Changing lanes


Ive often sat in traffic on Johannesburg’s busy streets, and wondered why so many drivers constantly lane hop… These drivers will cut and push their way into different lanes as that lane speeds up, but the end result is they normally get to their destination in the same amount of time. I always wondered if it was worth all the effort to cut a few seconds off their travel time? I would guess that in some instances, these drivers do cut some time off their ETA, but how often?

This then got me thinking about investing and how some investors try to hop in and out of investments during volatile times, with the aim of timing it perfectly. Are these investors any better than the guy pushing his way through traffic? in the long run, do they achieve a higher return? The short answer is no. In some cases, I’m sure investors could get the call right, and avoid some drop in capital value, but then you have the problem of timing your entry back into the markets. What you normally find is they will panic when the markets drop, and switch everything into cash, just to find that markets have actually bounced back by the time the switch happens. Or they will exit too soon, missing some of the upside, and then wait too long before getting back into the markets.

As it stands now, “cash” gives around 6% yields per annum. It has very little volatility, but little growth. With the Equity market, you do increase your risk to volatility, but in good times, you could see higher yields than cash in less than 1 week. This means if you didn’t time the market right, and missed that run in Equity, you could potentially miss a full year’s worth of cash growth.

So what is the best strategy for investing? Its quiet simple, speak to your Investment Manager, select a risk profile that suits your needs, or investment horizon, and stick to it. Don’t panic when you see markets reacting to situations that are out of your control. You need to ignore the noise, and just let your Investment Manager do what they do best! As per the Wall Street adage – “Time in the markets is better than timing the markets”.


Oil, where to next?


So in the past year, oil has dropped 49%, which is the second biggest fall since inception. The question is why?

The oil price is mainly determined by supply and demand dynamics, and with a slow down in Europe and China, this would explain the demand, but surely this could be countered by OPEC cutting supply, and driving the oil price higher? This would be basic Economics 101! Another reason could be the political unrest in the Middle East? This should not have that big an effect on the price, as they only make up one third of the OPEC production. What about the big move to alternative energy sources?

All of these may be a factor as to why, but one of the main reasons the price is falling, and may continue to fall are the internal arguments in the oil cartel! OPEC or better yet, Saudi Arabia could bump the price of oil back to $90 per barrel, but why? Saudi Arabia has the lowest cost to produce oil in the world. At a cost of $5-$6 per barrel to produce, they are still making 900% profit! So why not get the price higher and make more profit you ask? Well simply put, the U.S. needs a higher crude price to drive the technology advancements in fracking and shale oil, and to potentially move fracking to other countries. Currently, the U.S. is the only country with successful fracking operations. There is also a big drive to hybrid transportation. With a lower oil price, and ultimately a lower petrol price, why would you trade in your V8 Mustang for a Nissan Leaf? If you make petrol more affordable, you make the end user of petrol more likely to keep his gas-guzzler. This in turn means the consumer has more money at the end of the month due to lower expenses on gas, driving consumer spend in other areas. Which, once again is supply and demand!

The bottom line is that the Cartel is at a crossroad. There are views that Saudi Arabia is trying to cripple the U.S. Shale industry, while others say they just pulling a raspberry at Iran and Russia.

The question then must be where to next for the oil price? It would be easy to assume that the oil price may continue to fall to around $30 per barrel, based on the fact that Saudi Arabia seems to be driving the price down, and they still making profit at $10 per barrel, but realistically, even Saudi Arabia needs the price of oil higher! Making profit is one thing, but driving an economy is another. Saudi Arabia relies so heavily on the oil price to sustain GDP, that it would need the oil price above $90 to keep its GDP healthy. This current flooding of oil into the market will have short-term effects on the oil price, but its other factors that will determine the long-term price. We may see lower prices over the next 6 months to a year, but even when Brent crude hit its low of $04 in 2008, it didn’t remain there for long, and 3 years later it was back over $100 per barrel, a 200% increase.

Fed Minutes: A Summarised Version.

Monetary authorities spent their most recent policy meeting agreeing that the economy was improving and no longer needed stimulus tools such as asset purchases, though concerns persisted that inflation expectations may be falling, the minutes of the Federal Reserve’s October policy meeting released last Wednesday revealed.

At its October monetary policy meeting, the Fed left its benchmark interest rate unchanged at 0.00-0.25% and said it was closing its monthly bond-buying program in a move widely expected by markets.

