You and Your Money
Posted: 2009-12-21 23:57
Presenter: Bryan Hirsch Guest(s): Poultney, Pheiffer
Summit TV personal finance expert Bryan Hirsch speaks to Craig Pheiffer from Absa Investments and Gary Poultney from Sasfin about the excellent performance of the markets in 2009 and what investors can expect in 2010
BRIAN HIRSCH: Welcome to You and Your Money. Our subject is looking ahead at the markets with guests Craig Pheiffer general manager Absa Investments and Gary Poultney divisional director and portfolio manager at Sasfin. It always puzzles me when I’m asked what I expect returns to be over a calendar year - my standard response is market values know nothing about calendars. Among investment advisors asked that question this time last year who on earth could have predicted the market’s performance in 2009? Many commentators expected the markets to come off - but certainly not by 45% - and in March 2009 few if any were able to predict the increase of 50%. As it happens from January 2009 to now the all share index is up 21%, the resources a similar amount. Surprisingly the gold index is only up 18% when the gold price is up 34% in dollar terms - and who could have predicted the rand against the US dollar would have appreciated by 19%? If you try and assess your investment performance over one year expect to chase your tail is short term returns are so misleading they’re really irrelevant. Craig, what do you make of all this? This is your fifth time on the show - we’ve seen an unbelievable rollercoaster - could anyone have seen what was going to happen in 2009?
CRAIG PHEIFFER: I think it’s been a remarkable set of circumstances that we’ve lived through. I would like to think it’s a once in a lifetime occurrence - but given the way financial markets have developed it could well happen again. We’ve created huge amounts of liquidity in the markets now - some say we are creating a problem for a few years down the line. Certainly the problems we’ve had in the last year or two were created in 2001 when we created this huge amount of liquidity in the first place - but it’s a confluence of factors are all coming together. One key thing we did see was all of the global economies working together this time to try and solve this problem - all the central banks moved in concert talking to each other cutting rates at the same time trying to get those economies going again. That’s the one positive that we have seen. Obviously the markets responded as well. Certainly it’s been unprecedented times going from Armageddon one week to a bit of euphoria the next. We seem to now be steadying the ship a bit…
BRIAN HIRSCH: Craig, I’m going to talk to you about V, L, U and W shaped recoveries - but I first want to bring Gary in because he’s on the retail side. Gary, you’re a financial nanny - a financial investment advisor - and at the same time an investment analyst because your clients must have gone through some unbelievable panic stages…
GARY POULTNEY: Yes, they really have. It’s been quite difficult to try and second guess what the markets are going to do - you try to stick to the old “stay with the good quality shares as it comes right eventually.” But people still do panic a bit and worry about their finances and the families around them. Their sons and daughters - if their businesses go wrong then it comes back to the poor old man again and he’s got to sort it out - so it does put a lot of strain on these people.
BRIAN HIRSCH: Gary, we’ve seen unsophisticated investors move out into the markets at the wrong time and moving into the money markets. Where you manage portfolios have you been able to get your clients to relax and understand they’ve got to hold - that you take risk and you need time in the market and you need to hold - have you been able to achieve that?
GARY POULTNEY: It’s also about trying to get the best returns you can with limited risk. Returns on the money markets are pretty poor right now around the world - after tax especially. The returns from some of the shares - you will see dividend yields of up to 4% and 6% in some cases with the possibility of growth so it makes sense to stay in some of these equities…
BRIAN HIRSCH: That’s a good point. We’re talking about returns from 4% to 6% in dividends that’s tax free compared to money market at 6% or 7% with a 40% tax rate that’s below 5%...
CRAIG PHEIFFER: I think it all comes down to what your investment horizon is - if you don’t need the money next week or even next year and you’ve got a bit of longer time horizon you need to stick it out in the equity markets. We’ve seen it and our forefathers have seen it before us - the market goes in cycles and over the long term you get growth probably real returns of 7% or 8% is the norm after inflation. You have to be in equities over the longer term for growth. We get these bumps - and this was quite a substantial bump we’ve had to live through - but you just have to stick it out and be in the market. Clearly when the market was at eight or nine times PE ratios we were pricing in complete disaster. Who knew? It could have gone the other way. Things could have got still cheaper - but if you look historically over the longer term it was a cheaper place to be buying equities. That was quite a big opportunity. Of course we are now getting towards 17 times historical earnings so things are looking a lot more expensive and your choices are as Gary said quite limited again.
