The below long term chart of the JSE All share index from 1985 to date reflects the price history (via the blue line) of the JSE All share index over the last 26 years to date and hence we are using a long term chart to illustrate historical index price patterns. Long term charts usually depict a roadmap more accurately as there is more data and thus there is less opportunity to manipulate a chart using a shorter time frame.

Click here to view graphs

The long upward sloping red line is an approximate mean average price’ line of the JSE all share mean price over the last 26 years to date. Thus by looking at the chart in its complete data state (from 1985-2011) it does appear that the SA equity market may have ‘morphed’ into a potential bubble – relative the price action in the period 1985 – 2005 period which when looked at is a little alarming.

More concerning is the fact that it is also appearing to develop a ‘double peak top’, a formation which is traditionally a sign of a change of direction in technical. This is also a little reminiscent of the ‘double top’ formation in the SP500 in the 2000 / 2008 era – (this chart is copied below the JSE chart).
When comparing the two charts – there is an uncanny similarity around their price lines. The only difference is that the JSE appears to be lagging the SP500 chart pattern.

Thus when looking at the SP500 chart the ‘double top’ is depicted by the horizontal red line at the top and the correction action which is in the middle of the two peaks does not drop far enough to reach the long term mean average price line. However, once the double top is formed and the “crash” happens (in 2008 / 2009 period) the SP500 then falls below the long term mean average price line.
When looking at the JSE All share index chart below and comparing it to the SP500 chart – we see a very similar pattern to the SP500 chart – only that it is ‘lagging’ the SP500 chart. It has essentially replicated the ‘roadmap pattern’ of the sP500 so far by morphing into a bubble and forming the double top state which we are presently in.

If the JSE All share index were to replicate the SP500 pattern over the next 2-3 years to 2014 – and fall below its long term mean average price line (just like the SP500 did in 2008/2009) then the JSE would have to fall to around the 13 000 – 15 000 level.

This sounds completely absurd. But history of this ‘mean reversion’has presented itself time and time again, and it would be silly to ignore the signs.
Every other true market “bubble” over the last 8 years to date has reverted back to its mean average price level and then broken it and gone below it .
One only needs to draw up the charts of the Nasdaq bubble of 2000, the Dimension Data chart, Platinum mettle chart or the Oil price chart to see this chart pattern confirmed and the reversion to the long term mean theory proved time and time again.

Conclusion:
We are thus ignoring valuations (fundamentalists would be horrified) and only applying straight technical analysis, ‘roadmap theory’ and the theory that a market bubble always reverts back to its long term mean average price. This may be a little one-sided but the below charts have an eerie feeling about them and hence we urge caution to investors in pure equity in the South African markets as the charts are ‘warning’ of a potential fall back to the long term mean average price line at a level of 15 000.

The long term Kress economic cycle bottoms are all converging for an all time low for late 2013 / early 2014 and this cycle bottom is what has made me look closer at the technical picture being presented below.
It is alarming to consider that the JSE long term mean average price is between 14 000 and 15 000. However, we have been fore-warned as 2.5 years ago it was as low as 18 000. When you look at the two charts closely together; if the JSE replicates the SP500 roadmap – we will get to as low as 14 000. We are currently above 32 000.

The historical charts of the Nasdaq, DiData, Platinum Price, Oil price and the SP500 – all reverted to their mean and actually traded below the long term mean average price – albeit briefly.

I have enclosed below the long-term rand /US$ currency chart to depict why we are advising clients to exchange rands into US$ at the current ‘apparent’ optimum buying level of 6.70 to the US$. We believe that on a 3-4 year view looking forward, the rand /$ exchange rate (which is historically cyclical) will weaken as interest rates start to rise in the first world countries offshore, or alternatively, if there is another ‘global shock’ to the world financial markets (sovereign debt default in Europe or US). Assuming a global shock were to occur, this will cause the ‘risk off’ trade to go to extreme levels like it did in 2008/2009 and cause a ‘bottleneck’ by the foreigners to exit our emerging market investment space (bond & equity markets). This will cause the rand to spike (to the top red line on the graph) as it has done in the past – this risk off trade has happened twice in the last 10 years and on both occasions the move when it happens is rather vicious as depicted by the chart below.

The chart depicts the bottom red parallel trend line as being the ‘optimum’ time to sell rands and buy US historically; the top red parallel trend line depicts the exact opposite strategy (i.e. switch back & sell your US$ and buy back into rands to book your capital gain profit on the currency). The red headed arrows also depict the optimum times in history to have bought US$ with ZAR.