While the economy is improving, some monetary authorities want to be sure recovery remains sustained before raising interest rates, which is seen taking place sometime in 2015, with a few voting members expressing concerns that inflationary pressures remain soft.

“Participants anticipated that inflation would be held down over the near term by the decline in energy prices and other factors, but would move toward the Committee’s 2 percent goal in coming years, although a few expressed concern that inflation might persist below the Committee’s objective for quite some time,” the minutes read.

“Most viewed the risks to the outlook for economic activity and the labor market as nearly balanced. However, a number of participants noted that economic growth over the medium term might be slower than they currently expected if the foreign economic or financial situation deteriorated significantly.”

Deton Chronicle


Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it.  If it keeps moving, regulate it. And if it stops moving, subsidize it.

      –Ronald Reagan (1986)   


Good morning from a very soggy Johannesburg – it is either feast or famine when it comes to rain. Just 2 weeks ago we were all lamenting at the heat and how desperately we needed rain. Now we have it in droves. Sort of reminds me of the stock market where a few weeks ago we were all looking at doom and gloom, and now we have the US markets hitting new highs and a decent recovery at home as well! Makes our lives very interesting to say the least!   


The last 3 months activity around the globe:




























































So apart from the Rand/$ and the gold price, looking a little better than it did a month ago, but no predictions at this stage! 

The last few days has shown that… 

The US labour market continues to show improving strength. Initial jobless claims came in at 278K, the lowest level since the Global Financial Crises and the second lowest level in 35 years. This is a strong indication that could signal stronger wage growth which will increase inflation, currently below the Fed’s 2% target. On the political front, the midterm elections have favoured the Republicans by a colossal margin, which has fed through to a stronger tone in the dollar.

Over in Europe, the ECB governing council (GC) left the policy rates and longer term refinancing operations (TLTRO) programmes unchanged as was expected. The ECB stated that these programmes are expected to increase the balance sheet to EUR3trn, which was supported unanimously. As expected the BOE decided to leave the Bank Rate and its Asset Purchase Facility target unchanged.

Back in South Africa, Moody’s downgraded South Africa’s long-term foreign currency debt rating to Baa2 from Baa1 and changed the outlook on the rating to Stable from Negative. As a result the rand fell victim to stronger US employment data and the Moody’s downgrade which saw the currency move from 11 to 11.30 to the dollar. Adding further to the currency woes is South Africa’s vulnerable and tight electricity supply situation which gave rise to further load shedding risks. Someone needs to step up the plate and start taking some firm moves to fix the economy!


The recent market activity brings me to the tale of the Pied Piper of Hamelin, who I am sure everyone remembers?  It tells the story of a piper who in the year 1284, through the seduction of his pipe-playing, lured away the plague of rats that the town of Hamelin had been experiencing.   After getting rid of the rats, the townspeople of Hamelin reneged on the deal to pay the Piper, and so, in revenge he used the melodic sounds of his pipe to lure away the children of the town, who were never seen again. Only 3 children escaped, and that was because there was a blind kid, a deaf kid and a lame kid.  

The moral of this story is that sometimes markets too can seduce us into following it into desolation, and we become so captivated that we lose all sense of where we are, and where we are going, and why we were invested in the first place.  So in a funny sort of way, it pays to be blind, deaf or lame when it comes to investing in equities – By that I mean to be immune to the effects of the tunes that the markets play for us.    

This, of course, is why some of the most successful investors on the planet are those who consider themselves to be contrarians.  They don’t listen to the market, for that is the herd, and the herd are like the little children of Hamelin.  The good investor is one who doesn’t base their investment premise on what the market tune is, but choose their own way.  

What this really points us towards, of course, is to know where you are going and to not be distracted.  It means having a plan and sticking to it.  If the markets trebled in a year, and you were only half invested, do not believe that the following year will bring the same and then go all-in.  If you do, it will be only because you have listened to the music of the markets too much.  It’s time then to tone down that treble and go back to the base. 


Out of the mouths of babes: 

A little boy opened the big family Bible. He was fascinated as he fingered through the old pages. Suddenly, something fell out of the Bible. He picked up the object and looked at it. What he saw was an old leaf that had been pressed in between the pages. 

‘Mama, look what I found,’ the boy called out.

‘What have you got there, dear?’

