investment opportunities: balancing act presented by: dawie roodt 6 march 2008
TRANSCRIPT
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Investment Opportunities:Balancing Act
Presented by: Dawie Roodt
6 March 2008
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“…The global economy grew by 5 per cent from 2003 to 2007. It was a period of robust expansion but also of
widening international imbalances. Now there are storm clouds ahead...”
- Minister Trevor Manuel, 2008 budget presentation
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In This Presentation:
1. South African Economic Trends
2. Investment and the Business cycle
3. Balancing risk and return
4. Balanced portfolio
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South AfricanEconomic Trends
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2006 2007 2008
M3 (end of year) 23.1% 23.7% 19.8%
PSCE (adj. end of year) 27.6% 22.2% 16.6%
CPIX (average) 4.6% 6.5% 8.1%
Prime (end of year) 12.5% 14.5% 14.5%
Current Account: Nom -R111.0bn -R138.2bn -R145.1bn
Current Account: GDP -6.4% -7.0% -6.5%
R/$ (end of year) 7.04 6.84 8.40
GDP (full year) 5.4% 5.1% 3.5%
Economic Overview
Financials - Banks
Financials Retailers
Positive for equity Negative for bonds
Neutral equitiesPositive bonds (short term)Negative bonds (long term) Positive for rand hedges
Negative for importers Negative for bonds
Positive rand hedgesPositive exportersNegative importers
Negative bondsNegative equities
Positive bonds
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South Africa:GDP
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GDP at Market Prices
GDP market prices, q:q seasonal
0
1
2
3
4
5
6
7
8
2002 2003 2004 2005 2006 2007 2008
%
Source: StatsSA and own calculations
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Monetary Policy
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Pressure on the Rand…
Inflation bracket
ZAR/USD & ZAR/EUR
500
600
700
800
900
1000
1100
1200
1300
2002 2004 2006 2008
ZAR cents
Source: SARB and own calculations
9/11
Aftermath- Bull run
-Stability
- Emerging Market Appetite
-US troubles
- Emerging Market Risk rising
- Global Inflation - Politics
- Eskom
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Inflation
Inflation bracket
CPI & CPIX
0
3
6
9
12
15
2002 2004 2006 2008
%
Source: StatsSA and own calculations
CPIX Ave: 5.9%
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Interest rates
Prime
10
11
12
13
14
15
16
17
18
2002 2004 2006 2008
%
Mboweni Ave: 12.8%
Toothless SARB
Source: SARB and own calculations
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Debt Levels
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Private Sector Credit Extension
PSCE (excl Bill & Investments) and Mortgage Advances
8
13
18
23
28
33
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
%
Source: SARB and own calculations
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Household debt to disposable income
Household debt to disposable income of households
40
45
50
55
60
65
70
75
1970 1975 1980 1985 1990 1995 2000 2005
%
Source: SARB and own calculations
44.5%
50.2%
56.9%
59.4%
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Savings to disposable income of households
Ratio of saving by households to disposable income of households
-2
0
2
4
6
8
10
12
1970 1975 1980 1985 1990 1995 2000 2005
%
Source: SARB and own calculations
9.2%
5.4%
2.6%
0.5%
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Balance of Payments
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Balance of Payments
Current Account vs Financial Account
-8
-6
-4
-2
0
2
4
6
8
10
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
% GDPBarclays/Absa
De Beers delisting
Sanctions liftedDebt Standstill
Source: SARS and own calculations
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Fiscal Policy
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Background
Revenue & Expenditure:GDP
20
21
22
23
24
25
26
27
28
29
30
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
%
Trevor’s reign!