BRIAN HIRSCH: Let’s just talk about the V shaped recovery - the markets go down and up - and then there’s the U shaped recovery that takes a bit longer, the L that’s a long time at the bottom and then the W with a double dip - where do you think we are in this alphabet?
CRAIG PHEIFFER: When we talk about the alphabet we are talking about the economies rather than the markets - so let’s just separate those two for a second. I think the markets lead the economies. What we saw was that very sharp L where it was all fall down - it was calamitous Armageddon, the end of the world - that was the sharp line down. Now if you say where do we go from here, are we just going sideways? I think what we are looking at is a more gradual up slope - so not a proper V or an L but something in the middle - a very shallow but long recovery that’s going to take a much longer time to come through...
BRIAN HIRSCH: We have caller Kim with a question…
KIM: What is your outlook for inflation both locally and internationally?
BRIAN HIRSCH: Gary, that’s really the million dollar question, isn’t it? Inflation internationally, local inflation - have we brought it under control? Internationally when inflation picks up if it does are we going to get some problems in the markets?
GARY POULTNEY: I think we might see a little bit of an increase now in inflation rates again from about 5.9% to 6% but then still to be within our target range that’s set by the SA Reserve Bank - and that should be for the first few quarters of 2010. Thereafter I think it becomes a bit difficult to see where it’s going to lead us - because interest rates might start picking up again in the third or fourth quarter of 2010. It’s quite hard to see where inflation rates will be but it’s expected to be a bit benign...
BRIAN HIRSCH: I’m going to come back to that because I want us to talk a little bit about inflation and rates. Craig, just talking about interest rates for a moment - we talked about interest rates being very low internationally and not likely to increase - there’s a question now of whether we are likely to get an interest rates drop or interest rate increases in January 2010 or later in the year...
CRAIG PHEIFFER: I think locally we’ve seen the bottom of the cycle. We could still be there for some time - but we are seeing early signs of recovery. The first little snippet of a recovery was the third quarter GDP numbers at 0.9%. We must realise that’s the quarter on the previous quarter and then still seasonably adjusted and annualised so it’s a tiny little number that they’ve made as big as just 0.9% so there are very early signs of growth coming through. That’s really come through on the manufacturing side so far - we’ve still got to see more exports as the world economy recovers demanding more of our goods and services so we can export a bit more and we can manufacture a bit more. We’ve run down our inventories quite a lot now so we can get to that point where we start producing more and then through that process start creating jobs - and then hopefully those people who get jobs start spending more and the economic activity builds on itself - so I think we are at the start of the economic recovery and it will gain momentum.
commercial break
BRIAN HIRSCH: We are discussing what’s happened in the markets during the year and our thoughts for the coming year. We have caller Karen back on the line...
KAREN: Do you think there’s a lot of life left in our property funds?
BRIAN HIRSCH: We are going to deal with gold and property funds. Craig, let’s just talk a little bit about global inflation…
CRAIG PHEIFFER: The key thing with global inflation is we’ve had huge monetary and fiscal stimulus so there’s a lot of liquidity in the system - one would think that with all that liquidity lots of money and too few goods the traditional view is inflation must be the result. That’s not necessarily so because there’s a huge amount of excess capacity still in the economy - there’s a long way to work through that capacity before we really start getting inflation coming through into the system. From a global point of view we are not looking for a big pickup in inflation. Certainly it is going to pick up in the next little while - growth in the US is probably heading to the 4% to 5% real range in this last quarter and in the first quarter of next year so growth is picking up quite nicely there and we can see inflation picking up as a result - but I don’t think we are heading back to those headier numbers we’ve seen before of 4% and 5% before the whole crash so maybe in the 2% to 3% range and probably in the lower twos. In the UK and euro zone where they’ve got a 2% inflation target it probably gets close to that - and maybe a little bit over - but it should come back again. At this point in time inflation isn’t a concern.
