We're in the second half of the year and the JSE's performace has been something of a miracle. Up 12%, buoyed by resources, trading volumes haven't followed this pattern. We chat about this divergence, the performance of the platinum sector and we weigh in on the listed property space.
We also unpack Christine Lagarde's move from the IMF to head up the ECB.
...or watch on YouTube
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Welcome to 2019 – we made it this far. We all know that 2018 was a terrible year for investors on the local bourse. The Top40 closed 11.5% down for the year, and some of our large cap stocks ‘saw flames’, as the kids on the internet would say. Of course, trading volumes suffered.
International investors were jittery following the emerging market scare that had people speculating on whether there would be another EM crisis, akin to the one in 2013. It’s not surprising, given that countries like Turkey and Argentina gave investors a compelling reason to check out of the emerging markets. For South Africa, those fears were lumped with an unfavourable market (as pointed out above). Below is a look at total return performance by sector for 2018:
Source: SBG Securities Analysis, Bloomberg
Add the lethargy of small and mid-cap stocks and you understand why people wouldn’t be blamed for taking their money out of the market and parking it in cash then choosing to ‘wait-and-see’. However, this may not be the best move – particularly if you’re playing the long game. It’s important to always bear in mind that when it comes to investing, time is your biggest ally, closely followed by compounding. Both work together to help you create wealth. Compounding cannot work if you don’t give it the time to work. And, by 'time', we mean at least 10 years.
So how does one navigate a bear market without putting all your funds in cash and waiting the slug out? We have a few pointers you can use as a basis for your strategic planning:
Do not put your head in the sand. The worst thing you can do is turn a blind eye to what’s going on.
Reassess your strategy: it’s the new year and you have a somewhat clean slate to work from. There are a few questions you can use to help you make an informed decision:
Which companies did badly and why?
What economic and political factors affected companies with global exposure?
How do the company fundamentals look?
What are the prospects of the company and how will technology affect it company in the next 5 to 10 years? It’s important to use this time frame as a yardstick because that’s how far ahead you need to be thinking.
Align your strategy with your long-term financial goals. It’s tempting to focus on putting out the small (in the greater schemes of market performance in the last 100 years) fires – maintaining perspective and focus will help you reach your goals.
Refresh your knowledge of markets. This is particularly important if you still don’t have a firm grasp of what drives valuations. You don’t have to be a professional portfolio manager, but analysing a company includes looking at external and internal events to get a clearer picture of what’s going on. There are fundamental metrics you can look at – even if you do not have an accounting background. This webinar will help you understand these metrics and why they matter: Financial ratios for Fundamental Analysis: which numbers to look for and why.
Don’t panic. This is easier said than done, but approach your strategy with as much information as possible to make an informed decision.
You can also take a read at this very insightful piece from Bloomberg. While it’s geared towards US investors, the underlying principles are the same: What to expect when you’re expecting a bear market.
This material is considered educational communication and does not constitute advice. Please read our disclaimers here.
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Over the past couple of years South African investors have had their fair share of dodgy investment scams disguised as unique investment opportunities. Recently, someone posted on the community under the talk section, asking for clarity on what seemed like advice on a cryptocurrency scheme('Financial advice and bitcoin trading'). It made me think about the case involving one Steve Twain and the ‘$50-million cryptocurrency scam’ that left some South African investors in financial disarray. In Australia, cryptocurrencies have become the second most common investment scam. Not to say there's anything inherently wrong with crytocurrencies - however, they're fast becoming an easy vehicle for scammers to take advantage of people simply because they, much like forex, remain incredibly difficult to understand for the man on the street.
Whether we're talking equity, forex or bitcoin scams, when it comes to trading or investing schemes or platforms, be sure to look out the following signs:
High returns in a short period: Trading scams usually come with the promise of overnight riches.
Little or no risk is mentioned: Any broker you speak to will be sure to highlight risk when it comes to investing. When returns are guaranteed, you should immediately assume that something’s fishy.
Unconfirmed figures and graphs: It’s not uncommon for people to create performance charts to suit their narrative. This is easy for them to get away with when their target is uninformed. Always try to verify chart and figures.
Look for accreditation or registration with the Financial Services Board (FSB): If there’s a product offering of some sort, then usually there’s a governing body that companies have to be registered with. Always check this. Granted, this may be difficult for thosw wanting to invest in cryptocurrencies to do, since most regulatory bodies haven’t quite settled on how to regulate cryptos. That said, you should still do your due diligence – look at platform reviews. You’ll find plenty reviews on platforms with a quick Google search. And pay attention to all the negative reviews. Be vigilant when it comes to putting your money in someone else’s hands, particularly if they’re not a regulated deposit taking institution. If something is off, let the South African Reserve Bank know by going to resbank.co.za or you can call the FSB’s Fraud and Ethics Hotline on 0800 313 626.
