Transcript Slide 1
Absa Investments Media-Market Outlook-July 25 2012 Presented by: Christopher G.Gilmour-Investment Analyst And Now for Something Completely Different In 30 years in the financial markets, I have never seen conditions like this before In the 1970s and 80s, the “Weight of Funds” ensured a continued upwards movement in equity prices. Like shooting fish in a barrel In the 1990s and the Noughties, the removal of Prescribed Asset Requirements c/w a return to the international fold pushed SA equities higher But now we are in new and different territory, though investment fundamentals remain intact Like the rest of the world, our equity market is not aligned with the underlying economic fundamentals And Now for Something Completely Different There is a “race to the bottom” as far as interest rates are concerned. In late 2009, conventional wisdom saw US interest rates rising and those in the rest of the world following suit. But the reverse has happened. The Yield Gap in the developed world has normalised after 50 years. In SA we still have a Reverse Yield Gap-but for how much longer? The PE on the JSE ALSI appears cheap-but the PE on the FINDI is expensive US earnings growth is slowing but SA’s is still reasonable US Corporate Earnings Season-Q2 2012 A mixed picture but on balance slightly better than expected So far 124 S&P 500 companies have reported - 33 (26.61%) have missed EPS estimates, 86 have beaten estimates (69.35%) and 4 are inline - 53 (42.74%) have missed revenue estimates, 70 have beaten estimates (56.45%) and 1 has been inline - 81 (66.94%) have seen earnings grow from Q1, 40 (33.06%) have seen earnings decline - 79 (64.75%) have seen revenue grow from Q1, 43 (35.25%) have seen revenue decline. S&P 500 Index A Race to the Bottom (That nobody wants to win) 1890-2012 S&P 500 Earnings Growth (%) US earnings growth in secular decline JSE Alsi Earnings Growth (%) Earnings growth improving from last quarter JSE ALSI YTD Total Return (%) 4.9% growth YTD The Reverse Yield Gap US Yield Gap S&P 500 PE Ratio vs JSE ALSI PE Ratio (x) JSE ALSI PE Ratio (x) JSE FINDI PE Ratio (x) Retail Sales get an adrenaline boost? JSE Property Unit Trust Index Total Return YTD YTD total return of 18.9% Conclusion In the absence of a profound improvement in the S&P 500, it seems likely that global equity markets may continue to languish for the foreseeable future. US earnings growth is declining and the underlying economic fundamentals (either in the US or offshore) do not appear robust enough to improve this situation. The ALSI appears superficially cheap but if the large diversified miners are removed from the equation, the market is, in fact, expensive. Retail stocks get a boost from lower interest rates. If further rate reductions materialise, they could benefit further, notwithstanding that most are priced for perfection. Property stocks get boost from foreign investors seeking yield Summary ALSI P:E Fwd INDI P:E Fwd Earnings Growth ALSI Resources Industrials Financials 12.4x 12.7x 17.9x 15.6x Good value Pricey Y1 2.6% -15.9% 16.4% 14.4% Y2 10.7% 7.8% 12.0% 13.5% FORECAST RETURNS Y1 Equities Bonds Cash 10.4% 8.5% 5.5% Neutral Neutral Neutral THANK YOU