Protect and build your wealth in market volatility
Table of Contents Understanding volatility 3 4 Method #1: Avoid volatility 6 Method #2: Manage volatility 8 Method #3: Ignore volatility 13 What happened last year? Emerging markets versus developed markets 17 4 18 Local and global investment themes Three stock picks 21 2
JSE Power Hour: Profiting in a volatile market “Volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.” - Investopedia 3
Method #1: Avoid volatility The linear payoff profile Stick you cash in the money market. Currently you’ll get just over 7.5% on your cash. Your payoff profile is linear so after one year, so you’ll have exactly 7.5% more than you did the year before. SARB says inflation (CPI) is growing at 7%. The risk of course is that your personal inflation basket is growing at more than 7.5%. But it does take the volatility out of investing. 4
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Method #2: Manage volatility through uncorrelated investments and diversification Hedge funds, alternative investments, etc. A hedge fund's purpose is to maximise investor returns and eliminate risk, hence the word "hedge." The name "hedge fund" came into being because the aim of these vehicles was to make money regardless of whether the market climbed higher or declined. This was made possible because the managers could "hedge" themselves by going long or short stocks (shorting is a way to make money when a stock drops). 6
Warning: These are not outside the risk reward relationship. They only provide valuable portfolio diversification. 7
Method #3: Keep calm and carry on Volatility is almost synonymous with “sell - off” The share market is prone to volatility, but sell-offs provide a valuable entry point for new money. The only time you should panic in the stock market is if don’t have the time to wait out the dip. And if you have an investment time horizon of less that two years you’re in the wrong product! 8
Long only exposure 9
The detailed version 10
The simple version And so most stockbrokers eventually become psychologists 11
So now that we’ve looked at three ways for you to manage volatility. Let’s look at what’s working for us. 12
What happened last year? “ U.S. stocks are now about 80% overvalued. ” - Prophetic economist Andrew Smithers warns, July 18 th 2014 “ The public is walking into a trap again as they did in 2007. ” - Billionaire Carl Icahn, June 14 th 2015 … e ven the Royal Bank of Scotland says the markets are flashing stress alerts akin to the 2008 crisis. They told their clients to “ Sell Everything ” because “ in a crowded hall the exit doors are small. ” January 11 th 2016 13
First flag: Central Banks have little room to work with Second flag: The European debt situation Third flag: The unemployment picture is not as rosy as it seems Fourth flag: The China bubble? Sticking your head in the sand is not always Fifth flag: Commodity price surge… collapse? the best solution. Sixth flag: Economic data shows patterns similar to right before the last recession WARNING LABEL: We’re talking about relative management and economies are 14 complex adaptive systems and forecasting their behaviour is incredibly tricky.
What’s happening in the US, Europe and China The world has changed significantly. • The US is … • Europe is … • China is … 15
Central Banks are running out of ammunition The world has changed significantly. Rate hiking cycle does not look as • Banking regulations have changed aggressive as people expected… with Basil III. • Lower commodity prices. • An international perspective from the Fed. 16
Emerging markets versus developed markets Strong rebound in Q1. • Resources rally hard. • USD weakening. • Trend still in place. 17
Key global investment themes US interest Monetary policy divergence : We see lopsided economic growth, US leading GDP growth in the developed world whilst other economies are muted with dissimilar trajectories . US rates rising and strengthening the dollar : increasing demand for the dollar due to potential rate hikes in 2016 by the Fed – short-term weakness on Fed outlook can change quickly. FOCUS ON COMPANYS WITH INTERNAL REVENUE GENERATION Weak commodity prices : Fundamentals haven’t changed. S train on commodity exporters and benefit to importers FOCUS ON CONSUMER STOCKS European and Asian central banks continue to be accommodative but revenue not growing AVOID HIGH PE GROWTH STOCKS AS UNCERTAINTY INCREASES Worries over Chinese stock market volatility have stabilized but growth persist. EMBRACE TECHNOLOGY & DEMOGRAPHIC DIVIDEND Emerging markets vulnerable to developed world currencies and asset flows PORTFOLIO APPROACH – BECOME A “GLOBAL NEUTRAL INVESTOR” 18
Key local investment themes Weak currency importing higher inflation NEED PRICING POWER and MOAT/FEW SUBSTITUTES AVAILABLE Interest rate hiking cycle BULLISH BANKS/FINANCIALS – BEARISH RETAIL Drought putting pressure on food prices TRANSITORY Consumer discretionary income squeeze NOT CONSUMER FOCUS INSTEAD DEFENSIVE/B2B with CASH Unemployment 19
“You don’t have to be a genius to know what a good company is” – David Shapiro View investments from 1. Buy below intrinsic value. 2. Has the company got a track record different angles Checklist of growing revenues and earnings? 3. Does the company have a 3 year total return +20% competitive advantage that will Increasing revenue over 5 years assist it in growing and maintaining Increasing earnings over 5 years higher margins? The moat? Increasing dividends 4. PE’s price in expectations – form Increasing gross margin your own expectations and know Increasing ROE what others are expecting. Outstanding shares stable or 5. Look at management – Do you decreasing trust them with your money? PE, P/B, P/S, PEG, FPE in range 6. How does the company reward you Current ratio, LT-Debt/Equity the shareholder? Buybacks and Management quality dividends? 7. No smoke without fire – Exit! Fundamental, technical and quantative 20
Stock picks 21
Stock Pick #1: AdaptIT Adapt IT Holdings Limited is engaged in providing information Fundamental Metric’s technology (IT) services and solutions. The company provides solutions and services to the manufacturing, education, financial services and PE: 24.34 (EOH 28.58) energy sectors. The company also provides packaged and custom application development services on the Oracle, Microsoft, SAP and 12M Total Return: 36.18% IBM platforms. The company operates through four divisions located in Johannesburg, Pretoria, Durban and Cape Town. The company Dividend Yield: 0.89% operates through the following segments: Education, Manufacturing, Financial Services, Energy and Other. Its subsidiaries include Adapt IT Mcap: R1.72 bn EOH R19.26 bn) Pretoria, Adapt IT Durban, ApplyIT (Pty) Ltd and Adapt IT Johannesburg. The Company operates a Knowledge Centre at Zwakele CEO: Sibusiso Shabalala Primary School in Amaoti. 22
Stock Pick #2: Steinhoff International Fundamental Metric’s Steinhoff International Holdings NV is a Germany-based company that is active in the retail of household goods, apparel, as well as in the automotive industry. The household goods business area includes the retail of furniture, PE: 14.45 building materials and consumer electronics through the Company's subsidiaries Lipo Einrichtungsmaerkte, Poco and Conforama. In the apparel business area the Company operates, among others, through Pepco and is engaged 12M Total Return: 12.28% in retailing of women's, men's and children's wear, shoes, and accessories. The Automotive business area includes car rental activities through its subsidiary Hertz, as well as logistics services, warehousing and distribution, Dividend Yield: 1.87% agricultural services, supply chain consulting, mining services and passenger transport through its subsidiary Unitrans. The Company operates as a holding company and is present in Europe, Asia, Africa and Australia. Mcap: € 22.07 bn (R363.75 bn) CEO: Markus Jooste 24
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