PSG Wellington / Paarl Investment Opportunities in 2014 22 May 2014.

PSG Wellington / PaarlInvestment Opportunities in 2014

22 May 2014

| CONFIDENTIAL 0####

The world had (and still has) too much debt

2008 2008: MSCI ACWI = -40%...


Governments and central banks tried to get their economies going again

Keep interest rates low

Quantitative easing

http://www.google.co.za/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&docid=D9MaQhVNlk-XkM&tbnid=JRLj09dEhHOU9M:&ved=0CAUQjRw&url=http://fiscaltoday.com/learning-financial-crisis-2013/&ei=G21WU-zkHOed0wWX84DQBA&psig=AFQjCNHh80UIGmxelVtRL2QKOEhJHarAjQ&ust=1398259229703090


1. Keep rates low to try stimulate growth19

98

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

1

2

3

4

5

6

7

US UK ECB BOJ

Source: I-Net Bridge


2. Print money to stimulate growth

Dr Bernanke explains Quantitative Easing

http://dailybail.com/home/professor-bernanke-explains-quantitative-easing-cartoon.html


QE took the markets higher

Jan-

07

Mar

-07

May

-07

Aug-0

7

Oct-0

7

Dec-0

7

Mar

-08

May

-08

Jul-0

8

Sep-0

8

Dec-0

8

Feb-0

9

Apr-0

9

Jul-0

9

Sep-0

9

Nov-0

9

Jan-

10

Apr-1

0

Jun-

10

Aug-1

0

Nov-1

0

Jan-

11

Mar

-11

Jun-

11

Aug-1

1

Oct-1

1

Jan-

12

Mar

-12

May

-12

Jul-1

2

Oct-1

2

Dec-1

2

Feb-1

3

May

-13

Jul-1

3

Sep-1

3

Dec-1

3

Feb-1

4

Apr-1

440

50

60

70

80

90

100

110

120

130

140

QE1

QE2

QE∞

Source: I-Net Bridge. MSCI ACWI to 27 April 2014.

But what did this mean for us in SA?


SA was a beneficiary of money searching for yield

2012: R85bn into SA bonds1.5% 7%

Bonds, equities and the rand rallied, and became ‘expensive’


22nd May: Taper talkWhat happens when the taps get turned off?

Dec

-08

Feb

-09

Mar

-09

May

-09

Jun-

09Ju

l-09

Sep

-09

Oct

-09

Dec

-09

Jan-

10F

eb-1

0A

pr-1

0M

ay-1

0Ju

n-10

Aug

-10

Sep

-10

Nov

-10

Dec

-10

Jan-

11M

ar-1

1A

pr-1

1Ju

n-11

Jul-1

1A

ug-1

1O

ct-1

1N

ov-1

1D

ec-1

1F

eb-1

2M

ar-1

2M

ay-1

2Ju

n-12

Jul-1

2S

ep-1

2O

ct-1

2N

ov-1

2Ja

n-13

Feb

-13

Apr

-13

May

-13

Jun-

13A

ug-1

3S

ep-1

3O

ct-1

3D

ec-1

3Ja

n-14

Mar

-14

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0


SA vulnerable to global central bank policyRand became oversold

Source: I-Net Bridge to 31 January 2014

Foreign flows – SA Bonds and Equities

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

Jan-

10

Apr-1

0

Jul-1

0

Oct-1

0

Jan-

11

Apr-1

1

Jul-1

1

Oct-1

1

Jan-

12

Apr-1

2

Jul-1

2

Oct-1

2

Jan-

13

Apr-1

3

Jul-1

3

Oct-1

3

Jan-

14 (62,000)

(42,000)

(22,000)

(2,000)

18,000

38,000

58,000

6

7

8

9

10

11

12

Quarterly Foreign flows USDZAR

Fo

reig

n f

low

s (R

bn

)

US

D:Z

AR


SARB faced some tough choices

RAISED RATES

InflationWeakening rand

“The SARB face some very tough choices – A rate hike today, however unpleasant, might just be the saving grace for an economy in distress”

Investec Asset Management, 23 January 2014

Fragile five


South African markets - at a critical junction

Cheap international

money looking for returns

Big capital flows into EMs

(like SA)

Hides weak SA economic

fundamentals

Drives up the equity and

bond market prices

Artificially supports

Governments finances

What does this mean for investors?


Cash rates remain below inflation

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Source: I-Net Bridge, Investec Asset Management

Negative real cash rates to continue


Beating inflation not very easy

Source: Gavekal, February 2013

Riskxxx

x

x

x

xx

xx

xx x

Cash under the mattress

Cash at the bank

Short term treasuries

Domestic government bonds

Investment grade bonds

Real estate

High-yield and emerging market debt

Large-cap growth

Emerging markets

Small cap

Venture capital

Private equity

Large-cap value

Real return = 0%

Guaranteed losses unless world enters deflation


ALSI- Reached an all time high during the month of May


The FTSE/JSE All Share Index (in ZAR) (50 000)


SA Equities are expensive20-years to end April 2014 (17.5x)


Mean: 14.81

Std Dev: 2.48


But equities have delivered significant returns recentlyHowever there were huge divergences

Gol

d F

ield

s

Ang

loG

old

Mas

smar

t

Tru

wor

ths

Impa

la P

lat

ALS

I

MT

N

SA

B

Sas

ol

Ric

hem

ont

Ste

inho

ff

Nas

pers

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

-63%-53%

-30% -27% -26%

21%28%

40%48%

57%68%

103%

Top 10 Shares Next 11-20 Next 21-179 ALSI Total Return17%

18%

19%

20%

21%

22%

23%

24%

19.7%

3.5%(-1.8%)

21.4%

71% of the ALSI’s total return came from 5 stocks:

Naspers, Richemont, SABMiller, Sasol and MTN

10 shares contributed to 92% of the performance of the ALSI


“Past performance is not necessarily a guide to the future”

0

5

10

15

20

25

An

nu

alis

ed r

etu

rn (

%p

.a.)

Last 10 years Expected 10 year return

SA Property

SA Equity

SA Bonds

Cash


Unit Trust return extremes by sector

Money Market SA Variable Term SA MA Low Equity

SA MA Medium Equity

SA MA High Equity

SA Property average

SA Equity General

-40.00

-20.00

0.00

20.00

40.00

60.00Maximum return over 1 year

Minimum return over 1 year


Conclusion

• We are in unchartered territory

• Significant structural and valuation risk in most asset classes


Global imbalances mean caution is appropriate

Source: www.telegraph.co.uk

“If you have an unstable system, eventually something will cause it to collapse.”

- James Rickards


Conclusion

• We are in unchartered territory

• Significant structural and valuation risk in most asset classes

• Need to manage downside risk

• Now not the time to gamble

• Asset allocation is critical.

Thank youwww.investecassetmanagement.com


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Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of charges, fees and adviser fees is available on request from the manager. Additional adviser fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Forward pricing is used. The scheme trustee is FirstRand Bank Ltd (011) 371 2111.

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PSG Wellington / Paarl Investment Opportunities in 2014 22 May 2014.

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