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Moneyweb Seminar Rajay Ambekar
October 2011
The world is not close to being fixed
Page 3 | CONFIDENTIAL
07007
The crisis was averted – but the problem not solved
US DEBT (RELATIVE TO GDP)
0
50
100
150
200
250
300
350
1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 2015
% O
F G
DP
PUBLIC HO USEHO LDS
C O RPO RA TES FINA NC IA L
GSE
NET SAVING RATES
-10
-5
0
5
10
15
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
% O
F G
DP
NBER RECESSIONS SHADED
PRIVATE
TOTAL
PUBLIC
Too much debt… …and not enough saving…
Source: Morgan Stanley Research; 14 July 2011
Page 4 | CONFIDENTIAL
07007
Stress in Europe
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg
Page 5 | CONFIDENTIAL
07007
Central banks – Balance sheets keep growing…
Source: Bloomberg
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
Ma
y-0
6
Jul-0
6
Se
p-0
6
No
v-0
6
Jan-0
7
Ma
r-0
7
Ma
y-0
7
Jul-0
7
Se
p-0
7
No
v-0
7
Jan-0
8
Ma
r-0
8
Ma
y-0
8
Jul-0
8
Se
p-0
8
No
v-0
8
Jan-0
9
Ma
r-0
9
Ma
y-0
9
Jul-0
9
Se
p-0
9
No
v-0
9
Jan-1
0
Ma
r-1
0
Ma
y-1
0
Jul-1
0
Se
p-1
0
No
v-1
0
Jan-1
1
Ma
r-1
1
Ma
y-1
1
Jul-1
1
QE1
QE2
US, UK, ECB, BOJ, PBOC Balance sheet assets
Page 6 | CONFIDENTIAL
07007
600
800
1,000
1,200
1,400
1,600
1,800
Jun-0
4
Sep-0
4
De
c-0
4
Ma
r-0
5
Jun-0
5
Sep-0
5
De
c-0
5
Ma
r-0
6
Jun-0
6
Sep-0
6
De
c-0
6
Ma
r-0
7
Jun-0
7
Sep-0
7
De
c-0
7
Ma
r-0
8
Jun-0
8
Sep-0
8
De
c-0
8
Ma
r-0
9
Jun-0
9
Sep-0
9
De
c-0
9
Ma
r-1
0
Jun-1
0
Sep-1
0
De
c-1
0
Ma
r-1
1
Jun-1
1
Sep-1
1
And the effects of cheap money are evident
Source: I-Net Bridge to September 2011
S&P 500: Policy driving equities
China fiscal
stimulus package
QE1 start
ECB rate hike
QE1 exit
QE2 start
QE2
end
Page 7 | CONFIDENTIAL
07007
What if the US follows Japan?
Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg
How has our market performed?
Page 9 | CONFIDENTIAL
07007
200
400
600
800
1000
1200
1400
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
Jun-9
5
De
c-9
5
Jun-9
6
De
c-9
6
Jun-9
7
De
c-9
7
Jun-9
8
De
c-9
8
Jun-9
9
De
c-9
9
Jun-0
0
De
c-0
0
Jun-0
1
De
c-0
1
Jun-0
2
De
c-0
2
Jun-0
3
De
c-0
3
Jun-0
4
De
c-0
4
Jun-0
5
De
c-0
5
Jun-0
6
De
c-0
6
Jun-0
7
De
c-0
7
Jun-0
8
De
c-0
8
Jun-0
9
De
c-0
9
Jun-1
0
De
c-1
0
Jun-1
1
FTSE/JSE All Share (US$) MSCI Emerging Market Index (US$)
SA/Emerging markets – a great decade
Source: I-Net Bridge to 31 August 2011
All Share Index
Emerging Markets
ALSI ($) versus Emerging Markets ($)
Page 10 | CONFIDENTIAL
07007
We all went offshore ten years ago
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%M
ar-7
6
Jul-7
7
Nov
-78
Mar
-80
Jul-8
1
Nov
-82
Mar
-84
Jul-8
5
Nov
-86
Mar
-88
Jul-8
9
Nov
-90
Mar
-92
Jul-9
3
Nov
-94
Mar
-96
Jul-9
7
Nov
-98
Mar
-00
Jul-0
1
Nov
-02
Mar
-04
Jul-0
5
Nov
-06
Mar
-08
Jul-0
9
Nov
-10
SA Equiy relative to Global Equity performance (rolling 5-yr annualised)
Global Equities outperform SA Equities, rolling 5yr annualised
SA Equities outperform Global Equities, rolling 5yr annualised
The four most dangerous words in investing:
This time it’s different!
What about valuations?
