Investing in 2010

Taking stock – Davos 2010Alec Hogg

March 2010

Global power nexus

Icy reception for some

Major theme #1

Bank bashing

Sarkozy leads the charge in his official opening address

Implication

Banking shares appear to be high risk investment right now, but…

Major theme #2

Rise of China

Front and centre in every discussion; represented by rising star, Vice President Li Keqiang

Implication

Megatrend of power shift from West to East gaining momentum, aided by Crisis

Major theme #3

European problems mounting

Greek President George Papandreou trying his best but massive gap in credibility exists

Implication

Ancient problems of waste, corruption, state crowding, poor competitiveness in spotlight; Major realignment of currencies

Major theme #4

Climate change

Despite Copenhagen’s failure, political will created through voter concern at threat to mankind

Implication

Massive investment in alternatives to fossil fuels; realignment of costs to increase incentives for innovation

Major theme #5

African awakening

Continent attracting serious interest as an investment destination; IMF forecasts it is the third growth story after China and India

Verdict

South Africa the continental gateway, but Chinese won’t be the only competition for local firms

Looking ahead

Investment pointers

Bank bashing to hurt ST but re-rate sector long-term

China is re-writing rules for commoditised businesses

West’s structural problems to cause revaluation of subsidy distorted assets and currencies; but also lead to much increased competition globally

Climate change will unleash human potential to solve energy problems – challenge fossil fuel dominance

More info?

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Thank you

Investment PerspectivesWayne McCurrie

March 2010

Navigating choppy waters: Staying the course through market uncertainty

It is tempting for nervous investors to make short-term moves out of uncertain markets and plan to re-enter when things are calmer

However, it is very difficult to time the moves out of and back into the market, and you could end up taking needless losses and missing out on significant gains

Navigating choppy waters: Staying the course through market uncertainty

Investors sell at the bottom – When Bad News prevails

And buy at the top – When Good News prevails

Therefore essential to have some sort of guidance as to what to expect from markets

Where we have been – where we are now – and where are we going to be in two years time

The Classic Investor Cycle

This is a really good investment

Temporary setbackI am a long term

investor

Why did I everbuy this ?

Look at lastyears good return

I must get out.Cash is King

Don’t worry the marketis consolidating

I really got badadvice

REVIVAL

EXCITEMENT

OPTIMISTIC

EUPHORIA

DOUBT

ANXIETY

DENIAL

FEAR

DEPRESSION

PANIC

CAPITULATEDESPERATE

DESPONDENT

DOUBT

OPTIMISTIC

What a goodchoice I made !!

FUND INFLOWS

FUND OUTFLOWS

I will not do thisagain !!MARKET CYCLE

Maybe I panicked !

Was it right tosell ??

This is the bestthing I have ever

done !!

MAXIMUM RISK

MAXIMUM REWARD

THINGSCANT GETBETTER

THINGS CANT GET WORSE

Markets are NOT STUPID – THEY KNOW the existing news and circumstances

Quite frankly – the market is not ALL THAT interested in the current news

Markets are (basically) only interested in what is GOING TO HAPPEN, not what is actually happening

Markets will discount future anticipated events

That is why markets move sometimes contrary to expectations – They go up in bad time and down in good times.

MARKETS MOVE ON THE DRUMBEATS OF TOMORROW

HUMANS move on the drumbeats of yesterday and today

The Investment Clock Getting Guidance – “Road map”

Markets and the economy ARE related (intricately)

Therefore studying the economy and forecasting the future is VITAL in understanding markets

MARKETS MOVE ON THE DRUMBEATS OF TOMORROW

HUMANS move on the drumbeats of yesterday and today

Navigating choppy waters: The economic cycle

PEAK SLOWDOWN BOTTOM RECOVERY

GOOD NEWSSTRONG GROWTH

INFLATION LOWINTEREST RATES LOW

THINGS CAN’T GET ANY BETTER

START OF DOWN TURNINFLATION RISING

INTEREST RATES RISING

INFLATION MODERATINGINTEREST RATES AT PEAK

ECONOMY IN TROUBLE

THINGS CAN’TGET ANY WORSE

INFLATION FALLINGINTEREST RATES DOWN

GROWTH INPROVING

MAXIMUM RISK

MAXIMUM REWARD

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Peak

SlowdownBottom

Expansion

The investment clock – the basic economic cycle

21

Peak

SlowdownBottom

Falling Inflation Rising

Expansion



The investment clock – inflation and growth

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SlowdownBottom

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The investment clock – asset returns

