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Brexit Update & is the JSE still the best place to achieve high growth?

Dear Investor

 

Six weeks after the referendum about Britain’s membership of the EU and since then stock markets have dropped off in panic and then recovered strongly.

This was an understandably emotional reaction to an unexpected decision (with several potential problems which need to be addressed within the UK). 

Now that Britain has appointed a solid new PM in Theresa May and she has appointed a new Chancellor of the Exchequer and other ministers of acceptable reputation, all is not lost in the minds of investors.   

The Pound is still weak, this is an opportunity, both for Europeans and for Americans as well as for South Africans.

For us, with the FTSE ALSI index on the JSE hovering between 52,000 and 53,000, in comparison with its highest level of 54,000-odd last year, the question is this “Is the JSE still a viable option for almost all of my hard earned cash?”.

In my opinion, the JSE is no longer the place for cautious equity investments.  This is because the large cap universe within the JSE is diminishing and the local stock market isn’t growing in the number of new counters very quickly.

This means that it is becoming an emerging market stock market.

There are a few really interesting stocks worth looking at, some new entrants such as Stor-Age and Sygnia, but these are not the type of stocks which large fund managers can buy as they are too small.

Fixed interest investments such as Money Market accounts are attractive at current rates.  So are low-equity and medium-equity Balanced funds as these are able to move between asset classes efficiently, unlike their pure equity (SA only) counterparts.

Where to invest one’s capital needing appreciable growth levels over the next several years (as against slower growth which is attainable through low and medium-equity Balanced funds)? 

Two serious options & one other possibility if foreign exchange control legislation relaxes:

1)       We need to buy hard currency into the recent Rand strength (be careful not to invest during a panic such as we experienced in recent months) and to invest that capital in well-diversified global portfolios

2)       We need to invest in flexible mandate funds which allow the managers to decide how much to invest in SA and how much to invest overseas    

3)       If Treasury allows further overseas exposure in local pure equity funds, they may provide a third option going forward.

We are feeling rather bullish this week after our own election.  Should this change the way we think about where the best long term high growth (when converted into Rands) investment destination is? 

Possibly we can expect a more bullish future ahead of us, possibly not.  It’s going to take more to convince me that the ANC government is going to eradicate corruption, get serious about education, free up the labour laws and to turn its back on populist rhetoric in favour of an honestly frank free market approach to governance.    

Kind regards

BRIAN GROOM

 

 

BREXIT RULES THE WAVES!

Dear Investor

Britain has voted to leave the EU.

This is a massive moment for all those in Britain who’ve been against associating with nations with whom they have very little in common.

It is also a vote against allowing foreigners to take over one’s country (maybe too late though).

It is also a vote of confidence in their own ability and ingenuity, after all the industrial revolution began in England and so did formal trading in companies.

I think it’s a huge vote for everything that’s British – such as the Queen and the Royal Family and about putting the pride back into being British – the Stiff Upper Lip

There are many questions which we want answered, many of them economic and financial, but for now, the excitement and the national fervor prevail, almost like when SA won the right to hold the 2010 Football World Cup.

The vote has gone one way, now the hard work, like repealing the EU Act in parliament, negotiating a gradual exit from all EU institutions over the next 24 months and so on, begins.

The stock markets and the Pound are falling and so they would as they reflect uncertainty ahead, but a new dawn has arrived and with it much opportunity for some and much fear for others, but have those groups now exchange places? Goodbye Mr Cameron, you have cast your vote and so has the nation! 

 

A few pertinent questions:

Is the future going to be better for Britain, for the EU, for global growth, for global cooperation?  Or is it going to become worse for all or some?  Did the Syrian and others stampede into Europe lead the Brits to this decision?  Does this mean that other EU states will now take a tougher line on accepting migrants into their countries?

WILL GERMANY INSIST ON A SIMILAR REFERENDUM??? If it does, then the EU could be doomed.

