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Sasfin Securities; Balancing the risks; Nov 2013
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Sasfin Securities; Balancing the risks; Nov 2013



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  • 1. World Markets Balancing the risks
  • 2. Shut happens!  Tea Party echoing same thinking Republican moderates have expressed for years, except at higher volume Abhorrence of ObamaCare, loathing of government, faith in tax cuts and free market etc.  Tactics nearly forced US default  Caused grievous harm to Republican brand – 53% of Americans blamed Republicans versus 29% Obama  Damaged Republicans’ business leaning image  Sequester lowered growth – Grand Bargain on spending cuts sought  Shutdown and debt ceiling protests hurt business confidence – cost of shutdown estimated at $24bn  Tapering delay probable 2
  • 3. US economy – chugging along  Employment rising 24 months of successive job increases  Housing recovering New houses sold double 2011 lows  Retail spending improving Above pre-crash levels  Trade balance shrinking Half „08 highs of -$70bn  Oil & gas production exploding US fastest growing producer in 2012 lifting output by 1m barrels per day to 8.9m  Lower birth rate projections, aging work force and slowing productivity Gains likely to reduce GDP to 1.9% between 2012 and 2032 from post-war average of 3.5% 3
  • 4. S&P500 1990 - 2000 Tech revolution Globalisation Cell phone Internet 2000 - 2010 GFC (Collapse of Lehman) China emerges 9/11 crisis 2010 - 2020 End of commodity super cycle Shale, oil, gas revolution IT & communication transformation 3D printing, big data Aging demographics: US, Japan, China, Europe 4
  • 5. What the Frack ?
  • 6. Hydraulic Fracturing 6
  • 7. The Natural Gas Revolution  Fracking has allowed energy companies to dig deeper than before unlocking unconventional oil deposits Crude Oil net Imports  North America has largest stores of unconventional oil 50% more than total conventional crude in the Middle East  US could overtake Saudi Arabia as the world’s largest oil producer by 2020 Crude Oil net Exports  Making it less dependent on oil from foreign nations whose interests conflict with theirs  Imports are down to 40% from 60% in 2005 7
  • 8. The Natural Gas Revolution  Fracking has produced an abundance of inexpensive natural gas  Natural gas used to power ships, trains, heavy goods vehicles and power stations  Natural gas power stations have half the emissions of conventional BNSF carry 650k barrels coal plants a day, soon to increase to Emissions fallen 12% since 2007 on conversions 750k barrels a day, will  Boom in oil and gas drilling creating jobs in states hard hit by recession eventually reach over 1m barrels a day  Cheaper energy input costs attracting manufacturing back to the US 1m manufacturing jobs could be added by 2025  Plentiful oil will diminish incentives to reduce reliance on fossil fuels 8
  • 9. Global Economy Size of economy US 21.6% China 10.4% EU 26% Japan 8.4% Brazil 3.6% UK 3.5% Russia 2.6% Est. growth 2014 China 8.2% India 6.2% Russia 3.8% Brazil 4% US 3% Australia 3% UK 1.5% Europe 1.1% World 4.00% Emerging Regions 5.70% Advanced Economies 2.20%
  • 10. Europe‟s deficit problem 10
  • 11. Europe: signs of economic recovery are visible  Strongest gains estimated in Germany, UK & Ireland Euro zone expected to expand by 1.2% Forecast GDP growth 2014 - Germany: 1.3%, UK: 1.5%, Ireland: 2.1%  Spain, Italy & Portugal also showing economic gains Spain out of recession, growing at 0.1% in Q3  EU needs to increase growth potential, enhance job creation & boost European competitiveness  The origins of the disaster lies with excessive private borrowing  Greece got into trouble because its government spent too much and collected too little in taxes  The bust followed a private sector binge: mortgage debt in Ireland and Spain, corporate borrowing in Portugal and Spain  Euro zone blighted by private debt even more than Govt debt Without growth, zombie firms are unable to invest or grow Much like those wafting through Japan in the 1990s 11
  • 12. UK: economy accelerates to fastest growth since 2010  Problems persist: - Wages rising less than inflation - More government spending cuts in the pipeline - Dormant Euro Zone  Unlikely that the recovery will fade significantly: - Revival of the British housing market - Employment growing - Confidence returning - Productivity still well below its potential 12
  • 13. Japan: “Abenomics” a mix designed to jolt the economy CPI Japan’s economy will remain on track as the government prepares a 5 trillion yen ($50.6bn) stimulus package to offset the drag from a sales tax increase scheduled for next April. Economists expect the majority of the stimulus package to be spent on infrastructure and tax breaks for the corporate sector. Reuters 13