With astonishment in the young boy’s voice, he answered, ‘I think it’s Adam’s underwear!’ 

The European Crisis and Prospects for Recovery


Since the financial crisis of 2008, GDP growth in Europe has been dismal. This could be attributed to the appreciation of the Euro exchange rate, which has strengthened 10% on an effective basis between August 2012 and March 2014. This has led to a loss in competitiveness in export markets as well as business confidence with a resulting negative knock-on effect on manufacturing activity which continues to gradually decline as evidenced by the persistently poor PMI numbers coming out of the Eurozone countries. Effects of the latter phenomenon have been more pronounced in countries that have been slow to take up and implement structural reforms namely, Spain and Germany. To add to the Eurozone woes, rising political tensions in Ukraine are adversely affecting sentiment on the continent.

It has not been all bad though, Europe can still point out to continually and gradually declining bond yields; stabilizing unemployment which in turn has given consumers new found confidence to increase consumption; signs of renewed housing market transactions and rising construction activity as some of the factors that gives the continent and investors alike hope for an improved economic outlook.

Economic recovery: Scenarios

Investment: as driver of growth

In light of the above it is plausible that going forward, external demand from relatively thriving economies like the US and Emerging Markets like the BRIC countries supported by a weaker Euro will form the basis of economic growth in Europe which will be driven by investments.

Consumer spending: as driver of growth

With consumer confidence on the rise as unemployment abates, there is a high degree of probability that consumption will follow suit. To further support consumer spending in order for it to have material effect on economic growth, authorities could relax lending conditions.

Avoiding deflation

It is encouraging to note that in terms of rhetoric and policy action there has been a shift in emphasis from austerity measures which comprises of freezing, capping and or cutting expenditure to accommodative monetary policy- best exemplified by the recently instituted bond buying program by the ECB also known as quantitative easing-meaning that deflation is likely to be avoided. However, given the continuing substantial underutilization of resources in the labour market, the Eurozone may still struggle with very low levels of inflation for long time to come.


As I intimidated earlier, risks to growth forecasts are balanced. Downside risks include impact of US and the European Union (EU) sanctions on the Russian economy and Russia’s retaliatory measures. Upside risks encompass stronger-than-expected earnings growth in Germany and a positive shock to exports boosted by the weaker euro and a stronger world demand.

Impact of the current account deficit on the financial markets

History is littered with examples of countries that have experienced turmoil in financial markets due to large current account deficits. Turmoil in the markets is more pronounced if the deficit is being financed by short term portfolio investments.
The classical textbook definition of a current account deficit is the difference between imports and exports of goods and services. A decline in trade balance caused by either increased demand for imports and or poor export performance, as was the case in the second quarter of 2014 according to the Reserve Bank’s latest quarterly bulletin reported last Tuesday can increase the current account deficit.

A large current account is an imbalance which is always undesirable. However, for investors to navigate the treacherous waters caused by a current account deficit it is important that they establish the source of imbalance and how it has been financed. Because being large in itself may not necessarily lead to turmoil in the markets, case in point- the US has been running huge current account deficits since 2006 without any negative repercussions on the financial markets. Although studies by the IMF have shown that large deficits are ultimately not sustainable as a result of financing problems or a change in investment patterns in a domestic economy.

In the case of South Africa, a stubbornly low savings rate has meant that the country has had to rely on foreign investment to fund the deficit since first quarter of 2006, in particular through “…a combination of direct, portfolio and, to a lesser extent, other investment flows”. This has not been a problem in the past, especially in the wake of the global financial crisis which later morphed into a full blown economic crisis resulting in ultra-loose monetary policy, circa 2008 in the US and Europe making emerging markets attractive investment destinations.
The times are changing though. Whereas in the past 6 years, the only risk to South Africa’s attractiveness as an investment destination was external- from global markets. At the moment South Africa’s macroeconomic environment is weak, implying risk may arise internally as well.

Contrast these prevailing economic conditions in South Africa with recent developments in both the US and the UK where monetary authorities have already made the commitment to put an end to their respective quantitative easing programs and are seriously considering hiking interest rates. A rate hike in the US specifically, will fundamentally alter investment options across the universe posing a threat to the attractiveness of South Africa along other emerging markets as investment destinations.
Given the scenario as described above. Is it time for investors, foreign ones in particular to dispose of their equities in SA stocks? My view is that not yet, not least because returns on capital on the JSE represents income from outside the borders from South Africa but the country despite its economic and social challenges continues to attract capital and investment inflows, the latest bulletin from the Central Bank highlights the fact that foreign direct investment has more than tripled in the second quarter to ZAR 24.6 Billion Rand from ZAR 8 Billion in the first quarter.