Have a great, exciting weekend!

The Intasure Team

To Exit or to Remain - what will the Brits decide?

In just under two days’ time the Brexit referendum will have taken place and the results will be about to be made public.

This decision, as superfluous as it may seem to those of us who do not have decent homes or even electricity, is one of the most important in recent decades.

The effects of a British EU exit are, to be honest, unknown.  But one thing is certain, they will be far-reaching and would change the trading landscape of the West forever.  

Britain may be too small to remain a leading trading country if it exits.

The EU may begin to disintegrate should Britain, one of its major members and a major donor to the EU (while most other members are net borrowers), leave the common market.

Angela Merkel, Chancellor of Germany is therefore understandably worried.  The other heads of state in the EU are too and they should be because most of them would not be able to continue sucking up money from their big brothers/sisters any longer.

An exit is fancied by many British nationalists.  They’ve had enough of the bullying tactics of ambitious continental politicians and the laziness of the French.  But, will an exit help them to regain the preserved loss of their sovereignty?  Or will it lead to Britain becoming a back-water in terms of trade and as importantly, will Britain lose its place as a major decision maker in the West? 

On Thursday we shall see whether emotion (the Exit supporters) or sense (the Remain supporters) prevail.

Regards from the team at Intasure Life

SA ten year govt bond yield vs selected ten year global bond yields

Dear Client

Have a look at the graph to see what the yields (reward for taking the risk of not having one’s capital returned at the end of the term to maturity – in this case, 10 years) selected countries are offering investors who purchase their government bonds which mature after 10 years (from March 2016).

Simply put, the higher the perceived risk at inception, the higher the issuer needs to pitch his coupon (the annual income yield to the client as expressed as a % of the capital sum invested) when marketing his debt instrument – 10 year sovereign or government bonds in this case.

These yields change during the term for those investors who wish to buy into the instrument (bond) during the investment term (rather than from the outset).  Smart investors will purchase a bond when it’s out of favour and the yield is therefore high.  The time to buy SA government bonds – unbelievably – is now!  Smart investors will sell out of a bond when its yield is low (sometimes the yield changes quickly, such as when Nene was fired).  It is often hard to buy more of an asset (in this case a debt instrument) after you’ve recently lost money by being invested in it.  That is what being a contrarian investor means.  Buy when your heart is telling you to sell.  Sell when it is telling you to buy. 

Our SA R186 (10 year bond) which matures just 9 months after those illustrated in the graph, is offering a yield of just a fraction lower than that offered by the Greek government’s 10 year bond.  Depending of your view of the SA government’s continued ability to repay you your capital in December 2026, you may want to buy into SA government bonds.

Graph illustrating the Global 10 Year Bond Yields

Dear Client

Have a look at the graph on the right to see what the yields (reward for taking the risk of not having one’s capital returned at the end of the term to maturity – in this case, 10 years) selected countries are offering investors who purchase their government bonds which mature after 10 years (from March 2016).

Simply put, the higher the perceived risk at inception, the higher the issuer needs to pitch his coupon (the annual income yield to the client as expressed as a % of the capital sum invested) when marketing his debt instrument – 10 year sovereign or government bonds in this case.

These yields change during the term for those investors who wish to buy into the instrument (bond) during the investment term (rather than from the outset).  Smart investors will purchase a bond when it’s out of favour and the yield is therefore high.  The time to buy SA government bonds – unbelievably – is now!  Smart investors will sell out of a bond when its yield is low (sometimes the yield changes quickly, such as when Nene was fired).  It is often hard to buy more of an asset (in this case a debt instrument) after you’ve recently lost money by being invested in it.  That is what being a contrarian investor means.  Buy when your heart is telling you to sell.  Sell when it is telling you to buy. 