Graph 1: click here

The following chart below is the long term chart of the SP 500 index (which is the biggest share/equity index in the USA) and reflects that each time the rand has weakened dramatically in the last 10 years (this has happened twice) the USA index for shares and global shares have fallen dramatically in unison to rand weakness. Thus, the correlation between rand weakness to the US$ currency and the fall in US shares (and consequentially most global shares) is an almost 100% correlation over the last 10 years to date due to the “risk on / risk off’ strategy” that the big players are currently following on their proprietary trading desks and client trading portfolios.

We believe the same ‘video tape’ will be played out over the next 2-4 years with the rand moving back to the top red line (around 10.00 – 11.00 to the US$) and the SP500 having the potential to drop back to the bottom trend line in the below chart. This we believe would be as a result of the global sovereign debt issues escalating over the next 3 years.

Graph 2: Click here

Contrary to most asset management institutions which are suggesting ‘taking profit’ on their South African shares and taking the funds offshore by investing into foreign shares/equities – we believe these assets should be held rather in cash offshore and not shares. We thus agree with the first part of the investment strategy (exchanging rands into US$ at current levels) and take a view that the rand is very overvalued at the moment due to offshore interest rate being at extremely low levels that will eventually change and move higher. However, we do believe the more prudent strategy will be to not take the proverbial “double bet” of US$ and shares BUT to rather take a “single bet” – just in the currency exchange. The last two times the US$ / ZAR currency gain has been diluted substantially by the fall in the various global equity components offshore thus neutralising the investment strategy to a large extent.

The above two charts when compared and read against each other along the date lines on the bottom axis – depict that over the last 10 years the correct investment strategy historically when exchanging rands for US$ at the optimum exchange levels (2000/2001 and 2007/2008) was to hold cash and not global shares with the US$’s purchased.

We believe that the same investment strategy should be followed for the period 2011 – 2014. This is not only based on technical and cyclical analysis: history and correlations over the last 10 years, but on the global economic fundamentals (sovereign debt issues) which suggest that the US$ cash strategy for the next three years will out-perform over US$ shares. If the rand/$ does increase from R6.70 back to the top red line (around R11.00) by mid 2014, an investor sitting with US$ cash for that period will achieve a return of approximately 64% on the currency gain in rands. This equates to an annualised return of 21.39% p.a. with no ‘equity dilution risk’ that has historically caused this investment strategy to return substantially less if you were in shares.

There are various unit trust funds that are designed to accommodate the above investment strategy view over the next three years. Please feel free to contact us for a personal consultation in this regard as we sincerely believe that this may be the best return made over the next three years for South African investors.

There are no guarantees to the above investment strategy but the cyclical, technical and fundamental strategies suggest it could well be correct. It is only the current valuation based argument that is suggesting that the SP500 shares and global shares will not drop when the rand weakens. We believe that the ‘sovereign debt risk’ issue will continue to escalate substantially over the next 3 years and overtake the valuation based (PE Ratio) argument for global shares and that this will cause shares to underperform significantly (back to single digit P/E multiple levels overseas by 2014). Time will tell.

Investors have to keep up-to-date with relevant market information. This is demanding, time consuming and expensive for many people, which is why investing in unit trusts can provide so many benefits. It transfers the worry of making these important decisions to experts who are better equipped to oversee your investments. These professionals are known as fund managers. Contact Investonline if you’d like to learn more about the advantages of a fund management and unit trust investments.

3 major benefits of unit trust investments

Having financial management can take a big weight of your shoulders. If you’re a small investor looking to secure your economic prospects, there’s no better way to go than investing in unit trusts. Read on to find out why:

1. Diversify your stocks – Typically, small investors don’t have enough money to buy a broad range of investments. Instead, small investors can own units of a portfolio that comprises many investments. This way, you’re secured against instability through the larger number and wider range of stocks in your portfolio.
2. Access your money quickly – Investments that take too long, or are too hard to sell should be avoided, as they present a risk – especially if you’re suddenly in need of hard cash. Unit trust schemes provide you with quick and straightforward access to your money.
3. Professional money management – When you invest in unit trusts you get the service of professional fund managers. They’re highly qualified in their field and their expertise ensures that the decisions they make are structured and follow sound investment principals. In the long term, the know-how of the finance manager helps the investor produce above-average returns.

As you can see, unit trust schemes can be incredibly advantageous for small investors, as they provide diversification, quick and easy access to cash, as well as professional administration and supervision. Contact Investonline.co.za today if you’d like to get started investing in unit trusts.