  • 14. Electrifying a nation that had lost faith in its political class Nikkei Japan‟s economy recovering at moderate pace despite slowing exports Imports likely to remain strong due to solid domestic demand, while business sentiment is improving
  • 15. Emerging Markets continue to disappoint  China grows at the slowest pace in 13 years  Indian Rupee falls to record lows – rates rising to stem outflows  Brazil’s fundamentals deteriorate on incoherent economic policy  Russia down on falling energy prices and tight corporate credit  Investors continue to withdraw from emerging markets even in the face of Fed tapering talk 15
  • 16. S&P500 vs MSCI Emerging Markets Index Emerging Markets Developed Markets “Investors looking for emerging market-like growth rates should look to the US” Meredith Whitney
  • 17. China‟s tectonic shift – the dawn of a new era  New regime acting more carefully, balancing growth, shifting from a production oriented economy to one centred around household consumption  Demand slowly recovering, expect growth around 7.5%  Structural reforms designed to improve the supply side of the economy • Home to 20% of the world‟s population Reforms would help sustain the growth of productive capacity, improving the allocation of capital and labour • Cutting red tape and other regulatory barriers to entry would help private firms invest in industries now dominated by state-owned enterprises Household consumption accounts for 38% of GDP (US ~70%) • World‟s largest car market, 19.3m cars sold in 2012 • Largest internet market in the world • Reduced the per-watt cost of solar power from over $3 (2008) to under $1 (2011)   Consumption expected to overtake investment as the largest contributor to GDP Investment 42% (2010 – 2020) 34% (2020 – 2030) Consumption - 23% 41% (2010 – 2020) 51% (2020 – 2030) + 24%
  • 18. China‟s growing middle class is demanding more Western brands sell a lifestyle / image aiming to attract the aspirant Chinese consumer McDonalds Haagan-Dazs Nike Adidas Starbucks Paul Frank
  • 19. South Africa  Widespread labour unrest disrupting mining and manufacturing output  Falling commodity prices putting pressure on mine earnings  Rising input costs, electricity constraints, squeezing manufacturing margins  Slowdown in household spending  Continued shift in fiscal policy to social spending from infrastructure  Corruption, poor skills, inefficiency WEC ranks SA‟s education system 146 out of 148 countries and last in Maths & Science  Hesitant domestic and foreign investor confidence  Pessimism about the long term outlook for the economy  Debt downgrade possible if deficits continue to deteriorate 19
  • 20. JSE trading at all time highs
  • 21. Breakdown of the JSE: +23% from 1st Nov 2012 The top 15 companies make up over 70% of the JSE (12 month return) Market cap (ZAR) 1.1 tr British Am Tobacco 25% SABMiller 859 bn Billiton 655 bn Richemont 536 bn Naspers 385 bn 69% MTN 368 bn 29% Anglo American 335 bn -11% Sasol 328 bn 37% Standard Bank 203 bn 19% Firstrand 202 bn 29% 41% 12% 85% Vodacom 172 bn 158 bn 137 bn 129 bn Pick ‘n Pay 23bn Telkom 14bn Adcock 12bn JD Group -21% Barclarys Market Cap 36% Kumba Iron Ore Market cap: R714m 9% Old Mutual Xstrata/Glencore 7bn 9% 124 bn 75% Aspen 0 200000 400000 600000 800000 1000000 1200000
  • 22. Local Investment Ideas: Stick with the winners Companies expanding offshore into high growth regions Naspers, Aspen, Bidvest, BHP Billiton, Sasol Emerging market consumption growth SABMiller, British American Tobacco, Richemont Superior retail business models continue to hold Famous Brands, Woolworths Expansion into Africa Imperial, MTN, Omnia, Shoprite Expanding middle class exploring medicare options Life Healthcare, Mediclinic, Discovery 22
  • 23. JSE is more of a convenience store than a supermarket JSE Global Markets 23
  • 24. Create a champions league portfolio JSE Global Markets 24
  • 25. A guideline to our team‟s offshore investment ideas Escalating prosperity in developing nations LVMH, Daimler, Prada, BMW Increasing urbanisation L’Oreal, Altria, Anheuser-Busch InBev Competitive companies focusing on the consumer Nestle, Unilever, Adidas, J&J High yield in a low yielding environment Royal Dutch Shell, AstraZeneca, Sanofi, Allianz, Vodafone America: The next emerging market General Electric, Wells Fargo, JPMorgan, Berkshire Hathaway IT: Tech players transforming our lives Google, Amazon, Microsoft 25
  • 26. Thank You David Shapiro Kavita Patel Craig Diesel Carmen Solomons Deputy Chairman / Director Portfolio Manager Portfolio Manager Portfolio Assistant 26