Investment Newsletter (and related info)
January 2009
House price trends in 2008
According to Absa’s calculations, nominal annual average house price growth in the middle segment of the market (see explanatory notes) slowed down to below 4% in 2008, which was the lowest price growth recorded since 1996. It was even lower than the growth rate of about 5% registered in 1999 after interest rates were hiked to well above 20% the previous year as a result of the contagion effect of the Asian financial crisis. In real terms, house prices dropped by an average of almost 7% in the period January to November last year.
In December 2008, nominal year-on-year house price growth in all three categories of middle-segment housing (small, medium-sized and large houses) dropped further compared with November, while in real terms, prices were down by almost 10% in November compared with the same month a year ago.
(Courtesy Absa and FA News www.fanews.co.za)
Read the full report here
How safe is your collective investment scheme? (unit trusts)
In light of the latest scandal to hit the global financial industry, the alleged $50bn hedge fund defrauded by Bernard Madoff in the US, investors may be wondering how safe their money really is. Candice Paine , Head of Retail at Sanlam Investment Management (SIM) reassures investors that consumer protection is of utmost importance in the South African Collective Investment Schemes (CIS) industry, with structures and gatekeepers firmly in place, as well as vigilant media and financial professionals who act as watchdogs to the industry.
The litany of disasters, from simple poor investment management to outright fraud, seems to keep growing with 100-year-old institutions failing, others begging for bail outs and rating agencies failing to rate correctly. South Africa is not immune, as evidenced by the current case against J Arthur Brown, former head of Fidentia.
“What most investors tend to do is concentrate their efforts on looking at investment risk, costs, relative performance, asset class exposure, mandates, objectives and the like. Very few questions are asked about the governance of CIS and consequently how safe their money is from fraud,” says Paine.
“By way of explanation, CIS are governed by the Collective Investment Schemes Control Act (CISCA) which regulates, amongst other things, how funds are managed, what securities can be held in the fund and who can act as trustees. The Financial Services Board polices CISCA and also approves the trustees. All assets in a CIS are held separately from the investment manager or the management company’s assets, and are instead held by the trustee of the CIS,” she explains.
“The trustee is licensed under CISCA, appointed by the management company, and regulated by CISCA and the Financial Institutions Act (Protection of Funds). It is the trustee’s responsibility to ensure that the CIS is run in compliance with CISCA. The trustee is the custodian of the assets of the CIS.”
The management company appoints an investment manager, regulated under the FAIS Act and the Financial Institutions (Protection of Funds) Act, to manage the assets of the CIS in accordance with a detailed investment mandate.
“In addition, both the management company and the investment manager are required by law to monitor compliance with the founding document and the investment mandate of the CIS and its various portfolios, and to highlight any discrepancies to the trustee as well as the portfolio manager so the portfolio can be brought back in line,” Paine says.
The manager is also obliged to send investors a quarterly report and an annual report listing all the assets in the portfolio in which they are invested.
Paine also reassures investors that the local financial press acts as a watchdog of sorts through its constant coverage of issues like performance and fees. And, because of widespread use of CIS for institutional investments, there are myriads of analysts and other financial professionals constantly carrying out very detailed due diligences on these funds which cover not only investment process but also regulatory adherence and compliance.
“This comprehensive list of gatekeepers should give investors reassurance that consumer protection is of primary concern in the CIS industry,” says Paine.
The Collective Investment Scheme (CIS) industry in South Africa has grown exponentially since the move from defined benefit to defined contribution pension schemes. But not only those saving for retirement use these vehicles - they have also allowed fairly small investors to participate in the growth of capital markets in the past years.
“Collective Investment Schemes are available at a reasonable cost and cover a host of investment strategies. Their ease of use and accessibility has also seen an increase in the financial sophistication of the population as people are forced to take control of their financial future. The biggest challenge for investors now should be which fund to choose,” she concludes.
(Courtesy of Sanlam Investment Management and and FA News www.fanews.co.za)
Property stocks (listed property)
Johannesburg - Listed property looks like an attractive investment in 2009, although an uptick in vacancies could hurt income growth, say analysts.
Over 2008, the listed property sector shed 4.47% compared with a 23.23% drop in equities.
Richard Anderson, a portfolio manager specialising in listed property at Sanlam Investment Management, says he is concerned about the downturn in the economy and the impact that will have on tenants.
"We see bad debts and vacancies increasing this year, which will impact income growth. We see income growth declining slightly to levels around 8% - 9%," he says.
Catalyst Fund Managers investment manager Paul Duncan is more optimistic, saying that the valuations on listed property stocks are compelling. "Listed property stocks are not immune to market volatility and uncertainty. However, the companies have strong fundamentals and we believe that declines in the past year were linked to the general market's risk aversion," he says.
The general market expectation for distribution growth on listed property is seen at 10%.
This means that the forward yield on the sector stands at around 9.75%. On this basis, listed property is attractive compared to bonds. And the sector could also outshine cash, especially in the second half of the year when falling interest rates will impact yield on fixed cash deposits, currently at a rate of 10% on 12-month retail bank fixed deposit.
The market consensus is for interest rates to decline by between three and four percentage points over the next 12 months.
Anderson says listed property stacks up relatively well against equities with equities having "a hard time" with earnings. "So property stocks, which get some security from leasing contracts, do get some insulation from the earnings downturn."
(Courtesy News24, www.fin24.com)
A-Z of Investing in 2009 - from Aids to Zim - Investec
Aids:
Finally, an end to the madness. Barbara Hogan's appointment as health minister was the first of hopefully many responsible decisions by the new leadership.
