1. World Markets
Balancing the risks

2. Shut happens!

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
2

3. US economy – chugging along

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%
3

4. S&P500
1990 - 2000
Tech revolution
Globalisation
Cell phone
Internet
2000 - 2010
GFC (Collapse of Lehman)
China emerges
9/11 crisis
2010 - 2020
End of commodity super cycle
Shale, oil, gas revolution
IT & communication transformation
3D printing, big data
Aging demographics: US, Japan, China, Europe
4

5. What the Frack ?

6. Hydraulic Fracturing
6

7. The Natural Gas Revolution
 Fracking has allowed energy companies to dig deeper than
before unlocking unconventional oil deposits
Crude Oil net Imports
 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
Crude Oil net Exports
 Making it less dependent on oil from foreign nations whose
interests conflict with theirs
 Imports are down to 40% from 60% in 2005
7

8. The Natural Gas Revolution
 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 BNSF carry 650k barrels
coal plants
a day, soon to increase to
Emissions fallen 12% since 2007 on conversions
750k barrels a day, will
 Boom in oil and gas drilling creating jobs in states hard hit by
recession
eventually reach over 1m
barrels a day
 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
8

9. 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%

10. Europe‟s deficit problem
10

11. Europe: signs of economic recovery are visible

Strongest gains estimated in Germany, UK & Ireland
Euro zone expected to
expand by 1.2%
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

Euro zone blighted by private
debt even more than Govt debt
Without growth, zombie firms are unable to invest or grow
Much like those wafting through Japan in the 1990s
11

12. UK: economy accelerates to fastest growth since 2010

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
12

13. Japan: “Abenomics” a mix designed to jolt the economy
CPI
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
13

14. 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

15. Emerging Markets continue to disappoint

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
15

16. 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

17. 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
•
Home to 20% of the world‟s
population
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
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)


Consumption expected to overtake investment as the largest contributor to GDP
Investment
42% (2010 – 2020)
34% (2020 – 2030)
Consumption
- 23%
41% (2010 – 2020)
51% (2020 – 2030)
+ 24%

18. China‟s growing middle class is demanding more
Western brands sell a lifestyle / image aiming
to attract the aspirant Chinese consumer
McDonalds
Haagan-Dazs
Nike
Adidas
Starbucks
Paul Frank

19. South Africa

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
19

20. JSE trading at all time highs

21. 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)
1.1 tr
British Am Tobacco
25%
SABMiller
859 bn
Billiton
655 bn
Richemont
536 bn
Naspers
385 bn
69%
MTN
368 bn
29%
Anglo American
335 bn
-11%
Sasol
328 bn
37%
Standard Bank
203 bn
19%
Firstrand
202 bn
29%
41%
12%
85%
Vodacom
172 bn
158 bn
137 bn
129 bn
Pick ‘n Pay
23bn
Telkom
14bn
Adcock
12bn
JD Group
-21%
Barclarys
Market Cap
36%
Kumba Iron Ore
Market cap: R714m
9%
Old Mutual
Xstrata/Glencore
7bn
9%
124 bn 75%
Aspen
0
200000
400000
600000
800000
1000000
1200000

22. Local Investment Ideas: Stick with the winners
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
22

23. JSE is more of a convenience store than a supermarket
JSE
Global Markets
23

24. Create a champions league portfolio
JSE
Global Markets
24

25. A guideline to our team‟s offshore investment ideas
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
25

26. Thank You
David Shapiro
Kavita Patel
Craig Diesel
Carmen Solomons
Deputy Chairman / Director
david.shapiro@sasfin.com
Portfolio Manager
kavita.patel@sasfin.com
Portfolio Manager
craig.diesel@sasfin.com
Portfolio Assistant
26
carmen.solomons@sasfin.com