Page 12 | CONFIDENTIAL
07007
Equity Markets do not look expensive…
EM v DM: Forward P/E
Page 13 | CONFIDENTIAL
07007
10
20
30
40
50
60
70
80
90
100
Ma
r-7
5
Ma
r-7
8
Ma
r-8
1
Ma
r-8
4
Ma
r-8
7
Ma
r-9
0
Ma
r-9
3
Ma
r-9
6
Ma
r-9
9
Ma
r-0
2
Ma
r-0
5
Ma
r-0
8
Ma
r-1
1
But earnings are high!
S&P 500 Trailing 12 month EPS
Source: Bloomberg, September 2011
Current estimate: 99.22
Page 14 | CONFIDENTIAL
07007
Not so cheap on 10yr average earnings
Source: Morgan Stanley Research; 14 July 2011
S&P through-the-cycle PE ratio
S&P THROUGH-THE-CYCLE PE RATIO*
12.2
46.1
6.85.54.9
0
5
10
15
20
25
30
35
40
45
50
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
PE R
ATIO
* GRAHAM-DODD PRICE-EARNINGS, BASED
ON 10YR REAL AVERAGE EARNINGS
LONG-TERM
AVERAGE: 16.4
12M TRAILING PE
Page 15 | CONFIDENTIAL
07007
SA Equities...looks fair but again earnings is the risk
Source: I-Net Bridge to September 2011
ALSI trailing P/E
5
10
15
20
25
Ma
r-6
0
Ma
r-6
2
Ma
r-6
4
Ma
r-6
6
Ma
r-6
8
Ma
r-7
0
Ma
r-7
2
Ma
r-7
4
Ma
r-7
6
Ma
r-7
8
Ma
r-8
0
Ma
r-8
2
Ma
r-8
4
Ma
r-8
6
Ma
r-8
8
Ma
r-9
0
Ma
r-9
2
Ma
r-9
4
Ma
r-9
6
Ma
r-9
8
Ma
r-0
0
Ma
r-0
2
Ma
r-0
4
Ma
r-0
6
Ma
r-0
8
Ma
r-1
0
ALSI trailing P/E Mean +/- 1 Std dev
ALSI expensive
ALSI cheap
Page 16 | CONFIDENTIAL
07007
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
1.4
Jan-
70
Jul-7
1
Jan-
73
Jul-7
4
Jan-
76
Jul-7
7
Jan-
79
Jul-8
0
Jan-
82
Jul-8
3
Jan-
85
Jul-8
6
Jan-
88
Jul-8
9
Jan-
91
Jul-9
2
Jan-
94
Jul-9
5
Jan-
97
Jul-9
8
Jan-
00
Jul-0
1
Jan-
03
Jul-0
4
Jan-
06
Jul-0
7
Jan-
09
Jul-1
0
ALSI PE relative to MSCI World PE -1 Standard Deviation
Mean +1 Standard Deviation
SA equities…expensive vs global equities
Rand – the wild card
Page 18 | CONFIDENTIAL
07007
Foreign net purchases versus the Rand
Source: I-Net Bridge
4
5
6
7
8
9
10
11
-120
-70
-20
30
80
130
Jan-0
6
Ma
r-0
6
Ma
y-0
6
Jul-0
6
Sep-0
6
No
v-0
6
Jan-0
7
Ma
r-0
7
Ma
y-0
7
Jul-0
7
Sep-0
7
No
v-0
7
Jan-0
8
Ma
r-0
8
Ma
y-0
8
Jul-0
8
Sep-0
8
No
v-0
8
Jan-0
9
Ma
r-0
9
Ma
y-0
9
Jul-0
9
Sep-0
9
No
v-0
9
Jan-1
0
Ma
r-1
0
Ma
y-1
0
Jul-1
0
Sep-1
0
No
v-1
0
Jan-1
1
Ma
r-1
1
Ma
y-1
1
Jul-1
1
Sep-1
1
Foreign net purchases of SA Equities & Bonds (R'billion, rolling 12 months) USDZAR
Page 19 | CONFIDENTIAL
07007
The rand is still overvalued
Source: I-Net Bridge
Summary
Page 21 | CONFIDENTIAL
07007
Steadily holding our cautious mode
● The domestic equity market is over-valued – earnings are high
● We anticipate a great environment for stock picking…we are holding defensive
positions, cheap stocks and Rand hedges
● We are attracted to stocks with resilient, depressed or below average profit margins
● We are positioning for continued Rand weakness
● Global risks (Sovereign debt etc) are not going away and the economic recovery will be
muted
WE ARE DEFENSIVELY POSITIONED
● Markets have not sold off enough to warrant a broad scale acceptance of risk
Thank you
www.investecassetmanagement.com
Page 23 | CONFIDENTIAL
07007
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