If it’s too good to be true, it probably is: This is the golden rule. If you are guaranteed high returns in a very short period of time, you should be very sceptical.
For those of you with a particular interest in crypto scams, you can also check out this great article on Investopedia on How to Identify Cryptocurrency and Initial Coin Offering Scams.
While the FSB can’t regulate sites domiciled overseas or keep tabs on each and every single scam out there, bringing such cases to their attention can help them spread awareness. The internet has made it very easy for people anywhere in the world to run elaborate schemes and by-pass regulators. After all, the FSB and Reserve Bank can’t regulate which sites South African consumers choose to visit.
The most that you as an investor can do, is arm yourself with as much information as possible.
Want to learn how to avoid forex scams? Check out the podcasts below:
Forex trading : Separating myth from reality - Part 1
Forex trading: Separating myth from reality - Part 2
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If anyone has proof that a CEO took over a behemoth of a company and turned it around in 3 months - I'd want a masterclass with that person. Which is why I'm a bit concerned that people expected Ramaphoria to take effect a mere 3 months after he was elected president. Yesterday, GDP numbers came through lower than expected. Bloomberg consensus had expectations at -0.5% for annualised QoQ numbers and 1.9% for YoY numbers. Instead, we got -2.2% and 0.8% respectively.
The impact was almost immediate. The Allshare took a knock, with Bidvest (-5%) and Barloworld (-5.2%) taking the biggest hits straight after the GDP numbers came out. Later, however, this was muddied by an emerging market sell-off, which resulted in a bigger dip and adverse impact on banks and retailers. Today, South Africa's business confidence numbers came out and that came in two points lower than April's number. This has been the fourth consecutive fall since it hit a two-year high in January.
Looking at these numbers, one gets the sense that reality is finally setting in for South Africans. The economy needs a lot more than mere sentiment to grow and the work is only just beginning.
Sure, it’s disheartening to see the rand soar towards R13.00 after we dipped below R12.00 for the first time since 2015. But such short-term focus on the movement in the market will only end in heartache.
We must take our eyes off day-to-day market movement because we will be disappointed. You can even look away from the economic numbers and focus on JSE trading volumes. For most of May, daily trade volumes stayed well below the average – and that’s indicative of a sluggish environment.
So, with the rose coloured glasses finally off, let’s start focusing on the work that needs to go in to turning this economy around. It will not happen with a simple shuffle in leadership. Concrete steps need to be implemented and, until we are well into this process, hoping that the change will be magical is wishful thinking.
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The rand has seen some rather interesting moves in the past week. In a conversation with a friend, she asked who has said what to make the rand move. Of course, given the past year or so, one can’t help but wonder what local news are moving the rand because it’s become quite a norm. This time, however, local politics are not to blame. Our answer lies in the US treasury bond yield.
In the past couple of days we’ve seen the US 10-treasury bond yield break the 3% ceiling and touch 3.1%. It has since remained above 3%.
For emerging markets, this is not great news. We’ve seen large currency moves as investors dump EM bonds and rush towards the US. It makes sense, after all – US bonds are considered risk free. And who wouldn’t take a great yield that comes with no risk?
Back to EMs. South Africa is in a much better place that its emerging market peers, and for that we should be very thankful. To give some perspective: Argentina has been hiking interest rates wildly in the past few weeks. About three weeks ago, they had three rate hikes in one week, going from 27.25% to 30.25%, then 33.25% and eventually all the way up to 40%!
Turkey also raised interest rates in an effort to pick up the Lira, and while that offered temporary respite - it's almost as effective as putting a used plaster over a crack in the pavement and hoping it holds until you return with something 'better'. The temporary rise and fall of the currency following the rate hike announcement tells you that that's exactly what the market is doing: waiting. (To find out about the relationship between interest rates, inflation and currencies, click here.)
With those two examples, South Africa is in a much better place, even though the rand is steadily creeping towards R13.00.
So if you’re looking at the rand, wondering what’s going on, look no further than a stronger dollar, higher US yields, and struggling emerging markets.
A look at Emerging Market currencies vs the US dollar in the past month. Graph from Bloomberg.
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Whenever we see market darlings fall on the JSE, the number one question I get is: “should we buy it now?”
Of course, buy low, sell high wisdom tells us that the best time to buy a share is when the price is low. That way, you’ll make a killing the moment it rebounds.
