Managing money in uncertain times Graeme Krner & Jean Hamann - PowerPoint PPT Presentation

Managing money in uncertain times Graeme Körner & Jean Hamann 13 th October 2018

South African Politics Indulge me

SA in 2017

SA in 2018…so much has changed But it isn’t easy…..

Challenges remain • The ANC is fractured • CR has to bide his time (this requires a general election) • The capturers are not giving up without a fight • The economy is languishing

SA in a technical recession

But challenges remain • The ANC is fractured • CR has to bide his time (this requires a general election) • The capturers are not giving up without a fight • The economy is languishing • Business confidence is awful

PMI looks awful

But challenges remain • The ANC is fractured • CR has to bide his time (this requires a general election) • The capturers are not giving up without a fight • The economy is languishing • Business confidence is awful • Inflation pressure is building

SA CPI – On the wrong side of the mid-point

Global perspective

It’s US against the world

US (Trump) tensions with the world • The big one – China – trade war, meddling in US politics, technology etc. • Europe – tensions around trade imbalances • Russia – Meddling in US politics • UK – Trump’s harsh criticism of UK handling of BREXIT • Mexico and Canada - NAFTA 2.0 • Japan – Trade imbalances • NATO – Trump questions the role of NATO • Korea – Trump ignoring long time ally South Korea • Nambia – the ultimate insult • And Iran, Haiti (and other “ Sh &*hole African countries”)

But – Isn’t Trump good for the US • Make America great is noble! • The US economy is flying • He is standing up against injustice • Unemployment is at record lows

US Unemployment has been falling for a while

But – Isn’t Trump good for the US • Make America great is noble! • The US economy is flying • He is standing up against injustice • Unemployment is at record lows • US corporate profits are soaring • US markets are flying

The problems however are • Global politics has become like an episode in a reality show • Makes the world very unpredictable • It is causing massive fault lines in long established economic, trade, military, political etc. relationships • US debt is soaring

US Debt – A ticking timebomb US Debt is up +- $2 tn. (9%) Since Trump Came into office

US debt seen differently Debt per US taxpayer is $ 177 284

The problems however are • Global politics has become like an episode in a reality show • Makes the world very unpredictable • It is causing massive fault lines in long established economic, trade, military, political etc. relationships • US debt is soaring • Seriously risks global growth

But it is not (in spite of what Trump may think) all about him

Global growth is okay – G20 GDP (annualised) 9 G20 Average growth is 2.7% 7 5 3 1 -1 -3 -5

Inflation is largely under control (but rising) Mexico 5.0 South Africa 4.9 Brazil 4.5 India 3.7 Russia 3.4 United Kingdom 2.7 United States 2.7 Inflation above targets China 2.3 Germany 2.3 France 2.2 Australia 2.1 Euro Area 2.1 Japan 1.3

State of Global Markets

Key Themes • Monetary Policy Normalisation • Developed Markets – Courtesy of improved economic conditions, looking to tighten (US and UK, with less liquidity from EU) • Emerging Markets – Fairly divergent views split into two camps • Raising Rates, reacting to inflationary pressure (SA, Argentina, Turkey, Mexico) • Remain accommodative to spur economic growth (China, India, Singapore)

Key Themes • Monetary Policy Normalisation • For the better part of a century, Equities have been Hobson choice • Global interest rates have not been attractive but with more sensible bond yields, investors will look to switch • Asset prices could come under pressure courtesy of: • Higher discount rates • Alternatives looking more attractive

Key Themes • Emerging Market Rout • Structural and Political issues remain a big concern • Bloated Fiscal deficits and Rising Inflation, resulting in rampant interest rate rises. • Credit Ratings pressure • Risk Off scenario on the back of trade tensions

Key Themes • Global Syncronised Growth not necessarily correlated in across the broad market performances • US markets remain the stand out performer • Other global indices remain under sustained pressure

