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June 2015
NEWSLETTER
Market Overview
Aneka Janeke
Editor
May was a better month for global manufacturing with a
marginal pick up in the global PMI to 51.2. The global economy
continues to muddle along at best.
This correlation (lags by 6 – 9 months) also dominoes down to
commodities and it is therefore understandable how important
China and its economy are to the commodity market.
Global monetary policy remains very accommodative with China
the only one with real scope for further easing. Meanwhile, the
ECB continues its QE program and has dismissed any speculation
of an early end.
When commodities recover, expect a recovery in the currencies
of commodity producer countries. Societe Generale just
released a global report in which they make a bold statement –
commodity linked currencies are highly attractive.
With China’s annual economic growth rate continuing its
slowdown, the PBOC (People’s Bank of China) has started to
stimulate their economy via policy rates so as to engineer a “soft
landing”. We are of the firm opinion that this will be achieved.
Further monetary stimulus is anticipated until the government
feels that they have achieved stability with a clear sign of an
uptick in GDP growth.
We agree and believe markets are at an inflection point where
emerging market assets have just become too attractive. We
have most likely seen the worst of the Rand for this cycle. As
always, it is the foreigners that determine the Rand’s level, not
us or the media. We are not surprised that they view us to be
attractively priced at the same time people want to move
money offshore. Most investment decisions are driven by
emotions, instead of fundamentals.
Investors have a positive view on the outcome and has basically
“front-run” the efforts of the POBC by pushing the Chinese stock
market into a fully-fledged bull market. Interestingly there exists
a strong correlation between a strong equity market and a
recovery in China GDP.
PSG Team WVS | 200 Nelson Mandela Drive, Bloemfontein, 9301 | PO Box 12337, Brandhof, 9324 | Tel: +27 (87) 820 7451 | Fax: +27 (51) 401 5660 | [email protected]
PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.
The US Dollar, during the last month, lost a bit of steam with
currency traders further unwinding some of their long positions,
bringing much needed stability to the commodity markets.
The strength of the U.S. Dollar has been a problem for the U.S.
economy as well, with the Federal Reserve’s own models
showing that the currency’s drag on the economy is likely to
grow in coming months, forcing Janet Yellen to further delay the
first interest rate hike. In fact, Christine Lagarde, President of the
IMF, recently said in public that the Federal Reserve should wait
until the first half of 2016 before increasing rates.
Dollar Dilemma
At a price to earnings ratio of 17.8 times, the market is still 20%
above its longer-term average. We maintain and add to select
holdings where we find value and continue to avoid the big
industrial companies such as Richemont, SABMiller and Naspers.
This strategy will be vindicated sooner rather than later.
Hannes Barnard
Junie 2015
Asset Management in the
Current Economic Climate
Global and local equity markets are looking distinctly pricey at
the overall level. The South African equity market, in particular,
has exhibited meteoric price rises since the lows following the
financial crisis. And so we find ourselves, as we did in 2008,
looking back at almost six years of bull market returns, and
wondering how solid the ground is beneath us.
In delving beneath the market’s surface, however, there are
always risks to be avoided (assets trading well above what
they’re worth) and opportunities to be taken advantage of
(assets trading significantly below what they’re worth). As
bottom-up value investors, our job is to value businesses on
case-by-case basis, compare these values to the current market
prices, and invest in those trading at a significant discount (30
per cent or more) to the fair value we’ve calculated.
Unfortunately, the businesses offering good value are not high
quality, multinational industrials the market currently loves, but
the so-called market ‘dogs’ – mining companies and other
cyclical businesses going through incredibly tough times, which
will not last forever, but which are trading at very low prices as a
result. It is in these market environments that a value investor’s
temperament and mettle are tested – particularly when cheap
stocks get even cheaper, and overpriced stocks continue to
nose-bleed levels.
Lagarde is obviously concerned about emerging markets and the
potential fall-out from a rate hike in the U.S. Their currencies
have depreciated quite a lot this year. The developing
economies are extremely important to the global economy and
should they come under pressure, developed markets might lose
the traction gained over the last few years.
Our local market remains expensive but clear signs of selling
pressure (especially among overvalued industrials) have
emerged over the last few weeks.
The current dislocation between the industrial and resource
sectors in South Africa is extraordinary, and we are positioned to
take advantage of the return potential this presents, while
avoiding the obvious risks it highlights. Chart 1 shows the priceto-book (PB) ratio of the resources sector relative to the
industrial sector in South Africa. When the line is at high levels, it
shows the resources sector as being expensive relative to
industrials, and when the line is at low levels, it indicates that
the resources sector is cheap relative to industrials.