Gold
Deficit
Surplus
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Investments and the Economic Cycle
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Consumption Expenditure
Consumption Expenditure: Private and Government (% change)
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
1990 1992 1994 1996 1998 2000 2002 2004 2006
%
C G
Source: South African Reserve Bank
Positive for retailers and consumer goods
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Gross Fixed Capital Formation
Gross Capital Formation (% change)
-12.0
-8.0
-4.0
0.0
4.0
8.0
12.0
16.0
1990 1992 1994 1996 1998 2000 2002 2004 2006
%
I
Source: South African Reserve Bank
Infrastructure boom
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Total Exports and Imports
Total Exports and Imports (% change)
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
1990 1992 1994 1996 1998 2000 2002 2004 2006
%
X M
Source: South African Reserve Bank
Trade Account Deficit
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Balancing Risk and Return
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Resources
• Pro’s– Value of sales – Boom in commodity prices– Global demand for resources– Weaker rand inflates income
• Cons– Production problems (labour, electricity, deep gold
mines, input costs)– Sustainability of high precious metal prices?– High P/E-ratio
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Mining and Quarrying GDP at Market Prices
Mining and Quarrying GDP market prices, q:q seasonal
-10
-8
-6
-4
-2
0
2
4
6
8
10
2002 2003 2004 2005 2006 2007 2008
%
Source: StatsSA and own calculations
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Mining Value of Sales
Inflation bracket
Mining Value of Sales, Seasonal Adjusted
-40
-20
0
20
40
60
80
100
120
2002 2003 2004 2005 2006 2007
% y:y
Mining sales
Source: StatsSA
Mining Value of Sales, Seasonal Adjusted
-40
-20
0
20
40
60
80
100
120
2002 2003 2004 2005 2006 2007
% y:y
Mining sales Platinum
Mining Value of Sales, Seasonal Adjusted
-40
-20
0
20
40
60
80
100
120
2002 2003 2004 2005 2006 2007
% y:y
Mining sales Platinum Gold
Bull Run
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Contribution of mineral groups to total value of mineral sales, 2006
Mining division Percentage contribution
PGMs 34.5%
Gold 18.7%
Coal 18.7%
Iron Ore 4.9%
Nickel 4.5%
Copper 2.7%
Chromium 1.1%
Manganese Ore 1.0%
Other 13.9%
Total 100.0%
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Resources: Price and PE
Inflation bracket
Price Index & PE Ratio
0
10000
20000
30000
40000
50000
60000
70000
2003 2004 2005 2006 2007 2008
Price
8
10
12
14
16
18
20
22
PE
Source: I-net
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Industrials
• Pro’s– Infrastructure development– Manufacturing drive (auto industry, etc)– Weaker rand support exports
• Cons– Electricity supply– Slower growth?
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Manufacturing GDP at Market Prices
Manufacturing GDP market prices, q:q seasonal
-6
-4
-2
0
2
4
6
8
10
12
14
2002 2003 2004 2005 2006 2007 2008
%
Source: StatsSA and own calculations
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Manufacturing Value of Sales
Inflation bracket
Manufacturing Value of Sales, Seasonal Adjusted
-10
0
10
20
30
40
2002 2003 2004 2005 2006 2007
% y:y
Manufacturing sales
Source: StatsSA
Manufacturing Value of Sales, Seasonal Adjusted
-10
0
10
20
30
40
2002 2003 2004 2005 2006 2007
% y:y
Manufacturing sales Basic iron and Steel
Manufacturing Value of Sales, Seasonal Adjusted
-10
0
10
20
30
40
2002 2003 2004 2005 2006 2007
% y:y
Manufacturing sales Basic iron and Steel Food and beverages
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Contribution to total value of manufactured product sales, 2006
Manufacturing division Percentage contribution
Basic iron and steel, metal products and machinery
22.2%
Petroleum, chemical products, rubber and plastic
20.5%
Food and beverages 17.2%
Motor vehicles, parts, accessories and other transport equipment
15.4%
Wood and wood products, paper, publishing and printing
8.6%
Other 16.1%
Total 100.0%Source: StatsSA
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Industrials: Price and PE
Inflation bracket
Price Index & PE Ratio
2000
6000
10000
14000
18000
22000
2003 2004 2005 2006 2007 2008
Price
8
10
12
14
16
18
20
PE
Source: I-net
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Financials
• Pro’s– Interest rate cycle (Domestic and global)– Global competitive institutions– Value for money (P/E basis)
• Cons– Sub-USA crisis– Pessimism towards sector– Uncertainty
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Finance, Real Estate and Business Services, GDP at Market Prices
Finance, Real Estate and Business Services GDP market prices
0
2
4
6
8
10
12
14
16
2002 2003 2004 2005 2006 2007 2008
%
Source: StatsSA and own calculations
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Financials: Price and PE
Inflation bracket
Price Index & PE Ratio
2000
3000
4000
5000
6000
7000
8000
9000
10000
11000
2003 2004 2005 2006 2007 2008
Price
8
10
12
14
16
18
PE
Source: I-net
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Construction
• Pro’s– Infrastructure boom (2010)– Interest rate cycle (Domestic and global)
• Cons– Supply constraints– Electricity
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Construction GDP at Market Prices
Construction GDP market prices, q:q seasonal
0
2
4
6
8
10
12
14
16
18
20
2002 2003 2004 2005 2006 2007 2008
%
Source: StatsSA and own calculations
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Construction and Material: Price and PE
Inflation bracket
Price Index & PE Ratio
0
10
20
30
40
50
60
70
80
90
100
2003 2004 2005 2006 2007 2008
Price
6
8
10
12
14
16
18
20
22
24
26
PE
Source: I-net
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Asset Allocation
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Investment Options
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Balanced Portfolio
Asset Class Portfolio Weighting Analysis
Equities Neutral
(Sector specific)
- Resources: strong but overvalued-Industrials: Electricity?-Financials: Uncertainty continues, undervalued- Construction: New projects?
Bonds Under - Weaker rand- Inflation- Supply (Fiscal Surplus)
Cash Neutral - Interest rates
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