BRIAN HIRSCH: Do you believe the USA when they say they’re not going to increase interest rates?
CRAIG PHEIFFER: I do believe them - and for the foreseeable future they’re not. I think there’s two stages to withdrawing monetary policy that we are going to see - first of all there’s quantitative easing where we’ve seen a whole lot of money being pushed into the economy, into buying assets and into banks. The first thing is to drive that up - then only after that has happened will we start seeing interest rates going up so we are only looking for the US Federal Reserve to put up interest rates in the third September quarter of 2010 and in the euro zone just after the US, in the UK maybe 2011 and Japan maybe even 2012.
BRIAN HIRSCH: Gary, have you shifted your portfolio? We’ve got such a strong rand - or we think it’s strong and everyone talks about it being strong. Craig talks about manufacturing picking up and exporting - you’ve got a dilemma with the strong rand. Has there been a shift in portfolios to rand hedges - and what about gold shares?
GARY POULTNEY: I think most of the focus has been on the resources shares like Anglo American and BHP Billiton and the platinum shares perhaps. The gold shares have been hit by higher costs and lower production and there’s all these safety recommendations where if there’s an accident or something they have to close down that shaft for a period of time to assess what the problem was so lots of production hours have been lost plus the oil price has been reasonably high and that impacts on mine costs. Unfortunately the gold shares haven’t really come to the party as much as we would have liked them to have…
BRIAN HIRSCH: Gary, are you underweight rand hedges and resources?
GARY POULTNEY: No, we are quite overweight rand hedges at the moment. One has to consider that although the rand is quite strong it’s fairly strong against the dollar because of dollar weakness. The dollar seems to be in a range against the euro of about 1.45 to 1.55 so it’s not really breaking out of that yet. It’s still expected that maybe the dollar will get to show a bit more weakness in due course - but maybe also this little rally we’ve seen is the early signs of a bit of a turnaround coming through slowly but surely. If the rand has been one of the stronger performing currencies in the world in the last 11 months that does beg the question shouldn’t one be looking at still buying and staying with good quality rand hedges for when the whole shift starts taking place again and the rand must weaken slowly but surely against the dollar?
BRIAN HIRSCH: We’ve got Andrew on the line...
ANDREW: I’d like to know what the main risks are for emerging markets - and do we think that emerging market equities are still attractively priced?
BRIAN HIRSCH: I’ll come to that in a moment. Craig, I just wanted to talk about your views on gold and rand hedges?
CRAIG PHEIFFER: I could see the rand still stronger for a bit longer. I think just by being in most of the big cap shares in our markets you’re probably overweight rand hedges anyway because you’re probably overweight resources - and British American Tobacco that isn’t in the index but that’s our biggest market cap stock as well. If you’re in that as well you probably are overweight rand hedges. Taking a look at the dollar I think with this growth that we talked about earlier coming through we are going to see less funds actually looking for emerging market homes and actually coming back to the US - and that I think could keep the dollar a bit stronger in the next six months so more in that 1.40 to 1.45 cents against the euro range on the six month view. So the dollar could be stronger and we could see the rand weaken up again - and that would benefit the rand hedge stocks that we do have.
BRIAN HIRSCH: That was Andrew’s question - he asked what are the risks in the emerging markets? Is that a strengthening dollar?
CRAIG PHEIFFER: Yes, I think it’s the US economy doing better and improving - and those funds rather staying at home than going abroad. Our own market has been driven by this huge amount of liquidity - the emerging markets in general, risk aversion, trying to get out of the dollar that’s gone into the emerging markets. Now when those markets like our own are at 17 PEs and the rand is so strong - like Gary said you would think over time the rand would weaken up a bit and that might scare away investors that are already in here so we could see some funds going out if the markets are not that attractive and the rand should weaken up and we lose some of the attraction.
commercial break
BRIAN HIRSCH: We’ve got caller Brad on the line...
BRAD: If one’s making investments now in the markets should one wait or put in a lump sum?
