current Price Forward Dividend
Share price Earnings PE Yield
Peregrine 11.70 9.50 8.14 2.68%
Basil Read 12.30 4.33 4.33 3.47%
Old Mutual 13.97 16.71 8.24 2.11%
These are the shares I would buy for 'n longer term portfolio. The only one which I would buy at a lower level is Old Mutual at round R13.20. They are all lagging the market and Peregrine will publish good results for Y/E 2011. Basil Read is cheap and when construction recovers in a year or two I would like to have this one in my portfolio. Old Mutual might benefit from corporate action.
Peregrine might go down to R11.50 which is a very good level and Basil might go to R12.20. If this should happen I would buy some more.
Later
G
Tuesday, January 18, 2011
Wednesday, January 12, 2011
Investing 2011
Better than expected!
That sums up 2010. The 10 shares I chose in April 2009 and discussed in my June 2009 Blog returned 64% over the last 20 months and you can add 6% for dividends paid by them. At the beginning of 2010 I thought the JSE All Share Index would give us 9% for the year, it gave us 16% to which you can add 3% dividends. This year my crystal ball tells me that we should end the year 7.42% up at 34 503 points on the JSE. You can add another 3% for dividends so the return on an investment in the SA share market should give you 10.42% after tax. The market always over react so add a 10% to the 34 503 and the JSE ends on 37 953 points, that is a return of 18% excl dividends.
Cash will probably give you the same as 2010 which was a taxable 6.9% which is just pathetic.
So, you can clearly see that 2011 should be another good year for equities. As I mentioned in my November 2010 Blog, the companies which I think will perform well are American Multi Nationals and SA companies with a well established footprint in Africa.
"What about the Rand!"......you shout. Well, what about it? Who cares. It is overvalued and will get back to parity sometime. Don't delay making international investments just because you think the Rand will go to R6 against the US$. This is a long term game and the investment in the company you buy will always outperform the short term value of a currency!
When do I invest? I think the markets will come down about 7% before end of Feb 2011 which will give us a better buying opportunity. I have to mention that I thought the markets would come down at the end of September 2010 as well and lost some good money when I bought a Put option on the JSE Top 40 index to hedge my long term portfolio!
So, if you have cash you want to invest for the longer term (5 years plus), perhaps invest one third every month for the next 3 months.
If you do not have any investable cash but you have a job, fab! Earning an income not only provide us with pride in our abilities but also the most powerful financial tool. Just remember not to spend any money on buying a new car if you have one that does what it needs to do just because some dog tells you to!
I will cover a new product from Momentum Wealth in my next blog which gives you protection on the downside of the JSE Top 40 index but also participation in the growth over the next 3 years.
I will also use this Blog in future to share with you some stock tips (shares I believe offer value) and would appreciate the same from you.
That sums up 2010. The 10 shares I chose in April 2009 and discussed in my June 2009 Blog returned 64% over the last 20 months and you can add 6% for dividends paid by them. At the beginning of 2010 I thought the JSE All Share Index would give us 9% for the year, it gave us 16% to which you can add 3% dividends. This year my crystal ball tells me that we should end the year 7.42% up at 34 503 points on the JSE. You can add another 3% for dividends so the return on an investment in the SA share market should give you 10.42% after tax. The market always over react so add a 10% to the 34 503 and the JSE ends on 37 953 points, that is a return of 18% excl dividends.
Cash will probably give you the same as 2010 which was a taxable 6.9% which is just pathetic.
So, you can clearly see that 2011 should be another good year for equities. As I mentioned in my November 2010 Blog, the companies which I think will perform well are American Multi Nationals and SA companies with a well established footprint in Africa.
"What about the Rand!"......you shout. Well, what about it? Who cares. It is overvalued and will get back to parity sometime. Don't delay making international investments just because you think the Rand will go to R6 against the US$. This is a long term game and the investment in the company you buy will always outperform the short term value of a currency!
When do I invest? I think the markets will come down about 7% before end of Feb 2011 which will give us a better buying opportunity. I have to mention that I thought the markets would come down at the end of September 2010 as well and lost some good money when I bought a Put option on the JSE Top 40 index to hedge my long term portfolio!