Bank Aid:
Bailout bills to save the world. 10 000 times the size of Live Aid and Band Aid. The equivalent of £288 for every man, woman and child on the planet.
Credit crunch:
Moving from Wall Street to Main Street. The markets have taken their pain; now it's the turn of the economy. Expect newspaper headlines trumpeting growth slowdowns, earnings declines, retrenchments, rising unemployment etc., at least for 2009. SA will be better off than the developed world, but we certainly won't be immune.
Derivatives:
Originally designed to limit downside risk for conservative investors. Taken and abused as gambling instruments betting on the future prices of shares, options on shares, interest rates, currencies etc. Speculators bought, sold and swapped whatever they could in the mad frenzy that saw annual trade up from $1 billion in the early 80s to $1000 trillion last year. Only 2% of monetary transactions last year involved actual goods and services. Hardly surprising it all ended in tears.
Education:
Desperately needs fixing. Been allowed to deteriorate for far too long. SA's chances of future success hinge almost entirely on an educated youth. Hopefully the new ANC leadership can reverse this decline.
Fixed income:
After being neglected for so long, cash, bonds and fixed income products are back in vogue. Portfolio diversification is popular again. In a wild world, a predictable, stable return is better than nothing.
Growth:
Lots of talk about a global recession. The US, UK, Europe and Japan may well already be in recession. Asia will not see a recession and neither will we. Expect roughly 3% growth in SA this year and 1.5% - 2% next year.
Hedge funds:
Many investors have paid a significant price for not understanding what their hedge funds actually did. Some funds took highly leveraged bets, regardless of risk, and in markets such as these when they were meant to outperform, many have lost everything.
Inflation and interest rates:
Food and petrol prices are falling, the coming January adjustment means inflation has peaked and assuming the rand doesn't fall further, inflation should decline quite rapidly next year. Rate cuts of around 3% are expected in 2009. All of the above will bring relief to consumers.
JSE:
A very tough year. Was inevitable after four or five great years. Fallen in line with global markets and hit hard because of our large commodity component. Probably taken most of its pain, but expect bumpy conditions going forward, with a broad-based recovery probably during 2009.
Kgalema Motlanthe:
As interim president, we couldn't have hoped for better. Yet another rational decision by the post-Polokwane leadership. Let's hope such rational decisions are a trend for the future.
Lekota / Shilowa:
Good for democracy; will put the constitution firmly out of temptation's reach for any political party. Also, every municipality will now be closely scrutinised for contract fraud, corruption etc. in a way we haven't seen before. Risk of violence in run-up to elections must not be underestimated and must be outlawed from the start.
Mbeki:
A graceful departure, emphasising the maturity of our democracy. His legacy will hopefully focus more on his achievements around our economy and across the African continent rather than Aids and Zimbabwe.
Nelson Mandela:
Celebrated his 90th birthday this year, and still the number one statesman on the planet. We are truly blessed. Happy birthday Madiba.
Oil:
Prices were pushed too high by hedge funds speculating and then pushed too low as they had to reverse out of these positions (deleveraging).
President Obama:
Unfortunately more protectionist, so he will support continued subsidisation of US farmers, which is not great for Africa. Expect him to be supportive of good behaviour on the continent and quite tough on bad behaviour. On balance, he will be good for Africa because he has an interest, and because he is likely to take a firm stance.
Q3 2008:
The worst quarter for world markets since 1929. Worse than most people have ever seen, and hopefully the worst investors will ever see in this lifetime.
Rand:
Sold off heavily as investor sentiment towards emerging markets soured. We are a very liquid market with a big current account deficit and when investors head for the door, we get hit hardest. Expect the rand to regain some of its stature during 2009 as sentiment towards emerging markets recovers.
Springbok:
Whether you are pro or not, it's a globally recognised brand and a powerful one at that. Adopting the Protea but retaining the Springbok may be the ideal solution to a complex and emotional issue.
Trevor Manuel:
Spooked markets with talk of resignation. He has done a great job. At 12 years, he is the world's longest serving finance minister, but at some stage he will want to go. Allow him his freedom; there's lots of talent in Treasury. Ironically, markets also collapsed when he was appointed.
US consumer:
Under enormous pressure as the debt squeeze tightens. Grappling with recession, retrenchments, falling house prices and excessive levels of debt it may take more than rate cuts to dig them out of this hole. Expect stimulus packages and infrastructure spend to boost jobs and the economy, and expect dollars to get printed to pay for it.
Volatility:
On a scale not seen in most investors' lives. We've seen the worst, but it will take a while before investors recover their nerve, not to mention the damage to their investments. Interestingly, South African investors, more used to volatility than global investors, appear to be better diversified and a lot less panicky than developed world investors, for whom extreme volatility is unusual.
World cup 2010:
All seems on track, despite numerous pessimistic predictions in the beginning. Sure it's going to cost more; these events always do. The London Olympic price tag has gone from £4bn to £10bn. Will put us on the global map; it's up to us to decide if that's positive or negative.
Xenophobia:
Reared its ugly head. Not acceptable. So far seems to have been contained. Any resurgence must be extinguished fast.
Yes, we can:
The new 3-word slogan of America. Very different from the "axis of evil" mantra. Interesting times indeed.
Zimbabwe:
The world's lowest growth, highest inflation and shortest life expectancy. Democratic elections were held; the people spoke, and yet for some reason the struggle continues. Fix Zimbabwe and the rest of Sub-Saharan Africa looks great as an investment destination.
(Courtesy of Investec Asset Management- Jeremy Gardiner)
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