3. Where we are
USA (GDP $14 330 bn) Japan (GDP $4 840bn)
GDP: -6.1% (4Q: -6.3%) GDP: -15.2% (4Q : -14.4%)
Govt. debt is 110% of GDP Govt. debt is 225% of GDP
China (GDP $4 220bn) S Africa (GDP $300bn)
GDP: +6.1% (4Q: +6.8%) GDP: -6.4% (4Q: -1.8%)
Govt. debt is 23% of GDP Govt. debt is 27% of GDP
4. The Great Recession: how we got here
Excessive leverage
• “The most important lesson is the world needs a whole lot less
leverage”
Gross immorality
• Consumer credit give to people who couldn’t handle it
• Derivatives traders preyed on their customers
Stupidity
• People inside institutions themselves; regulators didn’t listen
“Horribly failed” by accounting profession
• The people who created the principles should be removed
8. Quotable
“The watchword throughout the
country became the creed I saw on
restaurant walls when I was young:
‘In God We Trust; all others pay cash.’”
Warren Buffett,
March 2009
9. Consequences of the financial crash
Deep economic recession which “it’s going to last a very
long time”
Probably lead to increased regulation for financial
services
China, not US taxpayer is picking up the tab
Lower US Dollar as politicians lower the value of
ballooning debt
Buffett: “You can bet on inflation.”
10. Quotable
“The best protection against inflation
is your own earning power. The second
best protection is owning a wonderful
business that does not need injections
of capital. With these guidelines, I’d
say invest in yourself.”
Warren Buffett,
May 2009
11. Bobbin Boy to Billionaire…
25 November 1835
to
11 August 1919
Shrewd stock investor and entrepreneur
Founded Carnegie Steel and became US Steel
Gave away 90% of his fortune
• Buffett too
12. The richest people of all time
1 John D Rockefeller Standard Oil $318.3bn
2 Andrew Carnegie Carnegie Steel $298.3bn
3 Nicholas II Tsar of Russia $253.5bn
4 William Vanderbilt VDBilt Railroads $231.6bn
5 Asaf Jah VII Nizam of Hyderabad $210.8bn
6 Andrew Mellon Mellon Bank $188.8bn
7 Henry Ford Ford Motor Company $188.1bn
8 Marcus Licinius Crassus Emperor of Rome $169.8bn
9 Basil II Byzantine Emperor $169.4bn
10 Cornelius Vanderbilt VDBilt Railroads $167.2bn
OTHERS:
15 Elizabeth I Queen of England $142.9bn
17 Sam Walton Walmart $128.0bn
22 Cleopatra Queen of Egypt $95.8bn
57 Bill Gates Microsoft $40.0bn
86 Warren Buffett Berkshire Hathaway $26.0bn
13. The Andrew Carnegie Playbook
Only buy when others are panicked;
Invest to build your business during times of crisis.
“Berkshire Hathaway is now following the
Andrew Carnegie Playbook.”
Charlie Munger,
May 2009
14. Some advice from Warren Buffett
“Stay within your circle of competence
– understand whether the competitive
advantages are durable or not. And
really understand that the market is
there to serve you.”
Warren Buffett
15. And when it comes to investing…
“If you have an IQ of 150, to be a good
investor, best you trade 30 points to
someone else. But you DO need to have
emotional stability, inner peace, the
ability to think for yourself. If you have
that quality, you will do very well at it.”
Warren Buffett,
May 2009
16. And while we’re on the subject of IQ…
“If you think your IQ is 160 and it’s
150, you’re a disaster. Much better is
someone with an IQ of 130 who
operates within himself.”
