PRIVATE CLIENT SECURITIES
MAY 2015
PROSPERITY
IN THIS CLIENT NEWSLETTER
• Business review and outlook
• Economic report
• Local equities
• Global equities
PROSPERITY
OVERVIEW AND BUSINESS UPDATE
The “Sell in May and go away” saying is probably one of
Local real economic growth slowed to 1.3% quarter-on-quarter
the best known and most often cited so-called market wisdoms
in the first quarter of 2015. The best performing sector in the
around. The phrase originated in the UK and references to it
first quarter was mining, but only because it’s normalising after
have been found as far back as 1694. For long-term investors
last year’s strikes. With low commodity prices and rising costs,
such notions offer little more than amusement. May was a
upside in this sector is limited. The most recent available data
month of gains across most world markets. The brief rally in
suggests weakness in both consumer spending and on the
certain commodities fizzled out and the expected boost to
production side of the economy. The latter is of course under
consumer spend due to lower fuel prices have yet to materialise.
enormous pressure from electricity load-shedding with no sign
As investors we keep an eye on the market’s sentiments and
of relief on that front in the short term.
economic lead indicators, but we are more interested in the
long-term view and specific company performance.
The Reserve Bank kept rates on hold at its May Monetary Policy
Committee meeting. Inflation rose to 4.5% in April, the mid-point
We are in a period where volatility is likely to increase on the
of the 3% - 6% target range. The Reserve Bank expects inflation
back of more credit-fuelled market speculation and uncertainty
to rise above 6% in the first quarter of next year, and warned
regarding the timing and expected impact of US interest rate
that it is likely to hike interest rates again. Its two main concerns
hikes. As we’ve noted in previous newsletters, these distractions
are Eskom’s application for a 25% tariff increase, which will
can cause a destruction of wealth if investors react to them
be confirmed in June and the potential impact on the rand if
out of greed and fear. A loss on paper is not the same as a
the expected US interest rate hikes kicks off in September. A
realised loss. Investors should heed their long-term objectives
weaker rand could put upward pressure on inflation, but the
and investment horizon while ensuring an appropriate level of
Reserve Bank noted that this “pass-through” effect is much lower
diversification within their investment portfolios. The only “free
than in the past.
lunch” in investing is diversification and time in the market
always trumps timing the market.
ECONOMIC REPORT
Global economic growth has been off to an unexpectedly soft
start this year, with the Chinese and US economies in particular
exhibiting slower growth in the first quarter. Europe and
Japan, the other major economies, posted decent first quarter
growth, but off a weaker base. Consumers have generally not
responded to the lower oil price as much as expected (while
producers have quickly cut expansion plans and jobs). Even
after a pretty sharp rebound from $45/barrel in January to
around $65/barrel in late May, the oil price is still around 40%
lower than a year ago. The benefit is likely to be felt during the
course of the year as consumers in the developed markets find
greater comfort in the idea that petrol prices will be “lower for
longer”. In the US and Europe, unemployment is still falling,
which should also support consumer spending.
02
PROSPERITY
LOCAL EQUITIES
BILLITON FOCUSES ON CORE
On 18 May, BHP Billiton listed certain of its non-core operations separately through South32 following the demerger announcement earlier in the year. Facing cyclically low commodity prices, this leaves Billiton in a position
where it can focus on cost reduction and greater efficiency in its core commodities portfolio of iron ore, copper,
coal, petroleum and potash. Countering the concerns over the quality of its assets, South32 does present a
diversified mix of commodities, financial strength and an attractive valuation.
ASPEN FOR THE LONG TERM
Aspen and its investors were equally surprised when a few large sell orders resulted in material price weakness in
May. The weakness may well be attributable to speculative hedge fund activity on the back of the GlaxoSmithKlein
(GSK) sale of around half its holding in the company in March. We believe it has very little to do with the long-term
investment case for Aspen and the share now presents a more attractive entry price for investors. For most of the
month it was trading in the price range of R365-R385 per share that was set for the placement by GSK.
Aspen announced the sale of a significant part of its Australian business, a move supported by their stated intent
to focus attention in areas where most value can be added and to lessen complexity. Price regulation by the
Australian government may make it difficult for pharmaceutical manufacturers to maintain margins down under.
WOOLWORTHS NOW NEARLY R100 A SHARE
Woolworths share price is within a hair’s breadth of R100. Five years ago you could buy the retailer at R23 a
share – that is a compound annual growth rate of 34%, excluding dividends. Investors continue to appreciate
their recent plans on David Jones and the Country Road group. Woolworths plans to push in-house affordable
luxury brands as they have done in South Africa (SA). One of SA’s most respected retailers, Whitey Basson, has
in the past been quoted as a fan and investor of Woolworths. Coming from such a formidable competitor, this is
arguably the highest compliment that can be paid to the company.
GLOBAL EQUITIES
CHINA’S GROWING MIDDLE CLASS LOVES DISNEY AND APPLE
Investors agree that China’s middle class and their rising personal consumption presents an attractive and
substantial growth opportunity for companies. What investors do not agree on is how to tap into this opportunity.
Our approach is to select well managed global companies that are leaders in their markets and are expanding
their footprint into China.