Given the ever widening deficit and other disappointing data, it is counterintuitive that investments especially in long term projects have increased. However, it is important to note that these inflows are a vote of confidence in the future of South Africa despite what the credit rating agencies may think. Embedded within this economic data- inflows- is a key political and social message subtly making a positive judgment call about the relative capacity of South Africa’s monetary and fiscal authorities operating within the existing political system to come up with a feasible plan to narrow the current account deficit. And this has and continues to inform my optimistic outlook on the fate of domestic financial markets.

Property, is it a buy, sell or hold?

The most frequent question we get from our clients about property is, should we pay the bond or invest the capital. The second most common question we get is, should we use our investment to buy an investment property and rent it out, or just leave it?

The answer to both of these questions is not clean cut. The fact remains, unlike shares, ETF’s, or Unit Trusts (like the Deton funds) which are measured and priced, property is not. This means you can physically see an increase in your investment over a set period of time whereas with residential property, there is very little data to show the same. Property is an asset, but you only realize your profits or losses once you sell the asset. This means that there is no real return value on this asset. The general thinking is that you buy a property, sit on it for a few years, and you either rent it out or you live in it, and several years later you sell it for double. This may have been the case a few years ago, but since 2007, the property market has not really moved. Once again, as stated, this may vary depending on area and depending on leverage (bonded or not), but on average, property has not beaten inflation (according to states given by ABSA bank).

So the question is, do you use property as an investment or not? Well, if you had invested R1 million in property in 2007, (7 years ago), the truth maybe that you have only received 3% or less from rental income. And the capital price hasn’t beaten inflation of 5.7% (results will obviously vary), so your R1 million is now only worth R1,500,000, provided you can find a buyer for it. And you would have received R230,000 in rental income profit, once again, provided it wasn’t bonded. So your R1 million is now worth around R1,8 million after 7 years. The real question is, what would it be worth if you were invested in the stock exchange?

Since January 2007, the JSE all share has given us over 100% return. Which is around 10.75% compound over the period, meaning your R1million has now doubled and would be worth around R2,050,000. If you consider that the JSE All share is only ranked in the middle of the Unit Trust pack over 7 years, where would you be if you had invested in a Unit Trust? Well one of the well known Equity managers in SA has compounded at a little over 14% for the 7 years, meaning your R1 million would now be worth R2,5 million. If we use the top performing Equity manager over the same period, this return would be closer to R3 million.

Remember all of these figures and values above are just looking at capital price, and would exclude any dividends on the shares. I cannot factor in the other variables on the property like monthly rates and taxes, maintenance and general upkeep of a property. Seeing that different properties have different needs, this would also be impossible to work out.

Where does the above leave us with a rising interest rate cycle and bonded property? The truth is, we are in a rising interest rate cycle, and we could see rates going up by another 2% over a 24 months period. While this increase helps our clients with interest bearing investments, it doesn’t help the man in the street with debt. This means the higher the Prime rate, the better “return” you receive by paying off a bond. So with this being said, what sort of return could you see from paying off debt? With the current Prime rate at 9.25%, and a potential 1-2% increase over the next 24 months, this could mean you could see a return of up to 11.25% if you have the capital to pay off your bond. While this return is not a bad return, it is not a compound return, as such, a return of 10% plus compounded over 5-10 years on the JSE would still beat this 11% return. If we start seeing rates return to the 13-15% levels, then there may be an argument for debt consolidation versus Equity investments. But while the Equity space is giving 5-6% dividend yields and capital growth in the teens, my view is that Equity is still the place to be.

So based on the above, where does this leave us? Do we now sell our properties we live in and go rent? Do we sell those investment properties and give the profit to your trusted investment manager at Deton Private Wealth to invest? Well I guess that is the million-dollar question, and it is definitely one that could be argued all day, but do we really have time for that? Personally, we are not big fans of residential property as an investment, and feel that over the longer term, Equity will outperform cash and Commercial Property. Another factor that you would need to consider is if you require an income, could you break a corner of your gingerbread house off to eat if money is tight?

Investment, Retirement and Markets