But what if it doesn’t rebound? For me, investing is not a gambling game. Neither is trading. And so, if you don’t have a particular indication for ‘buy’ apart from simply “but it’s falling” then you’re just gambling and not making an informed decision.
I have a checklist of questions one should consider before buying a share that’s falling at an alarming speed.
Do you know why the share is falling?
What is the company saying or doing in response to the rapid share price decline?
Is there stock falling because of an internal issue or is it something management has no control over (external).
Have regulatory bodies said anything that may impact the share price further?
This list is by no means exhaustive, but these are factors to consider before jumping into a stock whose share price has fallen. Don’t jump into a share because ‘everyone is doing it’. Gather enough information on what exactly has gone wrong and how it can be fixed, if at all. At the very least you’ll know that you’re making an informed decision.
I know losing out on the rise of what people consider a great stock is difficult to digest. When presented with an opportunity to finally buy it at a very low price – we shouldn’t charge in blindly. If the share recovers, you’ll have time to get it.
New to the world of investing? Follow our series on Financial Markets:
Financial Markets For Beginners || Episode 1: Defining Financial Markets
Financial Markets For Beginners || Episode 2: A Look At The Equities Market
Financial Markets For Beginners || Episode 3: Unpacking The Commodities Market
Financial Markets For Beginners || Episode 4: Navigating The Forex Market
Financial Markets For Beginners || Episode 5: Demystifying Derivatives
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I write a column for a certain publication and have come across many people drowning in debt who want a quick solution to getting out of debt. The truth, as I always share, is that there's not quick-fix to handling an enormous amount of debt.
One of the very interesting and recurring queries that I've come across often go something like this:
"My name is [Person’s name] and I am in quite a lot of debt. I was thinking of getting a loan from the bank and using it to trade so I can make money and work on paying off my debt. Where can I learn how to trade quickly?”
“I came across a trading site that offered me 50% returns. They have a 30-hour course that costs R20,000. I’m thinking about getting a loan from the bank, buying the course and learning how to trade. I’ll use the rest of the funds as capital for. If I can do that, I know I’ll make that money back and pay off my debt.”
When I got my first message along these lines, I gasped in wide-eyed shock.
But over the years these just keep coming. As fly-by-night Instagram traders gain (undeserved) fame, and Bitcoin traders promise overnight riches, these kinds of requests become more frequent.
But for anyone who's seriously considering trading, be aware:
You won’t learn how to trade in a weekend.
If your plan to get out of debt is trading your way out, get a new plan.
Never use money you can’t afford to lose to trade – whether it belongs to you, a bank, or loan shark. Don’t do it.
Despite what Instafab traders tell you, trading is not a ‘get rich quick scheme’ and you won’t master it in a weekend.
Is your platform promising you guaranteed returns? Run, it’s probably a scam.
With some trading products, losses can exceed deposits. This means taking a gamble with money you can afford to lose could land you in more trouble should you lose more money than you deposited.
Understand what you're doind at all times. Understand the products you're dealing with and the risks involved before you jump in.
Of course, always keep in mind that “if it’s too good to be true, it probably is”. This list is by no means exhaustive and you should always do due diligence on a trading site before you commit your capital. Find out what users have to say about the platform: how long has the site been up and what are people’s experiences with it. A lack of information should be a red flag. Don’t just rely on testimonials from site users. You can’t verify whether those are real or not.
Be careful when searching through sites like Twitter. It’s easy to stumble across bots – fake accounts that are created to push particular content. Look out for the same tweets coming from different accounts.
More importantly, if you’re in deep financial distress, it’s better to think about calling up your creditors and negotiating your repayments so you’re not overwhelmed by your financial obligations.
If you want to be a successful trader, seasoned, and honest, traders will tell you that it takes a lot of learning, self-education, losses and dedication. It’s not a walk in the park.
Use the resources at your disposal – you can see what we have on the community blog, learn or talk section, where youc an also interact with other traders. You can also visit sites such as JustOneLap.com or Investopedia, which have great educational resources that are invaluable in your journey as a beginner trader or investor. If you want to learn a bit more about financial markets, you can check out our podcast series of Financial Markets for Beginners.
(For anyone who'd like to add to why trading your way out of debt is a bad idea, please share in the comments section below.)
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Nothing so far - it's supposed to be reviewed so we might only find out after the Budget Speech. But with everything happening, lets hope TFSA's haven't fallen through the treasury cracks.
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The Aldermore move is rather interesting. I look at the UK now, and what is (not) happening with Brext and I have to wonder what informed that move.