Global Market Returns Index YTD 6M 1Y 3Y 5Y CSI300 (China) -19% -16% -16% -2% 35% JSE Top 40 (SA) -11% -7% -9% -2% 21% FTSE MIB (Italy) -10% -15% -12% -11% 5% DAX (Germany) -9% -6% -10% 16% 35% FTSE 100 (UK) -7% -2% -5% 11% 11% STXE 50 (Europe) -6% -2% -7% -4% 8% CAC (France) -2% -2% -3% 11% 23% NIFTY 50 (India) -1% 1% 4% 28% 74% ASX 200 (Australia) 0% 3% 5% 15% 18% NIKKEI 225 (Japan) 3% 8% 13% 27% 66% S&P 500 (US) 4% 5% 9% 38% 65% NASDAQ (US) 10% 6% 16% 61% 119%

Can US markets continue at this pace • US markets are currently in late cycle which could see a reversal • Valuations seem stretched • We have already seen 2019 earnings revised lower. Future earnings disappointments could result in large scale corrections (E.g. General electric)

State of Local Markets

Local Market Return Index YTD 6M 1Y 3Y 5Y JSE All Share -11% -7% -8% -1% 22% JSE op 40 -11% -7% -9% -2% 21% JSE Equal Weight -16% -11% -13% -16% -3% Listed Property -28% -12% -24% -22% 1% Industrials -20% -15% -20% -10% 27% Mid Caps -16% -13% -9% -2% 16% Financials -12% -11% 1% -6% 30% Small Caps -12% -11% -11% -9% 10% Resources 17% 19% 16% 13% -12%

Divergent Performances JSE All Share (1 Year Return) 35% 30% 25% 20% 15% 10% 5% 0% Less than - Between - Between -5% Between 0% Between 0% Between 5% Between 10% More than 20% 10% and - and -10% and -5% and 5% and 10% and -20% 20% 20%

Big Caps Fall from Grace - MTN

Big Caps Fall from Grace - Aspen

Big Caps Fall from Grace - Mediclinic

South African Bond Yields

Bringing it together

Chaos brings opportunity

Comparative yields 12,00% 10,00% 8,00% 6,00% 4,00% 2,00% 0,00% Cash Bonds Listed Property Equity Bank Prefs Excl. Tax After Tax (35%)

Cash • Was a great parking place • Yield sacrifice (to bonds and property) has grown • Look for pure cash…understand yield pick -up risks

Fixed income (bonds) • Yields over 9% present better prospects (esp. in retirement funds) • 9% - 4% = 5% return • Prefer to sit more in the medium end of the yield curve (e.g. 10 years) • Must watch for fiscal ill-discipline • We will be investing in bonds for the first time in many years

Listed property • We have avoided listed property for years as: • Many listed funds are ‘lazy’ • Yield pickups (over cash) was limited • Rental renewal pressure • Administered price pressure • Lots of space coming online • Looking better now, but one must be selective

Equity valuations Name DY PE PE1 TOP40 3,5% 10,6 8,7 ALL SHARE 3,7% 9,5 8,8 SMALL CAP 5,0% 2,4 5,8 SA LISTED PROP 9,3% 10,6 13,8 RESOURCES 4,2% 16,0 12,2 MID CAP 4,2% 14,3 12,1 INDUSTRIALS 2,4% 8,7 7,2 FINANCIALS 5,2% 11,2 10,1

Equities • Marking down of equities of late has created value • Preference for higher visibility counters • E.g. NAV plays • Higher dividend yields • Good opportunities in select mid and small caps • Look for companies that invested in themselves over past few years • Good opportunities in darlings that fell from grace

Shares to consider (now or only weakness) • Big cap NAV plays: Naspers, Reinet • Core equity holdings: Absa, Standard, Discovery, BHP Billiton, Sasol, Aspen, • Satellite shares to consider: City Lodge, EOH, Distell, Investec, Shoprite, Bidcorp, Pepkor, WBHO, Grand Parade, York, Foschini Group

Direct property • May be better off in assets you can manage yourself • Retail looks less certain than others • Brave investors may get bargains on the EWC fears

We believe the next few months will offer great opportunities to get good assets at bargain prices Be brave but not stupid!

Questions and discussion