So, if you have cash you want to invest for the longer term (5 years plus), perhaps invest one third every month for the next 3 months.
If you do not have any investable cash but you have a job, fab! Earning an income not only provide us with pride in our abilities but also the most powerful financial tool. Just remember not to spend any money on buying a new car if you have one that does what it needs to do just because some dog tells you to!
I will cover a new product from Momentum Wealth in my next blog which gives you protection on the downside of the JSE Top 40 index but also participation in the growth over the next 3 years.
I will also use this Blog in future to share with you some stock tips (shares I believe offer value) and would appreciate the same from you.
Friday, November 19, 2010
Investments in the year that was 2010 and the year that will be 2011
Looking back at 2010 we can see that investments made so far favoured the brave, with year to date returns (30/9/2010) as follows:
· SA Equities 8.7% (13% end October)
· SA Bonds 14%
· SA listed property 25.68%
· Rand/Dollar 5.4% stronger
· Foreign Equities 0.92% in US$
· Emerging market equities 8.7% in US$
· SA Cash 5.28% (3.17% after 40% tax)
· Inflation 2.84%
At the beginning of 2010 I expected equities to outperform Cash and inflation and hoped that the JSE All Share would reach 31 815 points (15% for the year). These expectations were based on the state of the world economy at that time and the fundamental valuations for the different asset classes.
I knew that interest rates had to come down and that holding money in cash could not be seen as an investment. I believed that the South African Rand should be above R8 to the Dollar and that where you had very little or no international equity exposure you should make use of the strong Rand to invest in those markets. Here I have been a tad premature and the Rand surprised.
I advised clients to remain true to strategic asset allocation principals when investing money and to follow the following specific guidelines:
· For money required in the next 3 years: Invest in cash
· For money required in 4 years from now: Invest in Preference Shares
· For money required 5 to 9 years from now: Invest in Balanced Funds
· For money required only in 10 years and later: Invest in Equity Funds
This strategy would have ensured sufficient cash for short term expenses and would have ensured participation in any growth in equities. The following example demonstrates the outcome:
For a 60 year old client investing R2.5mil, needing R10 000pm after tax to spend, the following investments with allocations and returns materialised year to date 31 October 2010:
· SA Cash 15% allocation 5.76%
· SA Preference Shares 5% allocation 12.96%
· Balanced Funds 28% allocation 11.90%
· SA Equity Funds 31% allocation 16.05%
· International Equity 21% allocation 1.51%
This portfolio provided a 10.15% average return for the year till 31 October 2010 (7.22% real).
At the beginning of 2010 there was still a lot of uncertainty as to the sustainability of the world recovery. The SA equity market has performed well during 2009 and the big question was whether the companies would be able to support the inflated share prices by generating higher earnings. This proved to be the case. The JSE lived up to my prediction of being very volatile and bounced between 26 500 and 28 500 points until October.
Then the US decided to approve the second Quantitive Easing Package (QE2) worth US$600bil, and people started investing in shares and bonds again. Year to date we have seen R60bil flowing to SA bonds and 20bil to SA shares.
The problem for 2011 and beyond
In short we can say that the developed world (USA and Europe), still experience a lot of problems. The US is printing $ to get the economy going which in turn weakens the $ and makes the US exports cheap but also strengthen the currencies of developing countries like SA, making our Rand too strong and thus our exports very expensive.
The low interest rates in the US (0.25%) combined with the massive amount of money the government is printing motivates investors to look for places to invest. In SA they can get 6-7% on bonds and up to 5% dividends in some blue chip shares. The result is international investors buying SA shares at rather expensive valuations.
The problem is that one day, in a couple of years from now, the abundance of money is going to give rise to inflation which will in turn see US interest rates rise. That will spark a sudden and severe turnaround of capital flows, seeing international investors selling their expensive SA shares and bonds and relocating the money to the US.
The Rand will fall out of the sky like a rock and probably overshoot any rational level against the $, spiking SA inflation with the resulting rising of interest rates and eventually company earnings coming under pressure and any overvalued shares taking a nosedive.