I've heard the arguments around increasing international footprint etc. I also understand that, at the moment, Africa isn't exactly hot property.
So I'm sort of on the fence about this. Will it actually pay off? I'm digging into Aldermore's results and I'll share thoughts when I'm satisfied I've covered everything thoroughly. They listed rather recently on the LSE, and one could argue they have a compelling story, but the political uncertainty has me wondering...
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‘Disruptive innovation’, a term coined by Harvard Professor Clayton Christensen, describes a process by which a product initially takes root in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors. (1)
For many investors the difference between passive and active investment approaches is clear cut. A ‘passive’ solution is one that is low-cost and requires a simple investment in a market capitalisation index. Any strategy crafted differently to this approach is considered ‘active’.
Fast forward to 2017 and we are witnessing a challenge to this convention.
‘Smart Beta’, a hybrid of active and passive, has gained significant interest in the industry as it is a way of delivering investment strategies in a low-cost, transparent way.
Smart Beta is similar to passive because it is rules-based and low-cost and has similarities to active because it varies from market capitalisation.
In reality a large percentage of active strategies can be explained within a defined set of rules. Essentially Smart Beta has the potential to offer investors an active portfolio strategy at a fraction of the cost without investors having to sacrifice on return, risk or objectives.
Smart Beta Application: A South African case study
An investment strategy in which active managers seek to buy equities with attractive dividend metrics is a trusted strategy and one that has recently gained traction in the global search for yield. These dividend strategies tend to rely heavily on rules and quantitative processes and therefore can be replaced with an equivalent Smart Beta approach. The following study sets out to examine dividend strategies within the SA market, and to establish whether or not Smart Beta can start displacing existing active funds.
CoreShares collected data on all retail equity funds in the SA market that have a dividend specific focus as part of their mandate. There were a total of five (5) funds with a combined assets under management (AUM) in excess of R10 billion.
Once selecting the funds with a dividend specific focus we documented each of the funds key characteristics that were sought when selecting shares. Figure 1 below, shows each of the funds objectives.
Figure 1: Dividend equity funds in South Africa and their investment rules
Following this we then refined these selection criteria into the below three (3) general characteristics:
Yield; A focus on shares with attractive starting yield relative to the general market,
Quality; A focus on shares with track record of paying sustainable and growing dividends,
Value; A focus on shares with low relative valuation measure.
In the figure below we have shown five funds based on their general characteristics and have ordered their selection priority from left (highest priority) to the right (lowest priority).
Figure 2: Dividend equity funds in South Africa and their investment styles distilled
When assesing Figures 1 and 2 above, it is not clear which of the five funds are active and which are Smart Beta. What this exhibits is Smart Beta’s ability to replicate investment strategies succinctly in a rules based environment. However for the client what is of greater importance is the relative success of the funds in achieving their intended objectives For the purpose of this case study we consider generating dividend income as the primary objective.
Table 1 shows the net cash flow that would have been paid to an investor if they had invested R1 million in each fund on 01 May 2015 and withdrew all distributions until 30 April 2017.
Source: Morningstar, as at 30 April 2017
Table 1: Quantitative comparison of funds in South Africa, 3 Years ended 30 April 2017
In Table 1 above, Funds A, B and D are active funds and C and E are Smart Beta funds. Fund E is the CoreShares Dividend Aristocrats ETF (Share Code: DIVTRX) Using a simple average the income generated per portfolio was 49% higher for Smart Beta and using an AUM weighted measurement the income generated was 87% higher for Smart Beta.
It is important to be aware of the reasons behind the difference in outcomes and whether or not a fund has a structural advantage over another. One of the main explanation is cost. A significant component of Smart Beta’s advantage when delivering on income generation for clients is the low-cost and efficiency with which it is able to replicate investment strategies.
In the instance of dividend strategies the cost efficiency is amplified. Investment fees which are subtracted from income accrued means a high fee structure will significantly detract from a funds ability to deliver on its primary objective of delivering high dividend income. Figure 3 and 4 below, illustrates this point and shows the negative relationship between income generated for clients and fees. This negative relationship is a similar finding to the recent Morningstar research (2) (K.Cox, 2017) wherein it is established that the least costly funds had the highest chance of future total return success.
Source: Morningstar, as at April 2017
Figure 3: High fees result in lower income generation for clients
Source: Morningstar, as at April 2017
Figure 4: High fees erode high gross yields resulting in lower client cash flow
Because of high costs the majority of active managers, even those with higher gross yields, struggle to deliver a favourable relative net yield thereby detracting from their primary value proposition.
It is clear from these findings, that dividend equity strategies using Smart Beta have great potential in the SA market by offering clients more value for fees paid.