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NeutralEquity

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MaxUnderweight

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SellSell

BuyBuy

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NeutralEquity

NeutralEquity

MaxUnderweight

Equity

MaxOverweight

Equity

SectorsNeutral Financials

Underweight ResourcesUnderweight All Industrials

SectorsOverweight Financials

Neutral ResourcesUnderweight Industrials


Overweight ResourcesNeutral Industrials

Bu

y B

an

ks

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ll Re

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urc

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ll Sta

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sS

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nd

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tria

lsSell Banks

Sell Resources

Sell Cyclicals

Buy Banks

Buy Resources

Buy Cyclicals

Bottom Slowdown

Sectors Underweight Financials

Neutral ResourcesUnderweight Cyclical Industrials

Overweight Staple Industrials

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PeakExpansion

F

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NeutralEquity

NeutralEquity

MaxUnderweight

Equity

MaxOverweight

Equity

Sectors Underweight Financials

Neutral ResourcesUnderweight Cyclical Industrials

Overweight Staple Industrials


Underweight ResourcesUnderweight All Industrials

SectorsOverweight Financials

Neutral ResourcesUnderweight Industrials


Overweight ResourcesNeutral Industrials

Bottom Slowdown

1q 082q 083q 08

4q 081q 09

2q 09

3q 09

1q 10

4q 09

2q 103q 10

4q 10

1q 11

2q 11

4q 11

Some perspectives on marketsay and today

USA Share Market

Made very little money on USA shares for ten years

US equities close to fair value

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60 61 63 64 66 67 69 71 72 74 75 77 79 80 82 83 85 86 88 90 91 93 94 96 98 99 01 02 04 05 07 09

EXPENSIVE

CHEAP

FAIR VALUE

S&P 500 current price/long-term average earnings

Current price/long-term earnings

Local equity close to fair value

Current price/long-term sustainable earnings

Long-term exit PE

Navigating in a high volatility environmentSam Houlie

March 2010

12 months ago.......we thought the world was about to end!!

http://www.investmentpostcards.com/wp-content/uploads/2010/02/budget.jpg

…instead Global equities recovered strongly since March 2009

MSCI World Index (in US$) (1133.3)

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The MSCI World gained 31% in 2009 and the MSCI EM gained a record 79%.

Source: I-Net Bridge

The US market has recovered astonishingly quickly…..

Source: Macquarie Research; Quarterly Strategy, 27 January 2010

2009 highlights Central banks and governments threw money at the credit crisis

Governments increased spending

Governments cut taxes and provided subsidies for the purchase of houses, cars and household appliances

Central banks bought government bonds (Quantitative Easing)

Source: Slate; Plexus Asset Management

2009 highlights China helped pull the rest of the world out of recession

GDP growth “recovered” from 6.1% in the 1st quarter to 10.7% in the 4th quarter and is forecast to grow 9.4% in 2010

China overtook Germany to be the world’s largest exporter

China overtook the US to become the world's largest car market

Source: JP Morgan

2009 highlights The global recession ended in the 3rd quarter

The recession in the developed world ended in the 3rd quarter but unemployment remains high at 9.7% in the US, 10.0% in Europe and 24.3% in SA

Source: Plexus Asset Management

http://www.investmentpostcards.com/wp-content/uploads/2009/09/john-darkow-22-september-2009.jpg

2009 highlights The dollar came under pressure

The dollar weakened on declining risk aversion and a resumption of the carry trade as the Fed drove rates down to 0.25%

Commodities rallied with the oil price doubling and the gold price hitting a new high of $1220

Commodity currencies also benefitted with the Brazillian Real up 33%, the Rand up 28%, the Aussie Dollar up 24% and the Norwegian Krone up 20%

Source: Appraisal News Online, Plexus Asset Management

http://www.investmentpostcards.com/wp-content/uploads/2009/05/22-may-h1.jpg

Commodity fund flow - December 2009 Cumulative inflows by year

Source: JPMorgan and Bloomberg

US$ billions

... but copper looks vulnerable to rising inventories

Source: Citigroup Global Markets; 8 January 2010

China’s investment boom unprecedented

Source: IMF, Pivot

GFCF/GDP of various countries

Cement capacity in stratosphere

Source: US Geological Survey, UN, Pivot

No surprises here - the market has leaped upward!