Furthermore, the extensive diversity of managed funds available guarantees that the individual requirements of each shareholder may be met. Whether you’re interested in high risk or high capital growth investments – or a low risk investment that provides consistent income over a period of time – managed funds provide solutions for almost every type of financier. If you’re interested in benefitting from an experienced and intelligent fund manager, contact Investonline today.

Breaking down the benefits of managed funds

For a detailed analysis of what you can expect from employing the services of a fund manager, read the below pointers:

• You’ll decrease your risk – Unit trusts can hold from ten to several hundred different investments. These can be diversified between countries, asset classes, industries and organisations. A diverse managed portfolio considerably reduces the risk of fluctuations in market value. While a personal investor may feel that they can branch out by themselves, statistically, significant diversification is achieved only with a portfolio of over forty stocks.
• You’ll have the guidance of a professional – Fund managers are experienced and qualified experts who specialise in the selection and upholding of investments. They maintain a wide range of contacts outside of their firm and have access to comprehensive information. This, together with in-house capabilities, allows them to make informed timely decisions on behalf of shareholders.
• You’ll be able to reduce costs – Trade strength stems from the ability to buy in bulk. This means that costs can be reduced if the financial manager can negotiate better deals. Additionally, by pooling your assets with other investors, you gain access to a variety of equities that you may have not been able to invest in as an individual.
• You’ll have access to international markets – Managed funds provide the personal shareholder with the opportunity to invest their money across the world, depending on what is requested. You will be able to invest in the most favorable intercontinental funds, dictated by the funds’ predetermined mandate.

Contact Investonline.co.za if you’re interested in learning more about the benefits of a fund manager.

In order to effectively maintain a portfolio of stocks in the share market, prospective investors should either keep themselves up-to-date with current market information or find a trusted source for financial advice and direction. By investing through Investonline.co.za, you can trust our specialists who are better equipped and possess a wealth of experience to aid you in achieving financial success. Contact Investonline.co.za and find out how you can minimise financial risk by employing the use of a professional fund manager.

Five benefits of unit trust investment

There are a number of benefits to having specialist assistance from a financial management vendor such as Investonline.co.za:

1. Diversification – Most conservative shareholders don’t have the amount of money it takes to buy a wide range of shares. By investing in unit trusts, these buyers can own segments of a portfolio that comprises many ventures. This minimises risk, as the unit trust investors are protected from volatility through the increased number, and wider range of stocks available in the portfolio.
2. Quick access to money – Most shareholders want to invest in funds that possess the convenience of allowing them to draw money out again should they need to do so at short notice. Buying a unit that you cannot easily or quickly sell poses a risk should you suddenly be in need of finance. Ideally, an investment that can be easily liquefied and cashed out within a short space of time is the best avenue for those who may need to access the funds in an emergency.
3. Professional management – People who put their funds in unit trusts usually get the additional service of a professional financial manager. At Investonline.co.za these specialists are trained and highly experienced in their field. Their expertise ensures that the decisions they make are structured and follow intelligent principals. Financial managers are unlikely to make rushed, uninformed choices, a trait that is highly common in people who invest directly in the stock markets. In the long term, the expertise of a qualified financial manager, who provides guidance and advice, can assist the depositor in generating favourable returns that would otherwise be difficult to generate.
4. Investment exposure – As a conservative investor, it’s sometimes difficult to buy shares in a particular company by yourself. It’s also impossible for you to invest in real estate, international securities and corporate bonds that would cost a few hundred thousand, if not millions of rands. Unit trust schemes make all of these possible for you. Rather than having to purchase the whole share, unit trust plans make a small portion available. This is usually based on the amount that clients are planning to invest. You can therefore tailor the amount of your investment according to the amount of money you have at your disposal.
5. Investment costs - If you buy shares directly from the stock market, you’re required to pay transaction costs such as broker commissions. In terms of percentages, this is higher than the amount paid by large institutional investors, such as the fund managers of unit trusts. Managers typically invest a large amount, which allows them to get access to institutional rates of return. As a small depositor, you don’t benefit from these reduced rates if you invest direct.

For individuals with conservative finances, unit trust investments are the way to go. Contact Investonline.co.za to secure your financial future today with the aid of an experienced financial manager.