“What is new about Smart Beta is not the (investment) idea – but the simple and transparent packaging. Carving out and lowering the cost of one significant component of active management.” Khan & Lemmon 2016
CoreShares believes that Smart Beta building blocks will start to play a much more meaningful role in the SA asset management landscape.
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When a company wants to raise capital, it has one of two options.
The first option is to apply for a loan. The second is to have a rights offer.
The company will determine how much capital it requires and from that will calculate the number of shares to put on offer and the price to offer it at.
Company XYZ Ltd wants to raise R60 million for additional capital to expand its operations. The company decides to issue an additional 15m shares @ R4.50 per share. XYZ Ltd's shares currently trade @ R6.25.
In terms of the offer, the rights would be distributed on a 4 for 10 basis, where for every 10 shares held, XYZ Ltd is offering you the right to buy another 4 shares at a 38% discount of R 4.25
What to do as a rights holder:
Option 1: Shareholders can take up the rights by making the election online. Click on the "perform election" tick in the tools column on your portfolio. By performing this election you agree to buy more shares in XYZ Ltd, 4 for every 10 held at a price of R 4.25. As you are the holder of a 1000 XYZ Ltd shares you will now hold 1 400 shares and the additional shares will cost you R 1 700.00.
Option 2: You can choose to ignore your right rights... However this is NOT recommended, as your existing shares will be diluted because of the new shares issued.
If you ignore them you will lose the value of the right given to you.
Option 3: If you do not want to participate in the right issue, you can sell your rights to other existing shareholder or to new investors.
For any additional information regarding the current rights issues, please contact our call centre on 0860 121 161 for more detailed information
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So Q3 was rather interesting...
ALSI's rand total return was +8.9% compared to Q2's -0.4% and Q1's +3.8%; this was also the best performance since Q3 2013. This is largely due to resources' 17.8% return. Financials and industrials also contributed to the numbers with returns of 5.1% and 7.4% respectively.
But Q4 is bound to be incredibly eventful time - even with everyone winding down for year end. With the rand shaky again, and the lead up to the ruling party's elective conference in December, one wonders what the Alsi will look like and which industries will make the top half and bottom for year end and Q4.
How will finnancials fare? Will resources stay on top? What about indstrials? And how much are household goods likely to recover (Q3 total rand return was -10.1%) - as rates were held steady last month and the silly season brings a retail rush?
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At the rate things are going in the UK, it's starting to look as if Brexit won't happen after all. In all the hoo-ha, no one has actually given the world a solid update on a way forward. Negotiations have seemingly stalled and both sides aren't willing to compromise.
Whatever the snap election was hoping to achieve seems to be failing spectacularly.
What a time for the west to be in complete shenanigans. At least their economies are safe; well, for the foreseeable future...
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No doubt the fundamentals are solid. I also think there's stil plenty of rrom to grow ito operational functions. I'm sad I sold mine when I did. I feel like I've missed the boat on it so all I can do is sit on the outside, looking in and shake my head at my own foolishness.
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A couple of days ago, when CPI went through the R900 mark, I posed this question on twitter - where is this share going, along with a short poll. Out of 36 people: 33% = 'good to buy'; 45% = 'hold'; 22% = 'overpriced - sell'. Some of the people who still believe it’s a buy at this level are convinced it’s another Naspers. Anyone who bought CPI a year or two ago is sitting pretty. Don't even get me started on anyone who bought it eons ago...
Now I've had some very interesting debates around Capitec. And all have been a variation of the model above. I don't own CPI but I find the company fascinating nonetheless.
Firstly, I’m curious to know their strategy around the middle income bracket market their targeting. There are a number of points worth going into here. Capitec’s initial target market was the low-income band. This means they had to process fewer transactions – which is why they could afford to keep their prices low.
However, higher income earners will result in higher transactions, both in frequency and volume – so how will they deal with the cost of these transactions? Should we expect a new pricing model to work with their credit card and middle income target market?
Other than that, at R900 – a look at what the bank offers vs the others makes you wonder what the next step is? Is Capitec going to stick to its existing model? If they expand (there’s been talk of venturing into vehicle finance) will that be a success or not? How will it be managed? And should we expect a corporate banking structure that caters to SMEs?
And to the long-term CPI holders out there, I'll ask the same question I asked my twitter followers: is it a buy, hold or sell? And why?
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Perhaps it might be worth looking at what Australia/ & Ukraine are doing ito regulating crypto-currency. As for anonymity, that will very likely be a stumbling block. Guess we'll have to see how others get around that particular roadblock.
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