Charlie Munger,
May 2009
17. Annus Horribilis X 2, or 3?
Market disruption in 2007 and 2008
• Crisis borne of modern finance
• Old-fashioned economic crisis
2009: Poor economic fundamentals support outlook for
stock market weakness
Recovery in developing countries not seen until 2010
Yet developing countries have lent economic stability
• Domestic demand from sustained development
• Stringent regulatory regimes
• Government investment
18. Slave to the USA? Decoupling holds
~ 60% of the rise in world GDP between 2000 - 2008
happened in developing countries
• 2000: developing countries = 37% of global GDP
• 2008: developing countries = 45% of global GDP
Economic and business cycles between 2000-2008
• Economic cycles of America and Europe converged
• Business cycles of India and China converged
Proving that
• Developing countries grow or shrink autonomously, not just
under the influence of the rich countries
Study by IMF, University of Virginia, Cornell University, quoted in The Economist, 20 June 2009, page 58
19. Developing Countries drive global growth
Between 2000-2008, developing countries
generated 60% of global GDP growth
Source: IMF, The Economist
20. A little perspective: 2007-9 v. 1998-9
Every 10 years or so, global economies & markets
plunge
SA not doing so badly compared to AEC impact
• Better information
• Localised problem
• DC regulatory controls
• SA saw significant gains post-crisis
Precedents exist for understanding current conditions
No doubt it will be a rough recovery, but recover it will
21. GDP from one major crisis to another
W L V Z S Alphabet soup of recovery profiles
Forecast
Forecast
Forecast
Source: Bloomberg
22. Onto the Next …
Good things do end, to start again
• China and India are expected to drive recovery
• USA to follow; EUR likely later
Domestic demand is key to recovery
• Governments of developing countries are pouring money into it
Rising exports to China, India will not wholly compensate
for drop in exports to USA, EU
South Africa is mostly driven by domestic demand
• Only ~30% of GDP comes from exports
• Relatively protected
23. The Good
Global market sentiment is positive – ‘worst is over’
• Markets run on: fundamentals & what everyone hopes will happen
• Sometimes the two agree
Investment stimulus in USA, China
• Positive impact on sentiment
• Results yet to be seen but expected to be good
• Funding the stimuli means higher taxes
South Africa
• Unit Trust investment in Equity is ~20% now
24. The Bad
Slower contraction; Japanese-style stagflation is possible
• Will we see a repeat of Japan and ZIRP?
• Yes: effective rates are negative, like Japan; unemployment rising
• No: more flexible and immediate responses to turmoil
2009 global stock market rally likely to fizzle short-term
• Rising oil prices put the brakes on growth
• Outlook for higher taxes reduces consumer spending
South Africa
• Begins its old-fashioned economic recession
• Strong rand is double-edged sword
• Unit Trust investment in Money Market is ~37% now
29. Stocks: Long-term perspective
Developing Country stock index performance since the last major crisis
Local currency, local index levels
Source: Bloomberg
30. Stocks: South Africa outperforms
Country/ Region Index June 2009 3 months 6 months 12 months YTD
World MSCI World Free -0.4% 21.0% 6.8% -29.0% 6.8%
EM MSCI Emerging markets -1.3% 34.8% 36.2% -27.8% 36.2%
Pacific MSCI Pacific 2.1% 25.7% 9.7% -24.3% 9.7%
Europe Dow Jones Euro Stoxx 50 -2.69% 25.7% 1.9% -33.8% 1.9%
Developing Countries
Brazil Bovespa -2.8% 47.7% 63.1% -35.8% 63.1%
China MSCI China 4.1% 35.8% 37.6% -8.1% 37.6%
India MSCI India -2.2% 59.8% 57.4% -5.0% 57.4%
Russia MSCI Russia -14.3% 37.8% 45.9% -61.1% 45.9%
South Africa MSCI South Africa 1.2% 31.3% 26.1% -11.9% 26.1%
Developed Markets
France Cac 40 -4.7% 22.1% 1.8% -34.2% 1.8%
Germany Dax 30 -3.6% 24.4% 0.9% -33.3% 0.9%
Hong Kong Hang Seng 1.6% 37.7% 30.4% -13.1% 30.4%
Japan Nikkei 225 (not TR) 3.5% 25.7% 5.6% -18.8% 5.6%
UK FTSE 100 -1.4% 26.0% 12.7% -34.6% 12.7%
USA Dow Jones Industrial 30 -0.4% 12.0% -2.0% -23.0% -2.0%
Source: Investec
31. Bonds: safe & suffer by comparison
Bond and Money Market (local currency returns)
Name June 2009 3 months 6 months 12 months Year-to-date
All Bond -0.23% 0.3% -4.9% 19.3% -4.9%
GOVI -0.23% 0.3% -4.6% 18.6% -4.6%
OTHI -0.24% 0.4% -6.0% 22.1% -6.0%
Bonds 1-3
0.11% 1.4% 3.7% 16.8% 3.7%
Years
Bonds 3-7
-0.28% 0.6% -1.8% 20.7% -1.8%
Years
Bonds 7-12
-0.03% -0.1% -6.0% 19.9% -6.0%
Years
Bonds 12+
-0.52% 0.1% -10.7% 24.1% -10.7%
Years
Barclays BESA Govt Inflation-
0.10% 3.4% 5.9% 7.7% 5.9%
Linked Bonds
Source: Investec
32. Take Warren Buffet’s advice
BUY WHAT YOU KNOW
Global Economic background
• China, India to drive economic recovery
• Investment momentum into those markets is strong
• USA due to recover next year; EU late 2010
Africa is the new Far East – 10-year horizon
• Undiscovered in terms of large investor flows
• Chinese and Indian investors have forged strong ties
• African leaders are tired of being pushed around, are giving as
good as they get
South Africa, largest & most advanced economy, to lead
33. Africa asserts itself on world stage
• Kikwete admonishes IMF/World Bank/UN
at WEF (Business Day, frontlineafrica.com, FT)
• African Leaders Want Bigger Role in
IMF, Push for Aid (Bloomberg)
• Africa seeks a voice in global financial
management (Africa Renewal)
• G20 Summit: Did Africa get what it
wanted? (The Independent, UK)
• Ethiopian PM and IMF to represent
Africa’s voice at G20 summit (afrik.com)
• Tsvangirai raised money overseas
Africa asserts itself and the value it
represents to the world via resources.
