sasfin securities; balancing the risks; nov 2013
TRANSCRIPT
World Markets
Balancing the risks
Shut happens!
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Tea Party echoing same thinking Republican moderates have
expressed for years, except at higher volume
Abhorrence of ObamaCare, loathing of government, faith in tax cuts and
free market etc.
Tactics nearly forced US default
Caused grievous harm to Republican brand – 53% of
Americans blamed Republicans versus 29% Obama
Damaged Republicans’ business leaning image
Sequester lowered growth – Grand Bargain on spending
cuts sought
Shutdown and debt ceiling protests hurt business
confidence – cost of shutdown estimated at $24bn
Tapering delay probable
US economy – chugging along
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Employment rising
24 months of successive job increases
Housing recovering
New houses sold double 2011 lows
Retail spending improving
Above pre-crash levels
Trade balance shrinking
Half „08 highs of -$70bn
Oil & gas production exploding
US fastest growing producer in 2012 lifting output by 1m barrels per day to 8.9m
Lower birth rate projections, aging work force and slowing productivity
Gains likely to reduce GDP to 1.9% between 2012 and 2032 from post-war average of 3.5%
S&P500
4
1990 - 2000 2000 - 2010
2010 - 2020
Tech revolution
Globalisation
Cell phone
Internet
GFC (Collapse of Lehman)
China emerges
9/11 crisis
End of commodity super cycle
Shale, oil, gas revolution
IT & communication transformation
3D printing, big data
Aging demographics: US, Japan, China, Europe
What the Frack ?
Hydraulic Fracturing
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The Natural Gas Revolution
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Fracking has allowed energy companies to dig deeper than
before unlocking unconventional oil deposits
North America has largest stores of unconventional oil
50% more than total conventional crude in the Middle East
US could overtake Saudi Arabia as the world’s largest oil
producer by 2020
Making it less dependent on oil from foreign nations whose
interests conflict with theirs
Imports are down to 40% from 60% in 2005
Crude Oil net Imports
Crude Oil net Exports
The Natural Gas Revolution
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Fracking has produced an abundance of inexpensive natural gas
Natural gas used to power ships, trains, heavy goods vehicles and
power stations
Natural gas power stations have half the emissions of conventional
coal plants
Emissions fallen 12% since 2007 on conversions
Boom in oil and gas drilling creating jobs in states hard hit by
recession
Cheaper energy input costs attracting manufacturing back to the US
1m manufacturing jobs could be added by 2025
Plentiful oil will diminish incentives to reduce reliance on fossil fuels
BNSF carry 650k barrels
a day, soon to increase to
750k barrels a day, will
eventually reach over 1m
barrels a day
Global Economy
Size of economy
US 21.6%
China 10.4%
EU 26%
Japan 8.4%
Brazil 3.6%
UK 3.5%
Russia 2.6%
Est. growth 2014
China 8.2%
India 6.2%
Russia 3.8%
Brazil 4%
US 3%
Australia 3%
UK 1.5%
Europe 1.1%
World 4.00%
Emerging Regions 5.70%
Advanced Economies 2.20%
Europe‟s deficit problem
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Europe: signs of economic recovery are visible
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Strongest gains estimated in Germany, UK & Ireland
Forecast GDP growth 2014 - Germany: 1.3%, UK: 1.5%, Ireland: 2.1%
Spain, Italy & Portugal also showing economic gains Spain out of recession, growing at 0.1% in Q3
EU needs to increase growth potential, enhance job creation &
boost European competitiveness
The origins of the disaster lies with excessive private borrowing
Greece got into trouble because its government spent too much
and collected too little in taxes
The bust followed a private sector binge: mortgage debt in Ireland
and Spain, corporate borrowing in Portugal and Spain
Without growth, zombie firms are unable to invest or grow
Much like those wafting through Japan in the 1990s
Euro zone blighted by private
debt even more than Govt debt
Euro zone expected to
expand by 1.2%
UK: economy accelerates to fastest growth since 2010
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Problems persist:
- Wages rising less than inflation
- More government spending cuts in the pipeline
- Dormant Euro Zone
Unlikely that the recovery will fade significantly:
- Revival of the British housing market
- Employment growing
- Confidence returning
- Productivity still well below its potential
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Japan: “Abenomics” a mix designed to jolt the economy
Japan’s economy will remain on track as the
government prepares a 5 trillion yen ($50.6bn)
stimulus package to offset the drag from a sales
tax increase scheduled for next April.
Economists expect the majority of the stimulus
package to be spent on infrastructure and tax
breaks for the corporate sector.
