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Investments
BCI Global Conference
6 June 2016
Vanessa van Vuuren
“Has the SA equity investment opportunity set
evolved to a case of rand-hedge versus non-
rand-hedge”?
GLOBAL FINANCIAL MARKETS
BCI Global Conference 2016
LONG RUN REAL EQUITY RETURNS
Sanlam Investments 3
0
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2
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th A
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zerl
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Euro
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stri
a
Real Annualized Equity Returns (Local Currency) for 115 Years (1900-2015)
For the South African investor investing in Rand, South Africa has been the best performing equity market globally
Long Run Equity Returns Source: Credit Suisse – Global Investment Returns Sourcebook 2016
BCI Global Conference 2016
LONG RUN REAL EQUITY RETURNS
Sanlam Investments 4
-1
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Au
stra
liaUS
Sou
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fric
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nm
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Wo
rld
Swed
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Fin
lan
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zerl
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UK
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lan
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Euro
pe
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lan
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Jap
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ex-
US
No
rway
Po
rtu
gal
Spai
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Ger
man
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lgiu
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Ital
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Au
stri
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Real Annualized Equity Returns (USD) for 115 Years (1900-2015)
For the foreign investor investing in USD, South Africa is the best performing emerging market and 3rd globally
Long Run Equity Returns Source: Credit Suisse – Global Investment Returns Sourcebook 2016
JSE- LONG TERM RESILIENCE DESPITE MAJOR CRISES
Sanlam Investments JSE- Long Term Resilience Despite |Major Crises 5
1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
FTSE/JSE All Share Index 1925-2016
1929 Great Depression
1960 Sharpeville Massacre
1970 Tech-Stock Crash
1980 U.S Recession
1987 Stock market crash as a result of the savings and loans crisis in the US
1999 Emerging markets crisis (Rand volatility)
2003 SARS outbreak & the Iraq war begins
2009 Credit Crunch & Great Recession
100
1000
10000
50000
BCI Global Conference 2016 Source: SIM Equities Research
THE CASE FOR RAND HEDGE INVESTING?
Sanlam Investments The Case for Rand Hedge Investing 6BCI Global Conference 2016 Source: SIM Economics Team
51,2%
48,8%
Large Cap Universe
21 counters
22
JSE LANDSCAPE: RAND HEDGE VERSUS SA INC
Sanlam Investments JSE Landscape 7
MARKET CAP
STOCK COUNT39% RH
61% NRH/SA Inc
MARKET CAP70% RH
30% NRH/SA Inc
83,2%
13,5%
2,8%0,5%
JSE Universe
Large
Mid
Small
Fledgling
Source: SIM Equities Research
75,6%
24,4%
Large Cap Universe
R2.2tn48,1%
51,9%
Mid Cap Universe
R777billion
R720bn
36,6%
63,4%
Small Cap Universe
R209bn
R120bn
44,3%
55,7%
Mid Cap Universe
34
27 33,3%
66,7%
Small Cap Universe
40
20
BCI Global Conference 2016
R7trillion
44,1%
55,9%
Fledgling Universe
R57bn
R45bn
35,0%
65,0%
Fledgling Universe
36
67
BEHAVIOURAL FINANCE: HEURISTIC BIASES
Sanlam Investments Behavioural Finance 8
Defined as a simple thinking strategy that often allows us to make judgements and solve problems efficiently – “rule-of-thumb” derived from experience that has no guarantee of accuracy or usefulness
Example: Racial profiling or stereotyping…ALL BLONDES ARE DUMB!
BCI Global Conference 2016
BEHAVIOURAL FINANCE: HEURISTIC BIASES
Sanlam Investments Behavioural Finance 9
Defined as a simple thinking strategy that often allows us to make judgements and solve problems efficiently – “rule-of-thumb” derived from experience that has no guarantee of accuracy or usefulness
Example: Racial profiling or stereotyping…ALL BLONDES ARE DUMB!
JK Rowling
(Author: Harry Porter)
Ginni Rometty(CEO: IBM)
Hillary Clinton
Meg Whitman (CEO: HP)
Marissa Mayer (CEO: Yahoo!)
BCI Global Conference 2016
HEURISTICS IN PRACTICE
Sanlam Investments Heuristics in practice 10
Rand weakens
Rand strengthens
Rand HedgeInvesting
BCI Global Conference 2016
RAND HEDGE VERSUS RAND LEVERAGE
Sanlam Investments Rand Hedge vs. Rand Leverage 11
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0,50
1,00
1,50
2,00
2,50
3,00
1960
1961
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1963
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Relative Strength of Indices
Industrials Resources
Rand-HedgeAnglo AmericanImpala Platinum
BHP BillitonAnglo Gold
Lonmin
Rand-HedgeSAB
NaspersRichemont
BATSteinhoff
BCI Global Conference 2016Source: SIM Equities Research
42 44
3439
36
4439
48
3540 42
53
6872
58
6762 61
42
60
4541
0
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20
30
40
50
60
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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-Q1
Stocks Outperforming SWIX
Rand Hedge Non-Rand Hedge
Source: SIM Equities Research
SA INC DEFIES RULE-OF-THUMB EXPECTATIONS
Sanlam Investments SA INC Defies Rule-of-Thumb Expectations 12BCI Global Conference 2016
Company Economic Sector CAGR in HEPS (2011-2016) Total return (2011-2016) Annualised return %
Capitec Niche financial services 31% 272.58% 22.4%
EOH IT 32% 786.37% 39.9%
FBR Food services/QSR 18% 212.20% 19.1%
ITE Niche retail 19% 254.24% 21.5%
CSB Niche retail 19% 312.01% 24.3%
COH Education 34% 680.30% 37.2%
CLH Hotels/leisure 9% 117.47% 12.7%
CONCLUDING THOUGHTS
Sanlam Investments Concluding Thoughts 13
• The rand is a single FACTOR when understanding and selecting an individual investment – not THE factor when constructing a portfolio
• All rand hedges DO NOT behave in the same way as is the case with all non-rand hedges/“SA Inc” stocks
• The rand is materially undervalued and a reversion of this strength is a very real UNTIMEABLE risk at this point
• SA Inc shares offer a vast and diverse opportunity set, but careful research and analysis is required
• Inflation-beating return sources:• Go down the size curve (retail investors CAN)• Select industries or sectors that offer resilience to macro headwinds (education, IT, niche retail, food services)• Select robust company fundamentals and understand the long term investment case
• Competitive advantage and unique proposition• Structural growth• Quality management• High returns on capital
BCI Global Conference 2016
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