Investec Value fund – celebrating ten years of exceptional performance

• Exceptional performance was achieved through sticking to a strategy and not being swayed by market opinion.
• The value fund’s biggest outperformance occurred between 2001 and 2004, local equities rallied strongly and the rand depreciated sharply – the value fund had high exposure to domestic equities, despite market consensus to invest offshore.
• The fund’s excellent returns can be attributed to our value style of investing – even at the height of the commodity bubble, the fund had no exposure to resources stocks.
• Value style of investing outperforms other styles over longer periods (5 years +) but may underperform the broader market in the short term.
• We use a bottom-up stock picking strategy & favour shares that are undervalued, and trade below their intrinsic value.
• Current outlook: for the first time in ten years we believe there is better value in international equity markets than in SA.
• The fund is currently fully invested offshore and also favours investments in gold.
• John favours stocks in the US, Europe, Japan and Israel

For more investment advice, visit www.investonline.co.za

Long term investing

-          In an industry with many different investment philosophies, slicing and dicing between value and growth, we consider the defining feature of our investment philosophy to be our long time horizon.

-          The ability to delay instant gratification is a quality absolutely essential for successful long term investing – an ability which is against human instinct.

-          The theory of investing is easy, putting it into practice in the real world is a different ball game.

-          Investors that have the luxury of a long time horizon have an enormous opportunity to profit from the mispricing that occurs when an asset’s near-term outlook diverges from its long-term prospects.

-          Despite this long term philosophy, there is much short-term performance pressure: performance in the unit trust industry is usually rated according to the preceding 12 months.

-          We don’t believe you can give yourself much chance of getting it right if you don’t cut out the short term noise and take the long-term view.

For more investor advice, visit www.investonline.co.za

For your convenience we have summarised this article below. The full article is available on our website (click here).

The tide is turning – developed market equities in the sweet spot

·        Developed world growth on the upside – economic recovery is underway in the developed world. Investors have shifted their attention back to developed markets, whose equities have outperformed that of emerging markets over the past six months. We expect there to be a huge rotation of EM assets into DM assets.

• Emerging markets fighting the inflation demon – the US’s stimulus programmes have caused inflationary pressures in EMs, chasing up asset prices and causing much liquidity. Sustainable growth depends on how well these countries can curb inflation.
• South African stock market should offer more value at year end – it is difficult to identify new equity opportunities at present, it is expected that the local stock market will be substantially cheaper by year end.
• Inflation expectations already priced into the local bond market – The SA bond market still looks attractive on a relative basis. The market is already pricing in a much weaker rand and higher rate of inflation and will continue to offer value until these levels are reached.
• Best returns should come from developed market companies – Offshore holdings will make a material contribution to performance as a result of a depreciating Rand and the attractive valuations of international shares. They should deliver better returns than local equities.

For more investor advice, visit www.investonline.co.za

This article is available under fund manager comments on our website, www.investonline.co.za. For your convenience, we have summarized it below:

Investor choice in 2011 dries up

·         Investors face the following situation: Cash offers negative real returns and bonds are unlikely to generate good returns over the next three years.

• Equities, particularly in emerging markets, have been a good option in an environment where there has been little choice.
• There still remains risks to the continued positive economic backdrop, such as rising inflation in china, a rise in interest rates, sovereign defaults in Europe and a potential decline in profit expectations.
• Particularly intriguing are current fund manager consensus views: Bullish on resources – specifically general mining, whilst being bearish on gold, food retail and platinum with a particularly negative outlook for banks.
• SIM’s investment strategy is to focus on factors that are within their control rather than trying to predict the future.
• Investors intent on avoiding loss must position themselves to prosper and survive under any circumstances.

·         SIM is unlikely to take big directional bets, but rather aims to capitalise on mispricing opportunities arising from human behaviour.

·         Sectors that are usually mispriced at the end of a recovery cycle are construction, resources and banks.

Click here to view the full article on the Investonline website

Investor advice – The income and growth challenge

• Most investors do not have enough exposure to growth assets, partly as a result of this recent exceptional period of superior performance. Growth assets are the most reliable means of protecting one’s capital against the eroding effects of inflation.

• Plan for higher inflation – older individuals have a higher personal inflation compared to the ‘average’ South African as quoted in the headline inflation.
• Plan for lower returns – the last decade is not a good basis for expected return forecasts. Expect interest rates to remain lower for longer.
• Plan to live longer – life expectancy is increasing thanks to advances in technology and nutrition.

What are the implications for retirement planning? Expect relatively high inflation and expect returns to be more subdued than over the past 10 years. The prudent planner will respond by moderating income drawdown rates and ensuring their portfolios are exposed to growth assets.

For more investor advice, visit www.investonline.co.za