When all of this might play out I don’t know. The only thing we can do now is to make rational decisions based on fundamental valuations using information of the day. I would therefore recommend the following investment approach based on asset allocation:
·Cash: only hold cash where you will need to spend it over the next 3 years.
·Preference Shares: Margins on these shares have fallen away and should be replaced by balanced funds.
·Balanced funds: The managers of these funds should be in a good position to manage funds for the medium term return.
·SA equity funds: It will be risky to invest in a SA share index like the JSE All Share. The selection of individual shares will be crucial to ensure that only cheap (value for money) shares are held in the portfolio.
·International equity: There are many international companies that are still very good value for money. One should utilise the strong Rand to invest in these companies. This will also protect against a weakening of the Rand.
Selecting specific shares
As I have predicted in 2009, shares were priced very attractively after the 2008 selloff and a general re-rating was a big probability. Investing in an index fund with the low cost advantage would have been a good choice. Going into 2011 things are very different. Most fund managers agree that shares in general might disappoint and the selection of specific companies will be very important.
The following two areas are highlighted as good potential:
· SA Equities 8.7% (13% end October)
· SA Bonds 14%
· SA listed property 25.68%
· Rand/Dollar 5.4% stronger
· Foreign Equities 0.92% in US$
· Emerging market equities 8.7% in US$
· SA Cash 5.28% (3.17% after 40% tax)
· Inflation 2.84%
At the beginning of 2010 I expected equities to outperform Cash and inflation and hoped that the JSE All Share would reach 31 815 points (15% for the year). These expectations were based on the state of the world economy at that time and the fundamental valuations for the different asset classes.
I knew that interest rates had to come down and that holding money in cash could not be seen as an investment. I believed that the South African Rand should be above R8 to the Dollar and that where you had very little or no international equity exposure you should make use of the strong Rand to invest in those markets. Here I have been a tad premature and the Rand surprised.
I advised clients to remain true to strategic asset allocation principals when investing money and to follow the following specific guidelines:
· For money required in the next 3 years: Invest in cash
· For money required in 4 years from now: Invest in Preference Shares
· For money required 5 to 9 years from now: Invest in Balanced Funds
· For money required only in 10 years and later: Invest in Equity Funds
This strategy would have ensured sufficient cash for short term expenses and would have ensured participation in any growth in equities. The following example demonstrates the outcome:
For a 60 year old client investing R2.5mil, needing R10 000pm after tax to spend, the following investments with allocations and returns materialised year to date 31 October 2010:
· SA Cash 15% allocation 5.76%
· SA Preference Shares 5% allocation 12.96%
· Balanced Funds 28% allocation 11.90%
· SA Equity Funds 31% allocation 16.05%
· International Equity 21% allocation 1.51%
This portfolio provided a 10.15% average return for the year till 31 October 2010 (7.22% real).
At the beginning of 2010 there was still a lot of uncertainty as to the sustainability of the world recovery. The SA equity market has performed well during 2009 and the big question was whether the companies would be able to support the inflated share prices by generating higher earnings. This proved to be the case. The JSE lived up to my prediction of being very volatile and bounced between 26 500 and 28 500 points until October.
Then the US decided to approve the second Quantitive Easing Package (QE2) worth US$600bil, and people started investing in shares and bonds again. Year to date we have seen R60bil flowing to SA bonds and 20bil to SA shares.
The problem for 2011 and beyond
In short we can say that the developed world (USA and Europe), still experience a lot of problems. The US is printing $ to get the economy going which in turn weakens the $ and makes the US exports cheap but also strengthen the currencies of developing countries like SA, making our Rand too strong and thus our exports very expensive.
The low interest rates in the US (0.25%) combined with the massive amount of money the government is printing motivates investors to look for places to invest. In SA they can get 6-7% on bonds and up to 5% dividends in some blue chip shares. The result is international investors buying SA shares at rather expensive valuations.
The problem is that one day, in a couple of years from now, the abundance of money is going to give rise to inflation which will in turn see US interest rates rise. That will spark a sudden and severe turnaround of capital flows, seeing international investors selling their expensive SA shares and bonds and relocating the money to the US.
