Investing in 2010
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A perspective on the probable and the possible. Presentations by Alec Hogg, Wayne McCurrie and Sam Houlie.

A perspective on the probable and the possible. Presentations by Alec Hogg, Wayne McCurrie and Sam Houlie.

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Investing in 2010 Investing in 2010 Presentation Transcript

  • Taking stock – Davos 2010
    Alec 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 alec@moneyweb.co.za
    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 Perspectives
    Wayne 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
    MAXIMUM RISK
    This is the best
    thing I have ever
    done !!
    What a good
    choice I
    made !!
    FUND INFLOWS
    This is a really
    good investment
    EUPHORIA
    Don’t worry the market
    is consolidating
    THINGS
    CANT GET
    BETTER
    DOUBT
    Look at last
    years good return
    Temporary setback
    I am a long term
    investor
    ANXIETY
    EXCITEMENT
    Maybe I panicked !
    DENIAL
    REVIVAL
    Why did I ever
    buy this ?
    FEAR
    OPTIMISTIC
    OPTIMISTIC
    MAXIMUM REWARD
    DOUBT
    DEPRESSION
    I really got bad
    advice
    Was it right to
    sell ??
    THINGS CANT
    GET WORSE
    PANIC
    I will not do this
    again !!
    DESPONDENT
    MARKET CYCLE
    CAPITULATE
    DESPERATE
    I must get out.
    Cash is King
    FUND OUTFLOWS
  • 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
    MAXIMUM RISK
    GOOD NEWS
    STRONG GROWTH
    INFLATION LOW
    INTEREST RATES LOW
    THINGS CAN’T
    GET ANY BETTER
    START OF DOWN TURN
    INFLATION RISING
    INTEREST RATES RISING
    INFLATION MODERATING
    INTEREST RATES AT PEAK
    ECONOMY IN TROUBLE
    THINGS CAN’T
    GET ANY WORSE
    INFLATION FALLING
    INTEREST RATES DOWN
    GROWTH INPROVING
    MAXIMUM REWARD
  • The investment clock – the basic economic cycle
    Peak
    Expansion
    Slowdown
    Bottom
    20
  • The investment clock – inflation and growth
    FallingInflationRising
    Peak
    Expansion
    FallingInflation Rising
    Slowdown
    Bottom
    FallingInflationRising
    21
  • The investment clock – inflation and growth
    FallingInflationRising
    Peak
    Expansion
    FallingGrowthRising
    FallingGrowth Rising
    FallingGrowthRising
    Slowdown
    Bottom
    FallingInflationRising
    22
  • The investment clock – asset returns
    FallingInflationRising
    Neutral
    Equity
    Peak
    Expansion
    Sell
    Sell
    Max
    Underweight
    Equity
    Max
    Overweight
    Equity
    FallingGrowthRising
    FallingGrowthRising
    Buy
    Buy
    Bottom
    Slowdown
    Neutral
    Equity
    FallingInflationRising
    23
  • The investment clock – sector allocations
    FallingInflationRising
    Neutral
    Equity
    Peak
    Expansion
    Sectors
    Neutral Financials
    Overweight Resources
    Neutral Industrials
    Sell Banks
    Sectors
    Underweight Financials
    Neutral Resources
    Underweight Cyclical Industrials
    Overweight Staple Industrials
    Sell Resources
    Sell Cyclicals
    Sell Resources
    Sell Staples
    Buy Banks
    Buy Resources
    Buy Industrials
    Sell Banks
    Max
    Underweight
    Equity
    Max
    Overweight
    Equity
    FallingGrowthRising
    FallingGrowthRising
    Buy Cyclicals
    Buy Resources
    Sectors
    Overweight Financials
    Neutral Resources
    Underweight Industrials
    Sectors
    Neutral Financials
    Underweight Resources
    Underweight All Industrials
    Buy Banks
    Neutral
    Equity
    Bottom
    Slowdown
    FallingInflationRising
    24
  • Inflation
    falling
    rising
    Overheat
    Recovery
    rising
    Growth
    falling
    Contraction
    Stagflation
    Average return during the relevant phase since 1960
    Average annual asset class return since 1960
    Investment clock – back-tested asset class returns since 1960
    25
  • The investment clock – where are we now?
    FallingInflationRising
    Neutral
    Equity
    Peak
    Expansion
    Sectors
    Neutral Financials
    Overweight Resources
    Neutral Industrials
    Sectors
    Underweight Financials
    Neutral Resources
    Underweight Cyclical Industrials
    Overweight Staple Industrials
    2q 10
    3q 10
    1q 10
    4q 11
    4q 10
    Max
    Underweight
    Equity
    Max
    Overweight
    Equity
    4q 09
    2q 11
    FallingGrowthRising
    FallingGrowthRising
    2q 08
    3q 08
    1q 11
    1q 08
    3q 09
    Sectors
    Overweight Financials
    Neutral Resources
    Underweight Industrials
    Sectors
    Neutral Financials
    Underweight Resources
    Underweight All Industrials