As you can see from the notes to the right of the graph, our SA R186 (10 year bond) which matures just 9 months after those illustrated in the graph, is offering a yield of just a fraction lower than that offered by the Greek government’s 10 year bond.  Depending of your view of the SA government’s continued ability to repay you your capital in December 2026, you may want to buy into SA government bonds.

 

 

 

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GRAPH OF THE WEEK � Global 10 Year Bond Yields

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Yields on ten-year government bonds of selected countries worldwide as of March 2016

 

The graph represents the yields on ten-year government bonds in selected countries worldwide as of March 2016.

 

In that month, the yield on ten-year U.S. government bonds was equal to 1.88 percent.

 

The yield on the South African R186 which matures on 21 December 2026 is currently equal to 9.035 percent.

 

(Source: Sharenet)

 

http://i7.cmail20.com/ei/r/CE/73A/065/191530/monday%20mail%20%20v1.00.005%2020160425_files/image004.png

     
 

Can you find certainty in uncertain markets?

Dear Investor

 

The following article appeared in the financial media recently.  It is an extract from an interview with a member of Marriott’s investment committee, Lourens Coetzee.  I hope that it resonates with you so that we continue the discussion when we next meet or via e-mail.

Can you find certainty in an uncertain market?

Equity markets this year have been dominated by volatility and uncertainty. Concerns around economic growth, geopolitical instability and the threat of higher interest rates in the US have all played their part in creating a sense of unease about where markets are heading.

In these conditions it is very difficult for investors to identify reliable sources of return. Where is it possible to find any kind of stability?

What is often overlooked is that share prices are only part of the equation when it comes to equity investing. If one is focused on this aspect, current conditions can seem very disconcerting.

However, things look less daunting if one focuses on the other component of equity returns – dividends. Despite what share prices might be doing, if you can identify companies that are reliable dividend payers, you are securing some measure of certainty.

Dividend growth is also the biggest driver of capital growth over time. That means the more predictable dividend growth one can achieve, the more predictable capital growth will be.

To give some idea of just how important dividends are, consider that the FTSE All-share Index on the London Stock Exchange has produced a capital return of just 13% over the last ten years. However, if one adds in dividend payments, the total return has been 41%.

Identifying the right stocks

How, though, do you go about finding companies that are going to pay sustainable dividends going forward? With the caveat that when investing in equities you can never be 100% certain of anything, there are some key characteristics you can look out for.

The first is to limit yourself to well-established, large-cap companies listed on major exchanges. Start-up and smaller companies bring too much uncertainty.

Secondly, there must be an existing track record of dividend payments and a balance sheet that can support dividend distributions in the future. The company must also have prospects that will enable them to continue to grow dividends over time.

The third consideration is whether the company is well placed in the current economic environment. Locally, for instance, Foschini and furniture retailers like Lewis have been solid dividend payers, but their reliance on credit sales makes their business models less secure in an environment where the consumer is under pressure and interest rates are rising.

“We prefer companies that offer basic necessities, like Unilever and Colgate-Palmolive,” says Lourens Coetzee, investment professional at Marriott. “We also have exposure to the healthcare, tobacco, beverage and banking industries.”

Linked to this is the fourth consideration – screening out industries that are deeply cyclical, such as mining, where it is very difficult to know what next year’s earnings or dividends might look like. Marriott also excludes industries that are highly unpredictable, such as IT and technology.

“It is very difficult for us to know where the next big idea is going to come from,” Coetzee explains. “A good example would be if you had compared Apple and Sony in the late 1990s. Very few people knew Apple, and Sony offered market leading products like the CD walk-man and PlayStation. But today through developing products like the iPod and iPhone, Apple is twenty times the size of Sony. The lesson is that we don’t know who the next Apple is going to be.” 

Finally, it is important to look at any company-specific risks that may put future earnings and dividend growth at risk. This includes looking at issues such as whether margins are steady and how debt is being funded.

The companies that would make it through all of these filters generally tend to have five characteristics: they fulfil a basic need; have strong brands; enjoy pricing power; operate in growing markets; and have diversified earnings.