The Rand will fall out of the sky like a rock and probably overshoot any rational level against the $, spiking SA inflation with the resulting rising of interest rates and eventually company earnings coming under pressure and any overvalued shares taking a nosedive.
When all of this might play out I don’t know. The only thing we can do now is to make rational decisions based on fundamental valuations using information of the day. I would therefore recommend the following investment approach based on asset allocation:
·Cash: only hold cash where you will need to spend it over the next 3 years.
·Preference Shares: Margins on these shares have fallen away and should be replaced by balanced funds.
·Balanced funds: The managers of these funds should be in a good position to manage funds for the medium term return.
·SA equity funds: It will be risky to invest in a SA share index like the JSE All Share. The selection of individual shares will be crucial to ensure that only cheap (value for money) shares are held in the portfolio.
·International equity: There are many international companies that are still very good value for money. One should utilise the strong Rand to invest in these companies. This will also protect against a weakening of the Rand.
Selecting specific shares
As I have predicted in 2009, shares were priced very attractively after the 2008 selloff and a general re-rating was a big probability. Investing in an index fund with the low cost advantage would have been a good choice. Going into 2011 things are very different. Most fund managers agree that shares in general might disappoint and the selection of specific companies will be very important.
The following two areas are highlighted as good potential:
Established international companies with a big part of their earnings being generated in the BRIC countries and
Companies with an established infrastructure in Africa.
Conclusion
It seems as if most investment professionals agree that although shares are not cheap, sitting in cash will produce no return, and that whilst the US keeps on printing money, and developed countries keep interest rates low, the place to be will still be shares, specifically those companies with close ties to the BRIC countries and Africa, as well as undervalued Blue Chip US shares.
We know that this is a party that will continue for a while longer and that the hangover is going to be severe one day, but over the longer term those investors attending the party with a good supply of headache tablets will have the benefit of good memories one day, although having to have stayed in bed for a day or two at one point.
Tuesday, November 2, 2010
Reply on comment received regarding Satrix posting
I would like to reply to a comment received on my Jan 2009 Blog regarding investing in Satrix.
If you make any comments and would like me to reply to them, please share your e-mail address.
My reply:
If you consider the time my blog was posted you will notice that it was the 12 Jan 2009. The 2008 Market Crash was very fresh in our minds and nobody had any idea where the bottom of the market was going to be. If you invested your R20 000 all at once on the 12th, you would have had -18% return 2.5 months later. JSE All Share went from 22 183 to 18 120! That would have destroyed the confidence of already shattered investors.
It would have taken 6 months to get back to your R20 000 investment.
So, the reason the “Rand Cost Averaging” principal (phasing in) was more important than the “economies of scale” principal was due to the uncertainty in the market at that stage.
If you make any comments and would like me to reply to them, please share your e-mail address.
My reply:
If you consider the time my blog was posted you will notice that it was the 12 Jan 2009. The 2008 Market Crash was very fresh in our minds and nobody had any idea where the bottom of the market was going to be. If you invested your R20 000 all at once on the 12th, you would have had -18% return 2.5 months later. JSE All Share went from 22 183 to 18 120! That would have destroyed the confidence of already shattered investors.
It would have taken 6 months to get back to your R20 000 investment.
So, the reason the “Rand Cost Averaging” principal (phasing in) was more important than the “economies of scale” principal was due to the uncertainty in the market at that stage.
Congrats to all equity investors!
This will not take a lot of time. I want to take you back to my blog posted on 28/4/2009. Just a short re-con:
Cash then at prime interest rates, 13%, cash now 9.5%, that is a 27% drop!
Shares then 20 000 points on JSE, now 30 500, that is a 53% climb!
The combined difference of investing in shares rather than cash over the last 17 months was 80%!!
For those of you who used the opportunity to invest in shares, well done! This will not happen again soon.
The strategy going forward should be:
Cash then at prime interest rates, 13%, cash now 9.5%, that is a 27% drop!
Shares then 20 000 points on JSE, now 30 500, that is a 53% climb!
