Tuesday, 27 March 2012 - 20:00
Charts
Bond Returns in an Inflation Targeted Environment As multi-managers we focus most of our research in two areas:
• Selecting the best fund managers and blending them together
• Valuing asset classes to determine expected returns and risks going forward
This week we’ll take a closer look at valuing bonds.
As mentioned in previous weekly reports, bonds are essentially loans made by investors to the issuers (governments, parastatals, corporates) who promise to repay the bond back at a predetermined date with a predetermined interest rate. The return of the bond is therefore fairly simple to calculate. The initial yield will in a large part determine the total return (on a nominal basis) if the bond is held to maturity. Factors that will affect the total return will be any default (failure to pay either coupon or principal) and the reinvestment risk.
Reinvestment risk comes about when the coupons (interest payments) are paid to investors and need to be reinvested. Should prevailing yields be below the initial yield then the total return will be lower than the initial yield to maturity, but if they are higher, then investors will be able to enhance their return by reinvesting at the higher rate.
The chart below shows the relationship between the initial 10 year spot bond yield and the subsequent 5 year annual return. As can be seen, there is a tight relationship between the two variables with the initial yield explaining over 90% of the total return.
A large part of the Monetary Policy Committee’s (MPC) mandate is to keep inflation between 3% and 6%. While there is a ‘political’ mandate to encourage strong GDP growth (which will sometimes result in inflation staying higher for longer) there is at least the framework to bring inflation back should it move significantly above 6% for any extended period.
The inflation rate that is priced into the market for the next 5 years can be approximated by taking the difference between the long (nominal) bond rate and the inflation linked bond rate. Since the turn of the millennium the implied inflation rate has been between 4.5% and 6% nearly two thirds of the time. This range is intuitive as it sits in the upper portion of the MPC’s target range.
History shows that when the implied inflation rate was above 6% the average subsequent 1 year return from bonds is 18%. When the implied inflation rate is below 6% the average subsequent 1 year return from bonds is 9%. Naturally it is therefore better (in general) to invest into bonds when the inflation outlook is poor than when it is rosy. Taking a closer look at the numbers reveals an average 1 year return of only 6% when the implied inflation rate is below 5% and 25% when it’s above 7%.
Below is a cross section of the implied inflation rate and subsequent 1 year return from bonds. Notice the trend line:
We expect that this relationship will hold as long as inflation targeting is part of the MPC mandate. With actual inflation expected to sit between 3% and 6% (but more likely closer to 6%), periods where the market expects high inflation will generally be followed by periods where expectations moderate. Falling inflation expectations are good for bonds returns as the market prices in lower interest rates, which results in capital gains on fixed income investments.
As with any valuation model, the actual outcome will most likely differ from the model’s expected outcome, but the model does give a good indication of the type of return that one should reasonably expect going forward. Periods with high starting yields AND high implied inflation rates are good periods to be investing into bonds, with the converse also being true.
Kind regards,
Mike Browne
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966
Tue, 27 Mar 2012
Top News
South African stocks ended higher on Tuesday, extending gains for the third day after, the U.S. Federal Reserve signaled it would continue to support the world's largest economy with loose monetary policy. Full story
South Africa's government bonds weakened for the first time in three days and the rand reversed earlier gains against the dollar on Tuesday, although the currency's carry trade appeal could boost it in the short term. Full story |
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Former armed forces commander Ilker Basbug stormed from an Istanbul courtroom on Tuesday and denounced his trial on coup plot accusations as an assault on the entire military leadership and a "black stain" on the country's history. Full storyA meeting of Syrian opposition groups on Tuesday that aimed to show they can unite to form an alternative to President Bashar al-Assad, was marred when a veteran dissident and Kurdish delegates walked out, saying their views were not being heard. Full storySyria has accepted a U.N.-sponsored peace plan, international envoy Kofi Annan said on Tuesday, as troops loyal to President Bashar al-Assad raided rebel forces who have taken refuge across the border in Lebanon. Full story |
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Markets | Wall Street paused near
four-year highs on Tuesday, while a number of large-cap stocks
