maybe I panicked !
Was it right tosell ??
This is the bestthing I have ever
done !!
MAXIMUM RISK
MAXIMUM REWARD
THINGSCANT GETBETTER
THINGS CANT GET WORSE
Markets are NOT STUPID – THEY KNOW the existing news and circumstances
Quite frankly – the market is not ALL THAT interested in the current news
Markets are (basically) only interested in what is GOING TO HAPPEN, not what is actually happening
Markets will discount future anticipated events
That is why markets move sometimes contrary to expectations – They go up in bad time and down in good times.
MARKETS MOVE ON THE DRUMBEATS OF TOMORROW
HUMANS move on the drumbeats of yesterday and today
The Investment Clock Getting Guidance – “Road map”
Markets and the economy ARE related (intricately)
Therefore studying the economy and forecasting the future is VITAL in understanding markets
MARKETS MOVE ON THE DRUMBEATS OF TOMORROW
HUMANS move on the drumbeats of yesterday and today
Navigating choppy waters: The economic cycle
PEAK SLOWDOWN BOTTOM RECOVERY
GOOD NEWSSTRONG GROWTH
INFLATION LOWINTEREST RATES LOW
THINGS CAN’T GET ANY BETTER
START OF DOWN TURNINFLATION RISING
INTEREST RATES RISING
INFLATION MODERATINGINTEREST RATES AT PEAK
ECONOMY IN TROUBLE
THINGS CAN’TGET ANY WORSE
INFLATION FALLINGINTEREST RATES DOWN
GROWTH INPROVING
MAXIMUM RISK
MAXIMUM REWARD
20
Peak
SlowdownBottom
Expansion
The investment clock – the basic economic cycle
21
Peak
SlowdownBottom
Falling Inflation Rising
Expansion
Falling Inflation Rising
Falling Inflation Rising
The investment clock – inflation and growth
22
Peak
SlowdownBottom
Fal
lin
g
G
row
th
R
isin
g
Expansion
F
alli
ng
Gro
wth
R
isin
g
Fal
lin
g
G
row
th
R
isin
gThe investment clock – inflation and growth
Falling Inflation Rising
Falling Inflation Rising
The investment clock – asset returns
23
Peak
SlowdownBottom
Expansion
F
alli
ng
Gro
wth
R
isin
g
Fal
lin
g
G
row
th
R
isin
g
Falling Inflation Rising
Falling Inflation Rising
NeutralEquity
NeutralEquity
MaxUnderweight
Equity
MaxOverweight
Equity
SellSell
BuyBuy
24
PeakExpansion
F
alli
ng
Gro
wth
R
isin
g
Fal
lin
g
G
row
th
R
isin
gThe investment clock – sector allocations
Falling Inflation Rising
Falling Inflation Rising
NeutralEquity
NeutralEquity
MaxUnderweight
Equity
MaxOverweight
Equity
SectorsNeutral Financials
Underweight ResourcesUnderweight All Industrials
SectorsOverweight Financials
Neutral ResourcesUnderweight Industrials
SectorsNeutral Financials
Overweight ResourcesNeutral Industrials
Bu
y B
an
ks
Se
ll Re
so
urc
es
Se
ll Sta
ple
sS
ell
Ba
nk
s
Bu
y R
es
ou
rce
s
Bu
y I
nd
us
tria
lsSell Banks
Sell Resources
Sell Cyclicals
Buy Banks
Buy Resources
Buy Cyclicals
Bottom Slowdown
Sectors Underweight Financials
Neutral ResourcesUnderweight Cyclical Industrials
Overweight Staple Industrials
26
PeakExpansion
F
alli
ng
Gro
wth
R
isin
g
Fal
lin
g
G
row
th
R
isin
gThe investment clock – where are we now?
Falling Inflation Rising
Falling Inflation Rising
NeutralEquity
NeutralEquity
MaxUnderweight
Equity
MaxOverweight
Equity
Sectors Underweight Financials
Neutral ResourcesUnderweight Cyclical Industrials
Overweight Staple Industrials
SectorsNeutral Financials
Underweight ResourcesUnderweight All Industrials
SectorsOverweight Financials
Neutral ResourcesUnderweight Industrials
SectorsNeutral Financials
Overweight ResourcesNeutral Industrials
Bottom Slowdown
1q 082q 083q 08
4q 081q 09
2q 09
3q 09
1q 10
4q 09
2q 103q 10
4q 10
1q 11
2q 11
4q 11
Some perspectives on marketsay and today
USA Share Market
Made very little money on USA shares for ten years
US equities close to fair value
5
10
15
20
25
30
35
40
45
60 61 63 64 66 67 69 71 72 74 75 77 79 80 82 83 85 86 88 90 91 93 94 96 98 99 01 02 04 05 07 09
EXPENSIVE
CHEAP
FAIR VALUE
S&P 500 current price/long-term average earnings
Current price/long-term earnings
Local equity close to fair value
Current price/long-term sustainable earnings
Long-term exit PE
Navigating in a high volatility environmentSam Houlie
March 2010
12 months ago.......we thought the world was about to end!!
