Tag Archives: investments

Changing lanes

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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”.

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Oil, where to next?

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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.

The European Crisis and Prospects for Recovery

Introduction

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.

Conclusion

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.

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?