    4q 08
    1q 09
    Neutral
    Equity
    2q 09
    Bottom
    Slowdown
    FallingInflationRising
    26
  • Some perspectives on marketsay and today
  • S&P 500 ten year performance
    S&P 500 Composite – 1/29/2010
    Source: Thomson Reuters Datasrear
  • USA Share Market
    Made very little money on USA shares for ten years
  • US equities close to 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 environment
    Sam 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)
    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 $1220
    Commodity currencies also benefitted with the Brazillian Real up 33%, the Rand up 28%, the Aussie Dollar up 24% and the Norwegian Krone up 20%
    Source: Appraisal News Online, Plexus Asset Management
  • Commodity fund flow - December 2009 Cumulative inflows by year
    US$ billions
    Source: JPMorgan and Bloomberg
  • ... but copper looks vulnerable to rising inventories
    Source: Citigroup Global Markets; 8 January 2010
  • China’s investment boom unprecedented
    GFCF/GDP of various countries
    Source: IMF, Pivot
  • Cement capacity in stratosphere
    Source: US Geological Survey, UN, Pivot
  • No surprises here - the market has leaped upward!
    The FTSE/JSE All Share Index (in ZAR) (26764.6)
    The JSE rose more than 100% in US$ since the beginning of March 2009 to December 2009
    -45.4%
    47.4%
    Source: I-Net Bridge
  • So we better see some earnings come through!
    Trailing PE: 17.4x
    EPS-growth: 30%*
    Forward PE: 13.4x
    Exit PE 14.5x
    Expected Return: 12%
    (3% DY)
    SA Equities: Earnings GrowthSince 1960 to end February 2010, Rolling 12-month %-change
    * I-Net consensus
    Source: I-Net Bridge
  • Markets can go sideways for an extended period
    Dow Jones: 1975 to 1982
  • Increased volatility offers opportunities for stock pickers
    Dow Jones: 1975 to 1982
    Cum.% p.a. %
    Warren Buffett, Berkshire Hathaway 676% 34%
    Sequoia Fund (Bill Ruane) 415% 28%
  • Increased volatility offers opportunities for stock picking
    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)
    Source: Empirical Research Partners, Legg Mason Capital Management
  • Discovery Equity FundTop 10 Equity Holdings (% of fund)
    ….the fund is VERY DIFFERENT to the market and the average fund
  • Discovery Equity Fund Cumulative performance as at 31 January 2010
    Source: Morningstar
    Returns are calculated on a bid-to-bid basis, net of fees, with gross income reinvested.
  • Summary – steadily shifting back into cautious mode
    “The central principle of investment is to go contrary to the general opinion”
    JM Keynes
    We anticipate a great environment for stock picking
    We are buying quality and under-valued laggards
    We are attracted to stocks with resilient, depressed or below average profit margins
    We 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 momentum
    Risk-premia across a variety of stocks and asset classes are way too low and investors should be more discerning from this point forward
    Equities should outperform bonds and cash. However, on a prospective basis, the return for equities could prove disappointing relative to current expectations
  • 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
  • Disclaimer
    All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity.  We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity.  No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation.  We endeavour to provide accurate and timely information but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions.  We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate.  Any representation or opinion is provided for information purposes only.  
    Investec Asset Management will not be held liable or responsible for any direct or consequential loss or damage suffered by any party as a result of that party acting on or failing to act on the basis of the information provided by or omitted from this document.  This document may not be amended, reproduced, distributed or published without the prior written consent of Investec Asset Management.
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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 fees and charges and maximum commissions is available on request from the company/scheme. Commission and incentives may be paid and if so, would be included in the overall costs. Forward pricing is used.
    Certain Investec Asset Management funds are offered as long-term insurance policies issued by Investec Assurance Limited, a registered insurer in terms of the Long-term Insurance Act.
    Investec Asset Management is an authorised financial services provider.
  • Questions and Answers?