…instead Global equities recovered strongly since March 2009
MSCI World Index (in US$) (1133.3)
600
800
1000
1200
1400
1600
1800
Apr
-07
May
-07
Jun-
07
Jul-0
7
Aug
-07
Sep
-07
Oct
-07
Nov
-07
Dec
-07
Jan-
08
Feb
-08
Mar
-08
Apr
-08
May
-08
Jun-
08
Jul-0
8
Aug
-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan-
09
Feb
-09
Mar
-09
Apr
-09
May
-09
Jun-
09
Jul-0
9
Aug
-09
Sep
-09
Oct
-09
Nov
-09
Dec
-09
Jan-
10
Feb
-10
The MSCI World gained 31% in 2009 and the MSCI EM gained a record 79%.
Source: I-Net Bridge
The US market has recovered astonishingly quickly…..
Source: Macquarie Research; Quarterly Strategy, 27 January 2010
2009 highlights Central banks and governments threw money at the credit crisis
Governments increased spending
Governments cut taxes and provided subsidies for the purchase of houses, cars and household appliances
Central banks bought government bonds (Quantitative Easing)
Source: Slate; Plexus Asset Management
2009 highlights China helped pull the rest of the world out of recession
GDP growth “recovered” from 6.1% in the 1st quarter to 10.7% in the 4th quarter and is forecast to grow 9.4% in 2010
China overtook Germany to be the world’s largest exporter
China overtook the US to become the world's largest car market
Source: JP Morgan
2009 highlights The global recession ended in the 3rd quarter
The recession in the developed world ended in the 3rd quarter but unemployment remains high at 9.7% in the US, 10.0% in Europe and 24.3% in SA
Source: Plexus Asset Management
2009 highlights The dollar came under pressure
The dollar weakened on declining risk aversion and a resumption of the carry trade as the Fed drove rates down to 0.25%
Commodities rallied with the oil price doubling and the gold price hitting a new high of $1220
Commodity currencies also benefitted with the Brazillian Real up 33%, the Rand up 28%, the Aussie Dollar up 24% and the Norwegian Krone up 20%
Source: Appraisal News Online, Plexus Asset Management
Commodity fund flow - December 2009 Cumulative inflows by year
Source: JPMorgan and Bloomberg
US$ billions
... but copper looks vulnerable to rising inventories
Source: Citigroup Global Markets; 8 January 2010
China’s investment boom unprecedented
Source: IMF, Pivot
GFCF/GDP of various countries
Cement capacity in stratosphere
Source: US Geological Survey, UN, Pivot
No surprises here - the market has leaped upward!
The JSE rose more than 100% in US$ since the beginning of March 2009 to December 200917000
19000
21000
23000
25000
27000
29000
31000
33000
35000
Ap
r-0
7
Ma
y-0
7
Jun
-07
Jul-
07
Au
g-0
7
Se
p-0
7
Oct
-07
No
v-0
7
De
c-0
7
Jan
-08
Fe
b-0
8
Ma
r-0
8
Ap
r-0
8
Ma
y-0
8
Jun
-08
Jul-
08
Au
g-0
8
Se
p-0
8
Oct
-08
No
v-0
8
De
c-0
8
Jan
-09
Fe
b-0
9
Ma
r-0
9
Ap
r-0
9
Ma
y-0
9
Jun
-09
Jul-
09
Au
g-0
9
Se
p-0
9
Oct
-09
No
v-0
9
De
c-0
9
Jan
-10
Fe
b-1
0
-45.4%
47.4%
Source: I-Net Bridge
The FTSE/JSE All Share Index (in ZAR) (26764.6)
So we better see some earnings come through!