The combined difference of investing in shares rather than cash over the last 17 months was 80%!!
For those of you who used the opportunity to invest in shares, well done! This will not happen again soon.
The strategy going forward should be:
- Don't panic when the shares drop back a bit, it has to happen!
- Continue investing on a monthly basis rather than big lump sums if you can.
- The next few years should see the Rand weaken and inflation picking up, investing in international shares now should benefit from the weaker Rand.
- SA Bullion sells Kruger Rands at round 5.5% cost. Gold will do well when Rand weakens against the $ and if the Gold price remains high. I am not a keen buyer of Gold but if you are then you might get something back in a few years from now.
It is almost end of the year. We will reflect on the past 12 months and look at 2011 in a month or two.
Thursday, September 23, 2010
Remember Zimbabwe!
It is a Sunday afternoon, 16 April 2000. A white farmer lies dead on his farm in the district of Macheke, Zimbabwe. His name was David Stevens.
In 1980 Zimbabwe gained its independence and Mugabe became the leader of the country. Every white person feared the worst and many left the country but for 20 years the country prospered. Then it all imploded and lives, families and fortunes were wiped out.
September 2010, Durban, South Africa. The ANC Youth League screams for Nationalization of mines. The implementation of a Media Tribunal is imminent and the redistribution of wealth is not "satisfactory". It is 16 prosperous years since the ANC came into power. Unemployment is rife and only the selected few ANC top brass became obscenely rich since transformation began. Government officials are living like kings and family members of the President became multi millionaires over night.
Why am I telling you this? Not because I believe that South Africa is going to implode soon or on the other hand that that South Africa is not a Zimbabwe, but for one reason only:
The future is uncertain; you have to put your eggs in different baskets!
In 2006 the Zimbabwe Dollar (Z$) was pegged at Z$101 000 for 1US$. On the black market however, the exchange rate was Z$300 000 for 1US$. This rate, as we all know, deteriorated 100 fold over the last couple of years. The irony in it all is that the Zim fat cats and ruling party officials made millions of US$ with the weakening of the Z$ because only they were allowed to buy US$ at the official rate. This is how it worked:
FAT CAT takes Z$10.1mil and buys US$100 (using official exchange rate)
FAT CAT goes to black market and exchanges US$100 for Z$30mil (using black market rate)
FAT CAT goes back to Reserve Bank and buys US$297 with his Z$30mil again.
FAT CAT made 200% profit without doing anything and continues doing this until he can buy a brand new Mercedes-Benz for US$100!
The question you should ask yourself is why are there still people outside of government prospering in Zimbabwe? The answer is simple, they repatriate foreign currency as and when they need it.
I probably need not say anything more to drive home my point. Anything can happen in the word. If you were an investor in American shares over the last 10 years, you made NO money! Would you have believed me if I told you this 10 years ago?
An investment in South African shares gave you a fantastic return over the last 10 years. Once again hard to believe! The Rand is strong at R7 to the US$. There are international shares that are trading at very favourable valuations currently.
My message is thus:
If you haven't got money invested outside of South Africa, doing so with a strong Rand, a fairly priced International share market and a knowledge that it is always prudent to "spread your bets", might come in handy one day when President MALEMA, calls the shots!
In 1980 Zimbabwe gained its independence and Mugabe became the leader of the country. Every white person feared the worst and many left the country but for 20 years the country prospered. Then it all imploded and lives, families and fortunes were wiped out.
September 2010, Durban, South Africa. The ANC Youth League screams for Nationalization of mines. The implementation of a Media Tribunal is imminent and the redistribution of wealth is not "satisfactory". It is 16 prosperous years since the ANC came into power. Unemployment is rife and only the selected few ANC top brass became obscenely rich since transformation began. Government officials are living like kings and family members of the President became multi millionaires over night.
Why am I telling you this? Not because I believe that South Africa is going to implode soon or on the other hand that that South Africa is not a Zimbabwe, but for one reason only:
The future is uncertain; you have to put your eggs in different baskets!