Reuters
CPI
Electrifying a nation that had lost faith in its political class
Nikkei
Japan‟s economy recovering at moderate pace
despite slowing exports
Imports likely to remain strong due to solid
domestic demand, while business sentiment is
improving
Emerging Markets continue to disappoint
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China grows at the slowest pace in 13 years
Indian Rupee falls to record lows – rates rising to stem outflows
Brazil’s fundamentals deteriorate on incoherent economic policy
Russia down on falling energy prices and tight corporate credit
Investors continue to withdraw from emerging markets even in the
face of Fed tapering talk
S&P500 vs MSCI Emerging Markets Index
Emerging Markets
Developed Markets
“Investors looking for
emerging market-like growth
rates should look to the US”
Meredith Whitney
China‟s tectonic shift – the dawn of a new era
New regime acting more carefully, balancing growth,
shifting from a production oriented economy to one
centred around household consumption
Demand slowly recovering, expect growth around 7.5%
Structural reforms designed to improve the supply side
of the economy
Reforms would help sustain the growth of productive
capacity, improving the allocation of capital and labour
Cutting red tape and other regulatory barriers to entry
would help private firms invest in industries now
dominated by state-owned enterprises
• Home to 20% of the world‟s
population
• Household consumption
accounts for 38% of GDP
(US ~70%)
• World‟s largest car market,
19.3m cars sold in 2012
• Largest internet market in
the world
• Reduced the per-watt cost of
solar power from over $3
(2008) to under $1 (2011)
- 23% + 24%
Consumption expected to overtake investment as the largest contributor to GDP
Investment Consumption
42% (2010 – 2020) 41% (2010 – 2020)
34% (2020 – 2030) 51% (2020 – 2030)
China‟s growing middle class is demanding more
Western brands sell a lifestyle / image aiming to attract the aspirant Chinese consumer
Adidas
Nike
Paul Frank
McDonalds
Starbucks Haagan-Dazs
South Africa
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Widespread labour unrest disrupting mining and manufacturing output
Falling commodity prices putting pressure on mine earnings
Rising input costs, electricity constraints, squeezing manufacturing
margins
Slowdown in household spending
Continued shift in fiscal policy to social spending from infrastructure
Corruption, poor skills, inefficiency
WEC ranks SA‟s education system 146 out of 148 countries and last in Maths & Science
Hesitant domestic and foreign investor confidence
Pessimism about the long term outlook for the economy
Debt downgrade possible if deficits continue to deteriorate
JSE trading at all time highs
0 200000 400000 600000 800000 1000000 1200000
Aspen
Barclarys
Kumba Iron Ore
Old Mutual
Vodacom
Firstrand
Standard Bank
Sasol
Anglo American
MTN
Naspers
Richemont
Billiton
SABMiller
British Am Tobacco
Breakdown of the JSE: +23% from 1st Nov 2012
The top 15 companies make up over 70% of the JSE (12 month return)
Market cap (ZAR)
25%
41%
12%
85%
69%
29%
-11%
37%
19%
29%
9%
-21%
36%
9%
75%
Market Cap
Pick ‘n Pay 23bn
Telkom 14bn
Adcock 12bn
JD Group 7bn
1.1 tr
859 bn
655 bn
536 bn
385 bn
368 bn
335 bn
328 bn
203 bn
202 bn
172 bn
158 bn
137 bn
129 bn
124 bn
Xstrata/Glencore Market cap: R714m
Local Investment Ideas: Stick with the winners
2) Emerging market consumption growth SABMiller, British American Tobacco, Richemont
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Companies expanding offshore into high growth regions Naspers, Aspen, Bidvest, BHP Billiton, Sasol
Emerging market consumption growth SABMiller, British American Tobacco, Richemont
Superior retail business models continue to hold Famous Brands, Woolworths
Expansion into Africa Imperial, MTN, Omnia, Shoprite
Expanding middle class exploring medicare options Life Healthcare, Mediclinic, Discovery
JSE is more of a convenience store than a supermarket
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JSE Global Markets
Create a champions league portfolio
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JSE Global Markets
A guideline to our team‟s offshore investment ideas
2) Emerging market consumption growth SABMiller, British American Tobacco, Richemont
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Escalating prosperity in developing nations LVMH, Daimler, Prada, BMW
Increasing urbanisation L’Oreal, Altria, Anheuser-Busch InBev
Competitive companies focusing on the consumer
Nestle, Unilever, Adidas, J&J
High yield in a low yielding environment Royal Dutch Shell, AstraZeneca, Sanofi, Allianz, Vodafone
America: The next emerging market General Electric, Wells Fargo, JPMorgan, Berkshire Hathaway
IT: Tech players transforming our lives Google, Amazon, Microsoft
Thank You
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David Shapiro Deputy Chairman / Director
Kavita Patel Portfolio Manager [email protected]
Craig Diesel Portfolio Manager
Carmen Solomons Portfolio Assistant