BRIAN HIRSCH: Gary, I think that’s always the question - people with cash say should one rush into this market? Craig spoke about 17 times earnings - but let’s understand and maybe you’d like to comment isn’t that coming off from where companies have shown a lot lower profits and therefore that in itself has a way of increasing earnings multiples?
GARY POULTNEY: Sure, but we also look at the long term average - and we are slightly above the long term average - so I think one has to look at that and say where are the forward earnings going to come from? Not dramatically so from the economy right now I don’t think - so we’ve got to think that share prices could well ease back a little in the short term. I think it’s right to ease the money in slowly because you are never sure that you are doing the right thing - you will still be a bit confused - but certainly to come into the market slowly and surely watching things like the dollar against the euro and Chinese growth certain key factors one has to be always on the lookout for.
BRIAN HIRSCH: Would you agree to phase the money in?
CRAIG PHEIFFER: I would. The market is historically in a more expensive valuation now so there is no need to rush in now. I would phase it in. Of course it does have a bit of momentum so you don’t want to lose out on that momentum if it does carry on. The markets are still likely to lead the economic recovery that seems to be gathering a bit of momentum now so the market could still have a bit of legs so you want to partake in that - you want to go along for the ride so I would think you would start getting involved now and if the market falls back you keep building your portfolio.
BRIAN HIRSCH: But you’re not suggesting that if you’re in the market you do anything? If you’re in the market you stay. If you’re putting more money in you phase it in…
CRAIG PHEIFFER: Yes.
BRIAN HIRSCH: Dealing with Karen’s question the property funds are quite an unusual part of the market because there’s possibly income there and growth. What’s your view - is there value?
CRAIG PHEIFFER: They’ve held up. Again it’s an alternative income source - although taxable. The thing about that income source is that it’s growing over time - those distributions are still growing. It’s single digit growth but that interest income that you’re getting is increasing every year - and that should still support prices and you should see some modest capital appreciation over time as well. Locally we’ve got a very limited pool of property and the funds that are based on top of that property, that hold the investments are also fairly limited so the rentals have been increasing and that’s flowed through to the distributions. Again if I was in those I would stick with them - just as a means of diversifying your portfolio you should have some income element and in that income element I would still have some property stocks. Always, going to that market have a selection of four or five of those if you can.
BRIAN HIRSCH: Gary, are you putting clients into any of the property loan stocks?
GARY POULTNEY: Because of the tax angle we’ve got to look at that as well, yes. It is taxable - but I like the idea now that if you’re looking for that recovery in the property market and the economy in general it’s not a bad place to be to get a reasonable income. You can see the value of your property every single day in the newspaper so I think it’s an easier way to be in the property market than buying your own flat and houses and trying to rent them out…
BRIAN HIRSCH: Craig, going ahead we haven’t asked you what you think for the next year or two - are you quite bullish on equities?
CRAIG PHEIFFER: We’ve had a remarkable year in 2009. The volatility is still going to be with us - and it’s always going to be a hair-raising experience - but I think when you look back after two years we will probably have a fair bit of growth but I don’t think we are going to shoot the lights out. We talked about the real long term average of maybe 7% or 8% growth - I think if we got that in each of the next two years we will be happy.
BRIAN HIRSCH: Your predictions?
GARY POULTNEY: I think it will be fine for the first half of 2010. There is the danger of a little bit of a wobbly in the second half - but I would still agree with what Craig is saying that it’s not going to shoot the lights out over the year but I think we are getting back to reasonable growth levels in the next year or so.
BRIAN HIRSCH: There is a belief that you can either make or lose a lot of money on the markets but the markets certainly aren’t a casino. There is a lot of money sitting in the money markets - those people probably have missed out substantially - but who knows what’s going to happen? I always make the comment that if you’re a long term investor you shouldn’t be worrying about the headlines you read every day as over the short term stock markets are complicated and prices are the result of huge guessing games. Too much focus is placed on the immediate outlook for both markets and companies as well as news headlines that can be very negative, and when the markets are running very positive. Investors need to have a strategy and understand all the risks and appreciate that to create wealth not only do you need time in the markets but to hold right through the tough times.
Before acting on any advice please consult your investment or financial advisor. |