SA poised for leadership.
34. African growth will be substantial
African economies are termed ‘frontier economies’ by major
investment banks
Profit potential over the next 10 years is large, based on
fundamentals and what people hope will happen
BUY WHAT YOU KNOW
China/India to lead economic growth – but do you know those
companies? What are costs to invest?
SA companies are
• Capitalising on domestic demand
• Moving into Africa to capitalise on rand, continental progress
36. Tough time for savers
Interest rates have fallen
• Repo rate down from 12% in November 2008 to 7.5%
(down 37%)
• Futures markets forecast further 0.5% to 1.0%
decline
• 3 month money market rate currently 7.0% pa
• After tax yield 4.2% (lower than inflation)
Global rates significantly lower
• US 3 month 0.5% pa
• UK 3 month 1.0% pa
Preference shares are down with lower prime rate
– but still appealing relative to short term rates
Corporate debt market more attractive but riskier
– although spreads have fallen
Equity markets appear to have bottomed – but the
outlook for growth and earnings remains uncertain
– companies conserving cash, reducing dividends
But downside risk in equities lower than upside
38. Snapshot of South African economy
Economy in recession – first in 2 decades
Heavily dependent on buoyancy of global
economy – exports plus imports make up
74% of economic activity
Manufacturing (18% of GDP) and mining
(7%) contracting sharply
Consumers (61% of GDP) paying down
debt – no appetite to spend although lower
interest rates, food prices and petrol helping
Housing market in decline but share market
stabilising
Government infrastructure programmes
valuable – but with savings rates low,
financing dependent on foreign investors
39. There are some rays of light…
Sensible fiscal and monetary policies have
anchored the economy (up to now)
Government debt levels remain low – recently
raised $1.5bn at reduced spread
Banks operating normally – prudentially
managed
National Credit Act and Forex controls
protected economy from worst of the global
crisis
Corporates in good shape – satisfactory
results under difficult trading conditions
Still opportunity for growth domestically as well
as in emerging Africa
Lower rates and easing prices put more
money in consumers’ wallets
2010 World Cup and other sporting events
providing short-term kickers
40. JSE
Sector breakdown of top 180 companies
Property
2.40%
Industrial
12.20%
Financials
13.30%
Foreign income
31.40%
Resources
40.70%
41. JSE
Market cap of top 10 listed companies
Market Capitalisation % of Total Market
Company
Rbn Capitalisation
British American Tobacco 449 11.5
BHP Billiton 385 9.9
Anglo American 297 7.6
SAB Miller 269 6.9
MTN 219 5.6
Sasol 173 4.5
Standard Bank 138 3.5
Angloplats 127 3.3
Impala Plats 108 2.8
Anglogold 101 2.6
58.2%
42. Equity markets recovering
- green shoots appearing
Signs of stabilisation in world economy –
“getting worse more slowly”
• China restocking – commodities prices picking up
• US existing and new homes sales steadying - mainly
at low end of market
• Credit increasing – spreads tightening
• US banks repaying government rescue money
• Certain business confidence indicators bottoming
Equity markets recent performance
suggests most of the bad news has been
absorbed
Over past 10 years real return on US stocks
-47% versus plus 71% on bonds - no risk
taking will end capitalistic system
Hurdle rate – shares should beat
bonds/money market
43. Bears still having their say
Commodity prices expected to fall after China
completes restocking – “treat China’s stimulus
package with caution”
US treasury yields rising on inflation fears –
“can’t have stimulus without inflation”
• Rising yields hurting mortgage refinancing
• Obstacle to economic recovery
• Oil creeping up – adding further doubt to recovery
Views that the US stimulus package, although
sizeable, isn’t large enough to sustain growth
Still questions about the drivers of US growth
• Global economy down
• Consumers still under pressure - rebuilding their
balance sheets and fearing job losses
• Corporate recapitalising and cleaning up their
business portfolios
Corporate profits in a decline
• Down in last 7 quarters – still falling
44. Quotes from recent result presentations
“Global economic conditions and consumer demand “Difficult conditions are expected to remain until at least
weakened during the year and there remains little the second half of 2009.”
visibility as to the timing of any recovery.” Astrapak
SAB Miller
“There are currently very few encouraging signs in the “Although interest rates are expected to decline further,
global picture. We cannot predict when an overall Tiger Brands is expected to experience difficult trading
improvement in trading will come.” conditions for the remainder of the year.”
