AgendaFixed Income and Cash Investing   Introduction   Fixed Income Markets   Cash InvestingBroad Asset Allocations
Introduction
Fixed Income - Introduction•   An issuing authority (Government – Agency – Corporate – Municipality) issues a Bond    (aka...
Fixed Income Markets
Fixed Income – South African Bonds                                     investments
Risk assets within Fixed Income give most of Aug gains back    Source: INET6                                              ...
Risk assets still ahead for the year, strong base effects ahead    Source: INET7                                          ...
Market uncertain as to how risks play out    Source: Bloomberg8                                               investments
EM local currency debt vulnerable to global risk appetite                                     Cumulative Foreign Bond flow...
Fixed Income – Inflation Rate                                investments
Fixed Income – Real Return on Bonds                                      investments
Inflation expected to breach the upper 6%target by Q4 2011Headline CPI (%) year-on-year                                   ...
Source: StatsSA                                -30                                                      -15               ...
Traditional valuation metrics not very effective at present                                                    -’ve Output...
Cash – An investment opportunity?•   Cash (for an individual or a tax paying entity) is actually only a good investment wh...
Fixed Income – USA Government Bonds                                      investments
Fixed Income – USA Real Return                                 investments
The US of AA+US government debt as % of GDP     US government debt is near 100% of GDP.     Not AAA credit rating stuff.  ...
Barack Obama – 08 August 2011 “Markets will rise and fall, but this is the United States of America.   No matter what some...
Asset Allocation
Investment clockSource: Momentum Asset Management                                    investments
Fixed Income – Relative Valuation against Equity                                                   investments
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Wayne McCurrie on Fixed Income and Cash Investing

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Wayne McCurrie on Fixed Income and Cash Investing

  1. 1. AgendaFixed Income and Cash Investing Introduction Fixed Income Markets Cash InvestingBroad Asset Allocations
  2. 2. Introduction
  3. 3. Fixed Income - Introduction• An issuing authority (Government – Agency – Corporate – Municipality) issues a Bond (aka Gilt) where they promise to pay a certain % interest rate (mostly fixed) every six months for a certain number of years (duration) and the capital at the end of the period. There are also Inflation Linked Bonds and the so called zero coupon bonds.• The valuation is based on the ruling interest rates in the market, the duration of the bond and the credit rating of the issuer• Simplistically if 30 year interest rates are 10% and the issuer is issuing a 8% bond of R1m over 30 years, the issuer will be able to “sell” the bond at R1m / 10 * 8 = R0.800m• The purchased will “make” money if rates fall and “loose” money if rates rise. I.e. if you bought at an 8% yield and rates go to 9%, your investment is worth less.• The capital value at the end of a 30 year bond has very little value in the calculation• This is the same for ALL duration bonds (only overdraft has no duration)• You (normally) pay TAX on interest received investments
  4. 4. Fixed Income Markets
  5. 5. Fixed Income – South African Bonds investments
  6. 6. Risk assets within Fixed Income give most of Aug gains back Source: INET6 investments
  7. 7. Risk assets still ahead for the year, strong base effects ahead Source: INET7 investments
  8. 8. Market uncertain as to how risks play out Source: Bloomberg8 investments
  9. 9. EM local currency debt vulnerable to global risk appetite Cumulative Foreign Bond flows per calendar year 80 2000 60 2001 2002 40 2003 2004 20 R Bn 2005 2006 0 2007 2008 -20 2009 2010 -40 2011 -60 Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Source: INET9 investments 9
  10. 10. Fixed Income – Inflation Rate investments
  11. 11. Fixed Income – Real Return on Bonds investments
  12. 12. Inflation expected to breach the upper 6%target by Q4 2011Headline CPI (%) year-on-year Headline CPI (% yoy) 10 9 8 7 6 5 4 3 2 1 0 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13Source: I-Net, Momentum Asset Management, (August 2011) investments
  13. 13. Source: StatsSA -30 -15 -10 -25 -20 5 0 -5 20 25 10 15 Telecommunication (equip) Hotels Recreational equipment Furnishings Appliances Vehicles upside price risks Postal & telecom services Footwear the 3% lower target band 27% of the basket is below Personal care Clothing Medical products Maintenance & repairs Financial services Other (funeral costs) Owners equivalent rent Percentage change in CPI categories for 2011 Recreational services Insurance Tobacco 34% of the basket is within the target band Non-alcoholic beverages Actual rentals for housing Domestic worker wages Alcoholic beverages Food, fuel and administered prices remain Restaurants % y/y change in CPI categories for June 2011 Medical services Public transport Food Tertiary education Primary and secondary education Water & services the 6% upper target band Stationery, books 39% of the basket exceeds Private transport Electricity and fuelsinvestments
  14. 14. Traditional valuation metrics not very effective at present -’ve Output +’ve Output Global gap / gap / Current Deflation Reflation G4 Inflation Protected 0.50% 2.00% 0.00% Securities SA risk premium 2.00% 1.00% 2.43% Inflation exp (1 yr 4.00% 6.00% 5.50% fwd) Supply premium / 0.50% 0.00% 0.50% discount Fair Value 7.00% 9.00% 8.43% Source: Bloomberg, Momentum Asset Management14 investments
  15. 15. Cash – An investment opportunity?• Cash (for an individual or a tax paying entity) is actually only a good investment when everything else is falling• Scenario • Real yields (i.e. above inflation) will most likely average abut 3% over time • Inflation (optimistically) will probably average 5% over time • Therefore cash should give you 8% BEFORE TAX• Therefore if you are an individual at marginal tax rate – you will earn (after tax) LESS than the inflation rate.• You will at best stand still over time investments
  16. 16. Fixed Income – USA Government Bonds investments
  17. 17. Fixed Income – USA Real Return investments
  18. 18. The US of AA+US government debt as % of GDP US government debt is near 100% of GDP. Not AAA credit rating stuff. investments
  19. 19. Barack Obama – 08 August 2011 “Markets will rise and fall, but this is the United States of America. No matter what some agency say, we’ve always been and always will be a AAA country.”Source: Bloomberg investments
  20. 20. Asset Allocation
  21. 21. Investment clockSource: Momentum Asset Management investments
  22. 22. Fixed Income – Relative Valuation against Equity investments

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