Source: I-Net Bridge
-45
-35
-25
-15
-5
5
15
25
35
45
55
65
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
20
09
Trailing PE: 17.4xEPS-growth: 30%*Forward PE: 13.4xExit PE 14.5x
Expected Return: 12%
(3% DY)
* I-Net consensus
SA Equities: Earnings GrowthSince 1960 to end February 2010, Rolling 12-month %-change
Markets can go sideways for an extended period
Dow Jones: 1975 to 1982
700
750
800
850
900
950
1,000
1,050
Apr
-75
Jun-
75A
ug-7
5O
ct-7
5D
ec-7
5F
eb-7
6A
pr-7
6Ju
n-76
Aug
-76
Oct
-76
Dec
-76
Feb
-77
Apr
-77
Jun-
77A
ug-7
7O
ct-7
7D
ec-7
7F
eb-7
8A
pr-7
8Ju
n-78
Aug
-78
Oct
-78
Dec
-78
Feb
-79
Apr
-79
Jun-
79A
ug-7
9O
ct-7
9D
ec-7
9F
eb-8
0A
pr-8
0Ju
n-80
Aug
-80
Oct
-80
Dec
-80
Feb
-81
Apr
-81
Jun-
81A
ug-8
1O
ct-8
1D
ec-8
1F
eb-8
2A
pr-8
2Ju
n-82
Dow Jones: 1975 to 1982
Increased volatility offers opportunities for stock pickers
Dow Jones: 1975 to 1982
700
750
800
850
900
950
1,000
1,050
Apr
-75
Jun-
75A
ug-7
5O
ct-7
5D
ec-7
5F
eb-7
6A
pr-7
6Ju
n-76
Aug
-76
Oct
-76
Dec
-76
Feb
-77
Apr
-77
Jun-
77A
ug-7
7O
ct-7
7D
ec-7
7F
eb-7
8A
pr-7
8Ju
n-78
Aug
-78
Oct
-78
Dec
-78
Feb
-79
Apr
-79
Jun-
79A
ug-7
9O
ct-7
9D
ec-7
9F
eb-8
0A
pr-8
0Ju
n-80
Aug
-80
Oct
-80
Dec
-80
Feb
-81
Apr
-81
Jun-
81A
ug-8
1O
ct-8
1D
ec-8
1F
eb-8
2A
pr-8
2Ju
n-82
Dow Jones: 1975 to 1982
Cum.% p.a. %Warren Buffett, Berkshire Hathaway 676% 34%Sequoia Fund (Bill Ruane) 415% 28%
Range 1975 1976 1977 1978 1979 1980 1981 1982 Total
# of companies
46 5 0 2 27 34 2 8 124
% of 500 9.2% 1.0% 0.0% 0.4% 5.4% 6.8% 0.4% 1.6% 3.1%
Range 1975-77 1976-78 1977-79 1978-80 1979-81 1980-82 Total
# of companies 148 36 48 132 101 93 558
% of 500 29.6% 7.2% 9.6% 26.4% 20.2% 18.6% 18.6%
Range 1975-79 1976-80 1977-81 1978-82 Total
# of companies 268 186 112 193 759
% of 500 53.6% 37.2% 22.4% 38.6% 38.0%
Increased volatility offers opportunities for stock picking
Source: Empirical Research Partners, Legg Mason Capital Management
Number of Doubles or Greater Over Rolling One-Year Period (Top 500 Companies)
Number of Doubles or Greater Over Rolling Three-Year Periods (Top 500 Companies)
Number of Doubles or Greater Over Rolling Three-Year Periods (Top 500 Companies)
Discovery Equity FundTop 10 Equity Holdings (% of fund)
Fund Current ALSI 28-Feb-10
MTN Group 10.1% BHP Billiton 13.9%
BAT plc 9.1% Anglo American 9.9%
African Bank Investments 8.5% SABMiller 6.6%
FirstRand 7.7% MTN Group 5.6%
Sasol 6.1% Sasol 4.8%
Investec Global Franchise 6.0% Standard Bank 4.5%
Liberty International 5.9% Richemont 3.6%
Sun International 5.4% Impala Platinum 3.2%
JD Group 4.6% Naspers 3.1%
AVI 4.5% AngloGold 2.7%
Total 67.9% Total 57.9%
….the fund is VERY DIFFERENT to the market and the average fund
60
70
80
90
100
110
120
No
v-2
00
7
De
c-2
00
7
Jan
-20
08
Fe
b-2
00
8
Ma
r-2
00
8
Ap
r-2
00
8
Ma
y-2
00
8
Jun
-20
08
Jul-2
00
8
Au
g-2
00
8
Se
p-2
00
8
Oct
-20
08
No
v-2
00
8
De
c-2
00
8
Jan
-20
09
Fe
b-2
00
9
Ma
r-2
00
9
Ap
r-2
00
9
Ma
y-2
00
9
Jun
-20
09
Jul-2
00
9
Au
g-2
00
9
Se
p-2
00
9
Oct
-20
09
No
v-2
00
9
De
c-2
00
9
Jan
-20
10
Discovery Equity (15.9%) FTSE/JSE All Share (-6.5%) Sector average (-9.0%)
Discovery Equity Fund Cumulative performance as at 31 January 2010
Source: MorningstarReturns are calculated on a bid-to-bid basis, net of fees, with gross income reinvested.
Summary – steadily shifting back into cautious mode
We anticipate a great environment for stock pickingWe are buying quality and under-valued laggardsWe are attracted to stocks with resilient, depressed or below average profit marginsWe remain underweight Resources (except for paper, gold, energy and a fledgling position in steel)We are positioning for Rand weakness and are most attracted to non-commodity Rand hedges We remain concerned about the current momentumRisk-premia across a variety of stocks and asset classes are way too low and investors should be more discerning from this point forwardEquities should outperform bonds and cash. However, on a prospective basis, the return for equities could prove disappointing relative to current expectations
“The central principle of investment is to go contrary to the general opinion” JM Keynes
Equity markets almost always peak when rates are low, so moving in desperation away from low rates into substantially overpriced equities always ends badly
Jeremy Grantham
Thank you
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