On the one hand, the chart shows how the market has
continued to drive the relative rating of the resources sector
lower from already very low levels for the past three years. On
the other hand, it shows how, at the height of the commodity
super-cycle bubble in early 2008, the resources sector was
trading at about twice the historical average relative valuation
level to the industrial sector. Today industrials are trading at
about three times the historical average valuation level relative
to the resources sector.
PSG Team WVS | 200 Nelson Mandela Drive, Bloemfontein, 9301 | PO Box 12337, Brandhof, 9324 | Tel: +27 (87) 820 7451 | Fax: +27 (51) 401 5660 | [email protected]
PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.
What this means is that industrials are more expensive today in
relative terms than the resources sector was when it was
experiencing the greatest valuation bubble since the mid-1980s.
Considering the destruction of capital that followed the overvaluation of resources stocks from those highs, we continue to
fervently avoid highly over-priced industrials and are investing in
resources with the same discipline and vigour with which we
avoided them in 2008.
This approach to investing may seem sensible, but there’s a
nasty short-term by-product that comes along with it – you have
to endure short-term price volatility and often temporary losses.
But we know that if we do our research in such a manner that it
gives us a high degree of conviction in how much a business is
worth, we’ll probably be able to sit through the discomfort of
short-term price movements, and even build our position
further if prices decline. Ultimately, the significant long-term
gains that market inefficiencies dangle as carrots are only
available to those investors able to endure the stock on the
other side.
Linda Eedes (Analyst, RECM)
InvestSA
May 2015
Editors letter
We say farewellIt’s with tears in our eyes that we say goodbye to our colleague
Jacques du Toit who is leaving for Cape Town at the end of June.
The news of his decision to resign surprised us all. We will miss
him, but realize that exciting opportunities and challenges await
him there. It has been an honour to work with him for the past
few years. We have all benefited from his wit and wisdom and
wish him every success on his new career path.
It is hard to say goodbye to a colleague who has been less of a
co-worker and more of a friend. Farewell.
Kind regards
Aneka Janeke
PSG Team WVS | 200 Nelson Mandela Drive, Bloemfontein, 9301 | PO Box 12337, Brandhof, 9324 | Tel: +27 (87) 820 7451 | Fax: +27 (51) 401 5660 | [email protected]
PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.
Melanie’s letter
With this month’s letter, I decided to keep the reading light and
include some non-finance facts for a laugh. Maybe you just
learn something that you didn’t know a few minutes ago:
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You were born with 300 bones, by the time you are an
adult you will have 206.
Zimbabwe has experienced the worst inflation in the
world: 6.5 sextillion percent in November 2008
Honey does not spoil. You could feasibly eat 3000 year
old honey
The Spanish national anthem has no words.
The portrait of Abraham Lincoln on the penny faces to
the right and all other portraits of presidents on U.S.
circulating coins face to the left.
It takes more calories to eat a piece of celery than the
celery has in it.
Native Americans used to name their children after
the first thing they saw as they left their tepees after
their children were born, hence the names Sitting Bull
and Running Water.
The Matami Tribe of West Africa play their own
version of football, instead of a normal football they
use a human skull.
Coca-Cola would be green if the food colorant wasn't
added.
Human thigh bones are stronger than concrete.
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It is impossible to sneeze with your eyes open. We
dare you, give it a try!
It is against the law to burp, or sneeze inside a church
in Nebraska.(Remember that when you plan on going
there one day)
Earth is the only planet not named after a god.
In 1386 a pig in France was executed by public hanging
for the murder of a child. (To discourage all the other
pics to display that type of behaviour?)
To produce a single pound of honey, a single bee
would have to visit 2 million flowers.
The average American spends about a year and a half
of his or her life watching commercials on television.
(Maybe do a few push ups to optimize that time?)
The elephant is the only mammal that can't jump!
Just like fingerprints, everyone's tongue is different.
A duck's quack doesn't echo anywhere, no one knows
why.
Kind regards
Melanie van der Merwe
The opinions expressed in this document are the opinions of the writer and not necessarily
those of PSG and do not constitute advice. Although the utmost care has been taken in the
research and preparation of this document, no responsibility can be taken for actions taken
on information in this newsletter.
The Team
Wiehan van Staden
083 276 4707
Financial Advisors
Johan du Plessis
072 386 1802
Learner
Financial Planner
Nici Macdonald
073 729 5102
Eben Rautenbach
072 958 5228
Supporting Staff
Jacolet Cilliers
Aneka Janeke
Liezel Pretorius
Melanie vd Merwe
PSG Team WVS | 200 Nelson Mandela Drive, Bloemfontein, 9301 | PO Box 12337, Brandhof, 9324 | Tel: +27 (87) 820 7451 | Fax: +27 (51) 401 5660 | [email protected]
PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.