4. 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…
5. 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
6. 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
7. 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
8. 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
10. 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
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14. 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
15. 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
16. 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
17. 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
18. 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
19. 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
20. The investment clock – the basic economic cycle Peak Expansion Slowdown Bottom 20
21. The investment clock – inflation and growth FallingInflationRising Peak Expansion FallingInflation Rising Slowdown Bottom FallingInflationRising 21
22. The investment clock – inflation and growth FallingInflationRising Peak Expansion FallingGrowthRising FallingGrowth Rising FallingGrowthRising Slowdown Bottom FallingInflationRising 22
23. 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
25. 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
34. …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
35. The US market has recovered astonishingly quickly….. Source: Macquarie Research; Quarterly Strategy, 27 January 2010
36. 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
37. 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
38. 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
39. 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 $1220 Commodity currencies also benefitted with the Brazillian Real up 33%, the Rand up 28%, the Aussie Dollar up 24% and the Norwegian Krone up 20% Source: Appraisal News Online, Plexus Asset Management
40. Commodity fund flow - December 2009 Cumulative inflows by year US$ billions Source: JPMorgan and Bloomberg
41. ... but copper looks vulnerable to rising inventories Source: Citigroup Global Markets; 8 January 2010
44. 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
45. 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
46. Markets can go sideways for an extended period Dow Jones: 1975 to 1982
47. 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%
48. 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
49. Discovery Equity FundTop 10 Equity Holdings (% of fund) ….the fund is VERY DIFFERENT to the market and the average fund
50. 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.
51.
52. 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
53. 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
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