Richemont Tiger Brands
“Retail trading conditions are expected to remain “The overall trading environment in the second half is
challenging in the coming months.” expected to remain difficult.”
Nu Clicks Barloworld
“Reduced economic activity and the likelihood of “The company is well aligned with infrastructure,
declining inflation will result in lower turnover growth.” mining and power generation markets and will continue
Spar to benefit from anticipated government and parastatal
spend on infrastructure spend.”
“The indebtedness of the consumer remains a concern.” Steffanutti
JD Group
45. Equities
Recent results have given us a glimpse of how
companies are operating in the current Badly hit:
• Platinum, base metal producers (ferrochrome)
tumultuous environment
• Companies servicing mining and motor industries
• Credit retailers – furniture, white and brown goods, motor
vehicles
• Residential housing market – related construction
companies
• Gaming industry – top end of the hospitality industry
• Financial services – especially non-retail banks
In the black
• Banks
• Life insurers
• Cash retailers – food, clothing, building
• Low end hospitality
• Construction – civils, cement
• Tobacco and liquor
• Cell phones
• Resources - iron ore, coal, gold
• Health, pharmaceuticals
46. Africa – open for business
Shedding image that only growth industry is
crime
No longer associated with war, famine and
tyrants
Still poverty stricken but development
booming
Financial markets opening – FDI flows
greater than aid
Democracy on the increase
Still relies mainly on commodities – oil,
forests, mines
Growth over last four years over 6%; 2009
forecast at 2%
China spending billions of dollars helping
build infrastructure
China trade increasing rapidly
47. Current 24 favourite stocks
Resources
• BHP Billiton, Sasol, Exxaro
Offshore
• British American Tobacco, SAB Miller,
Richemont
Africa
• MTN, Naspers N, Shoprite, Aspen, Tongaat
Financials
• Standard Bank, Metlife, Discovery, JSE
Consumer
• Pick and Pay, Mr Price, Truworths, Tiger
Brands, Nampak
Hospitality
• City Lodge
Infrastructure
• PPC, Basil Read, Raubex
48. Lessons learned from the current crisis
The US retains its power to command the global economy
and create disorder
• Humbled and reputation of its iconic institutions
damaged but the nation still leads the world
US and China will probably lead the turnaround with their
huge stimulus packages
• Fortifying China’s standing as a major power
• India in the wings
• Europe slipping away
The credit crisis demonstrates that the dollar remains the
leading reserve currency
• Despite fears that high debt levels may compromise
dollar’s status
• Dollar recently endorsed by Japanese, Russian and
Chinese finance ministers
Downturn highlighted the vulnerability of economies heavily
reliant on exports – minerals and manufactured good (eg
China, Germany, Japan)
Heady days of easy credit have passed – risk premiums
will rise
Self regulatory risk management techniques proved
inadequate – need for greater vigilance in financial markets
52. Situation in the world
anything but normal
Good news
Aggressive government stimulus
policies and financial rescue packages
beginning to lift confidence
Spreads between government and
other more risky bonds declining – inter-
bank rates also easing suggesting an
increase in money flow
Risk appetite improving – share prices
up sharply since March lows – all the bad
news appears to be in the market
53. Situation in the world
anything but normal
Bad news
Householders still overextended and feeling
pressure from bust in housing market and stock
markets and fear of unemployment – will inhibit
spending while they rebuild savings
Huge fiscal deficits could push lenders to
demand higher returns to compensate risk
Companies deleveraging – focusing on core
businesses – avoiding expansion projects or
mergers
Banks may have turned corner but could still
face more asset write-downs
Countries will soon need to rebuild their
balance sheets – higher taxes
Government involvement in economies could
raise spectre of protectionism
54. Challenges ahead
Remedial actions by authorities have removed
risks of a major bank failure
Investment industry faces a huge regulatory
overhaul that could lead to tougher controls
Government relationship with banks will probably
reduce liquidity levels in financial markets
Capitalistic system at the mercy of government
and regulators - hamper entrepreneurial ventures
and hinder m&a/private equity funding
Need to rebalance global economy – encourage
borrowing countries to export and saving
countries to spend -
Rising call for protectionism – urge to keep jobs
and capital at home – break globalisation
Risk premium on equities could possibly increase
- investors will seek higher return measures
55. Failed the stress test
Share options
• Introduced to reward management
• Align the interests of management with the
stakeholders
• “Don’t give me options – issue me puts!”
Share buy-backs
• Aggressive programmes destroyed wealth
• Rethink the benefits of management’s wisdom
Valuation techniques
• Analysts metrics over optimistic
• Did not succeed in providing support
IFRS
• Mark-to-market fed write-downs exacerbated crisis
Scrip lending
• Allowed sellers to mark down shares dramatically
fuelling downturn
Risk managers
• Sophisticated techniques failed to pick up
weaknesses in pooled products