Pay the right price

While analysing stocks on this basis will help you identify those that are most likely to be reliable dividend payers, that doesn’t mean you should rush into buying them all straight away. It is still important to make sure you are not over-paying. 

Retirement Reforms - An update

Dear Investor

 

We’ve attached the latest explanation from Treasury regarding which retirement reforms are going to take place as at 1 March 2016 and those which aren’t.

 

Please read through this important article and let me have your questions. 

Retirement Annuities 101

Hi there

 

We’ve attached a very brief animated clip about saving towards your retirement by investing in a retirement annuity.

 

While this is clearly not the only way to save, it is a smart way to save if you are earning taxable income, because you could be enjoying a valuable tax break by investing in an RA.

 

Have a look and give me a call if you’d like to discuss this further.  

Watch a 1 min 48 sec video on why investing in an RA is a good idea.

 

regards

The Intasure Life team

Drought to be our biggest headache this year?

A Happy New year to you

 

Well, now that the pleasantries are over, lets cut to the chase

 

The year has started with similar nervousness to that experienced back in 2008 and we know what happened later that year!

 

Lets hope this time round things settle rather than worsen

 

Amongst various other obvious causes for concern amongst investors, such as our misguided president, high and increasing unemployment, rising inflation, over-valued sectors on our stock market, social unrest, there is new threat that needs to be considered in our planning: The Drought

 

South Africa hasn’t experienced a drought like the one we are now dealing with, for some years.  The effects of this drought are not yet fully understood, but some economists predict that it could push food inflation as high as 20 or even 30%.  This is because the worst hit farmers are having to shoot their weaker livestock before getting them to the abattoir due to their extreme weakness and their inability to get onto trucks.

 

Farmers then earn less when this clearly low quality meat reaches the abattoirs.  This also means that there is a glut of red meat reaching the market currently, although more and more of it is of low quality.

 

Importantly, many farmers will have no livestock left to bring to the market in a few months’ time which will lead to a shortage of red meat and this could lead to red meat needing to be imported later in the year according to some economists.

 

We need to prepare for even more difficult times ahead, very soon, in fact.  Our already poor savings culture is under threat and now is the time to start refusing to buy those items which we really don’t need.

 

If we prepare for the worst, we shouldn’t be disappointed by the reality that we are dished up later in the year.

 

Let’s hope that these predictions are incorrect.  If not, then we need to be positioned to deal with them.

 

Best wishes

The team at Intasure Life Pty Ltd

Markets jittery on several fronts

 

You will no doubt also be feeling rather edgy after recent developments in both local and overseas stock and bond markets.

 

Last week we lost around 9% on the bond market while the currency lost even more and local bank shares specifically lost 20% on average.

 

Overseas there are concerns that the government bond markets have become over extended in general.

 

Despite Pravin Gordhan having been appointed as the replacement Finance Minister on Sunday night, local equities, bonds as well as the Rand have still not fully recovered their losses of last week.

 

The opinion of some analysts is that Jacob Zuma’s actions of last Wednesday have now moved South Africa into the sub-category of those Emerging Markets which have unstable political outlooks meaning that our overall investment attractiveness now faces an additional headwind.  Of course, this new trend may be a positive one for locals as the possibility of Zuma being told to vacate his position as president is now a slight possibility, while for overseas investors the new uncertainty on the political front is not a welcome development.

 

The next few months will indicate where our country is headed politically, and in the interim markets of all sorts will suffer due to the increased perception that we are not an investor-friendly destination, for the moment anyhow.

 

A cautious stance is prudent in these uncertain times and radical changes to portfolios and currency mixes at this time are not wise.  Portfolios should ideally have been cautiously positioned some months ago and the Rand should recover, at least to some degree, in the coming weeks.

 

We would like to wish you a safe, relaxing and happy festive season.  

 

The team at Intasure Life