In 2006 the Zimbabwe Dollar (Z$) was pegged at Z$101 000 for 1US$. On the black market however, the exchange rate was Z$300 000 for 1US$. This rate, as we all know, deteriorated 100 fold over the last couple of years. The irony in it all is that the Zim fat cats and ruling party officials made millions of US$ with the weakening of the Z$ because only they were allowed to buy US$ at the official rate. This is how it worked:
FAT CAT takes Z$10.1mil and buys US$100 (using official exchange rate)
FAT CAT goes to black market and exchanges US$100 for Z$30mil (using black market rate)
FAT CAT goes back to Reserve Bank and buys US$297 with his Z$30mil again.
FAT CAT made 200% profit without doing anything and continues doing this until he can buy a brand new Mercedes-Benz for US$100!
The question you should ask yourself is why are there still people outside of government prospering in Zimbabwe? The answer is simple, they repatriate foreign currency as and when they need it.
I probably need not say anything more to drive home my point. Anything can happen in the word. If you were an investor in American shares over the last 10 years, you made NO money! Would you have believed me if I told you this 10 years ago?
An investment in South African shares gave you a fantastic return over the last 10 years. Once again hard to believe! The Rand is strong at R7 to the US$. There are international shares that are trading at very favourable valuations currently.
My message is thus:
If you haven't got money invested outside of South Africa, doing so with a strong Rand, a fairly priced International share market and a knowledge that it is always prudent to "spread your bets", might come in handy one day when President MALEMA, calls the shots!
Tuesday, August 3, 2010
Death, Taxes and Financial Advice
Unavoidable, all of them are unavoidable! My client was sitting across the table, sipping a coffee and listening intently. We were talking about opportunities in the property market for people with ready cash at the moment. He is a wealthy man and clued up when it comes to financial matters.
Why then is he at my office, paying me an annual fee to manage a Preservation Fund for him? He is relatively young and there is not much we can or should do to his current investments so one could argue that we are not adding any value!
Now the short answer is that a trusted financial advisor is like a toilet, you can go without one for quite a while but when you need one, you really need one!! The most important word in the previous sentence is "TRUSTED". Trust can only be established over time by proving that your best interests are taken into consideration and that advice received over an extended period of time proved to be to your advantage.
There are too many people that will sell you something either for their own benefit or because they believe that it is a good product but have no solid evidence that it is.
When it comes to financial matters everybody have advice to give, your parents, your brothers and sisters, your friends, your priest, husband, wife, grocer and off course your "advisor". Unfortunately it only takes one misguided or bad piece of advice to destroy years or even a lifetime's worth of savings
Here are a couple of things to remember:
Why then is he at my office, paying me an annual fee to manage a Preservation Fund for him? He is relatively young and there is not much we can or should do to his current investments so one could argue that we are not adding any value!
Now the short answer is that a trusted financial advisor is like a toilet, you can go without one for quite a while but when you need one, you really need one!! The most important word in the previous sentence is "TRUSTED". Trust can only be established over time by proving that your best interests are taken into consideration and that advice received over an extended period of time proved to be to your advantage.
There are too many people that will sell you something either for their own benefit or because they believe that it is a good product but have no solid evidence that it is.
When it comes to financial matters everybody have advice to give, your parents, your brothers and sisters, your friends, your priest, husband, wife, grocer and off course your "advisor". Unfortunately it only takes one misguided or bad piece of advice to destroy years or even a lifetime's worth of savings
Here are a couple of things to remember:
- Always get a second and third opinion.
- Establish a relationship with a licensed financial advisor early on in your life.
- Test their advice with small investments over time.
- Do not make big investment decisions on your own. Emotions are the prime destroyers of wealth.
- Never get into a position where you have to make a huge decision without someone you have trusted for years.
- Get involved with your investments and even if you have very little invested, use the opportunities offered to you to discuss it with your advisor.
So perhaps now it makes sense that my client is prepared to pay me to manage his portfolio. He has been with us for over 6 years, his investments have performed well, he can always phone and ask my opinion, he does not have to make emotional decisions and he knows that in 10 years when he retires, trusting our advice will not be an issue.
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