The JSE rose more than 100% in US$ since the beginning of March 2009 to December 200917000

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-45.4%

47.4%


The FTSE/JSE All Share Index (in ZAR) (26764.6)

So we better see some earnings come through!


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Trailing PE: 17.4xEPS-growth: 30%*Forward PE: 13.4xExit PE 14.5x

Expected Return: 12%

(3% DY)

* I-Net consensus

SA Equities: Earnings GrowthSince 1960 to end February 2010, Rolling 12-month %-change

Markets can go sideways for an extended period

Dow Jones: 1975 to 1982

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Increased volatility offers opportunities for stock pickers


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Cum.% p.a. %Warren Buffett, Berkshire Hathaway 676% 34%Sequoia Fund (Bill Ruane) 415% 28%

Range 1975 1976 1977 1978 1979 1980 1981 1982 Total

# of companies

46 5 0 2 27 34 2 8 124

% of 500 9.2% 1.0% 0.0% 0.4% 5.4% 6.8% 0.4% 1.6% 3.1%

Range 1975-77 1976-78 1977-79 1978-80 1979-81 1980-82 Total

# of companies 148 36 48 132 101 93 558

% of 500 29.6% 7.2% 9.6% 26.4% 20.2% 18.6% 18.6%

Range 1975-79 1976-80 1977-81 1978-82 Total

# of companies 268 186 112 193 759

% of 500 53.6% 37.2% 22.4% 38.6% 38.0%

Increased volatility offers opportunities for stock picking

Source: Empirical Research Partners, Legg Mason Capital Management

Number of Doubles or Greater Over Rolling One-Year Period (Top 500 Companies)

Number of Doubles or Greater Over Rolling Three-Year Periods (Top 500 Companies)

Number of Doubles or Greater Over Rolling Three-Year Periods (Top 500 Companies)

Discovery Equity FundTop 10 Equity Holdings (% of fund)

Fund Current ALSI 28-Feb-10

MTN Group 10.1% BHP Billiton 13.9%

BAT plc 9.1% Anglo American 9.9%

African Bank Investments 8.5% SABMiller 6.6%

FirstRand 7.7% MTN Group 5.6%

Sasol 6.1% Sasol 4.8%

Investec Global Franchise 6.0% Standard Bank 4.5%

Liberty International 5.9% Richemont 3.6%

Sun International 5.4% Impala Platinum 3.2%

JD Group 4.6% Naspers 3.1%

AVI 4.5% AngloGold 2.7%

Total 67.9% Total 57.9%

….the fund is VERY DIFFERENT to the market and the average fund

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Discovery Equity (15.9%) FTSE/JSE All Share (-6.5%) Sector average (-9.0%)

Discovery Equity Fund Cumulative performance as at 31 January 2010

Source: MorningstarReturns are calculated on a bid-to-bid basis, net of fees, with gross income reinvested.

Summary – steadily shifting back into cautious mode

We anticipate a great environment for stock pickingWe are buying quality and under-valued laggardsWe are attracted to stocks with resilient, depressed or below average profit marginsWe remain underweight Resources (except for paper, gold, energy and a fledgling position in steel)We are positioning for Rand weakness and are most attracted to non-commodity Rand hedges We remain concerned about the current momentumRisk-premia across a variety of stocks and asset classes are way too low and investors should be more discerning from this point forwardEquities should outperform bonds and cash. However, on a prospective basis, the return for equities could prove disappointing relative to current expectations

“The central principle of investment is to go contrary to the general opinion” JM Keynes

Equity markets almost always peak when rates are low, so moving in desperation away from low rates into substantially overpriced equities always ends badly

Jeremy Grantham

Thank you

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Investing in 2010

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