Both Disney and Apple are investing heavily in China. Disney is opening its largest store and a $5.5 billion theme
park in Shanghai while Apple’s iPhone and Mac are reeling in buyers in China, sending Apple’s second quarter
profits up by 33 percent. IPhone sales in greater China outpaced those in the US for the first time, helped by the
Chinese New Year celebration.
WARREN BUFFET AND 3G CAPITAL TEAM UP AGAIN
Following the acquisition of Heinz in 2013, Berkshire Hathaway and 3G Capital are close to finalising the merger
of Heinz with Kraft Foods. This will create a global giant in the foods business (world’s fifth largest by sales). The
current shareholders of Heinz, which include Berkshire Hathaway and 3G Capital, will hold a 51% stake in
the newly formed company. Brazil-based 3G Capital lead the 2008 takeover of Anheuser-Busch InBev and are
succeeding in extracting the required economies of scale and efficiencies. In the case of the Kraft-Heinz merger
these skills will again be required, but revenue growth will also be a focus. Heinz sells its products globally (60%
outside the US) while Kraft is predominantly in the US. The opportunity to sell certain Kraft products globally after
the merger will boost the topline.
MONSANTO AND SYNGENTA MERGER?
While there is some overlap in the businesses (for example Monsanto produces Roundup and Syngenta produces
Callisto – both herbicides are well known in South Africa) the net result of Monsanto’s potential acquisition of rival
Syngenta would create a formidable global player in crop protection and seeds. Competitors such as Bayer has
for many years been following a strategy of marketing seeds and crop protection from a single source. Monsanto
could also cut its corporate tax rate by more than a third if it the deal succeeds and it then moves its head office
to Switzerland where Syngenta is based. This would be despite political resistance in the US to so-called tax
inversions. The synergies appear obvious, but the risk is overpaying - Monsanto’s initial offer of $45 billion has
been rejected.
03
PROSPERITY
CONTACT US
CAPE TOWN
CHRIS POTGIETER
Head: Private Client Securities
Tel: (021) 524 4582
Cell: 082 827 9777
[email protected]
ANIL THAKERSEE
Chief Investment Officer
Tel: (021) 524 4526
Cell: 082 560 1468
[email protected]
AVIEN PILLAY
Head: Research and Investor Services
Tel: (021) 524 5313
Cell: 076 912 6045
[email protected]
OCKERT VAN NIEKERK
Head: Trading and Advisory
Tel: (021) 524 4899
Cell: 083 445 2511
[email protected]
DEREK ALTON
Portfolio Manager
Tel: (021) 524 5466
Cell: 072 290 4220
[email protected]
PAUL STEVEN
Portfolio Manager
Tel: (021) 524 4572
Cell: 076 719 3958
[email protected]
MICHAEL TONKIN
Portfolio Manager
Tel: (021) 524 4410
Cell: 082 331 3599
[email protected]
JOHANN VAN ZYL
Portfolio Manager (Stellenbosch)
Tel: (021) 861 4400
Cell: 083 261 0140
[email protected]
ASANDA MAXAXUMA
Client Liaison Officer
Tel: (021) 524 5314
Cell: 083 392 1321
[email protected]
TREVOR O’CALLAGHAN
Portfolio Manager
Tel: (011) 245 3801
Cell: 083 660 8321
[email protected]
GARY SMITH
Portfolio Manager
Tel: (011) 245 3802
Cell: 082 464 3691
[email protected]
DEAN GINSBERG
Portfolio Manager
Tel: (011) 245 3818
Cell: 083 650 8223
[email protected]
SUSAN BUYS
Client Liaison Officer
Tel: (011) 245 3805
Cell: 082 599 1185
[email protected]
LASCA JOUBERT
Senior Administration Specialist
Tel: (011) 245 3807
Cell: 083 417 1816
[email protected]
BRONWEN DE KLERK
Client Liaison Officer
Tel: (011) 245 3806
Cell: 082 371 5043
[email protected]
JACQUES THERON
Portfolio Manager
Tel: (012) 369 7235
Cell: 082 495 6465
[email protected]
COLLEEN OLIVIER
Client Liaison Officer
Tel: (011) 369 7236
Cell: 076 978 8862
[email protected]
MICHELLE MATTHEWS
Client Liaison Officer
Tel: (021) 524 4421
Cell: 083 979 6391
[email protected]
JOHANNESBURG
PRETORIA
GREG POTGIETER
Portfolio Manager
Tel: (012) 369 7234
Cell: 082 823 2731
[email protected]
The Estuaries, 2 Oxbow Crescent, Century City 7441. PO Box 207, Cape Town 8000, South Africa.
Tel +27 (0)21 524 4400, Fax +27 (0)21 441 1060, www.omwealth.co.za
Private Client Securities: Cape Town: +27 (0)21 524 4400| Sandton: +27 (0)11 245 3805 | Pretoria: +27 (0)12 369 7236 | [email protected]
Old Mutual Wealth Private Client Securities (“PCS”) is a business unit of Old Mutual Life Assurance Company (South Africa) Limited (“OMLACSA”), a licenced Financial Services Provider, Reg. No: 1999/004643/06.
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