hit new highs as portfolio managers grabbed top performers. . . Full story | | Weak oil stocks dragged
European shares lower on Tuesday, led by France's Total
after it warned a massive gas leak at. . . Full story | | World stocks touched an
eight-month high o n T uesday, while the dollar edged up from the
previous day's losses a day after. . . Full story | | Heavyweight oil stocks dragged
Britain's top shares lower on Tuesday, reversing earlier gains
that had been driven by strength in banks and miners,. . . Full story |
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| Gold prices steadied on Tuesday
as a fall in the euro pulled it from two-week highs earlier in
the day on the back. . . Full story | | Hong Kong shares finished
higher on Tuesday, with locally listed Chinese companies
climbing for the first time in 10 sessions on short-covering
after U.S.. . . Full story | | European shares rose on
Tuesday, adding to the previous session's rebound after Federal
Reserve Chairman Ben Bernanke said that easy monetary policy
would remain. . . Full story | | Britain's FTSE 100
advanced in early trade on Tuesday, extending solid gains in the
previous session as expectations of further monetary easing. . . Full story |
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SA Business | South Africa on Tuesday cut its maize output forecast for the 2011/12 season by 3 percent, exactly in line with market expectations, after late-season drought weighed on yields.. . . Full story | | South Africa's Government Employees Pension Fund (GEPF) is considering investing around $22 billion outside the country to diversify its risks and some of that may go to other African countries and. . . Full story | | Singapore Airlines Ltd, the world's second largest by market value, said on Tuesday it paid a fine of 25 million rand to settle a South African investigation into price-fixing of flights. . . Full story |
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| Emerging economies must be
given a fair shot at leading the institutions at the heart of
global finance or they will end up going their own way, a
challenger for the top job at the World Bank.. . . Full story |
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Company News | The terms of the agreement are in the process of being renegotiated, including inter alia the consideration payable as well as. . . Full story | | Shareholders are advised that an agreement has been signed between Bonatla and Globus Investments (Pty) Ltd. ("Globus Investments") in terms of. . . Full story | | Simmer and Jack Mines is currently finalising its interim results for the six months ended 31 December 2011. Accordingly, shareholders are. . . Full story | | Top Fix shareholders are referred to the previous cautionary released on SENS on 7 February 2012 and are advised that discussions. . . Full story |
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| Resgen has signed an agreement to acquire land adjacent to the company's Boikarabelo mine and agreed to a put option under. . . Full story | | Shareholders are referred to the unaudited interim results for the six months ended 31 December 2011 released on SENS on 23. . . Full story | | Further to the announcement released on SENS yesterday, shareholders are advised that with effect from 26 March 2012, Mr DR Gain. . . Full story | | Shareholders were advised that Ellies expects that earnings per share and headline earnings per share for the year ended 30 April. . . Full story |
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Company Results | Revenue improved to R387.3 million (R324.2 million) and gross profit jumped to R117.6 million (R97.4 million). However, operating profit dropped slightly to R22.7 million (R23.3 million), while loss for the period. . . Full story | | Revenue increased from R3 928.8 million to R4 229.5 million in 2011. Gross profit increased to R1 113 million (2010: R1 073 million) while operating loss of R233.2 million (2010:profit of. . . Full story | | |
World Markets (Spot Prices)
Name | Time | RP | Move | % Move | JSE Overall | 17:00 | 33858.22 | 193.76 | 0.58% | JSE Top 40 | 17:00 | 29957.44 | 160.88 | 0.54% | JSE Gold | 17:00 | 2460.13 | 9.98 | 0.41% | JSE Financial | 17:00 | 24945.16 | 278.53 | 1.13% | JSE Industrial | 17:00 | 37608.52 | 236.46 | 0.63% | JSE Indust 25 | 17:00 | 31530.16 | 184.10 | 0.59% | JSE Resource | 17:00 | 50060.42 | 78.04 | 0.16% | DJ Futures | 19:56 | 13170.00 | -34.00 | -0.26% | DJ Ind | 19:41 | 13236.90 | -4.73 | -0.04% | SP 500 | 19:56 | 1416.21 | -0.30 | -0.02% | Nasdaq | 19:56 | 3127.01 | 4.44 | 0.14% | FTSE 100 | 17:35 | 5869.55 | -33.15 | -0.56% | DAX | 17:46 | 7084.64 | 5.41 | 0.08% | CAC40 | 17:46 | 3472.96 | -29.02 | -0.83% | Nikkei | 08:26 | 10255.15 | 236.91 | 2.36% | Shanghai | 09:26 | 2347.18 | -3.42 | -0.15% | Hang-Seng | 10:26 | 21046.91 | 378.05 | 1.83% | All Ords | 07:37 | 4391.60 | 36.40 | 0.84% | NZSE 50 | 06:46 | 3483.96 | 12.04 | 0.35% |
| | Name | Time | RP | Move | % Move | Gold | 19:59 | 1685.10 | -4.70 | -0.28% | Gold/Rand | 19:58 | 12774.73 | -32.10 | -0.25% | Gold/R kg | 19:56 | 410451 | 979 | 0.24% | Silver | 19:59 | 32.6700 | -.1200 | -0.37% | Platinum | 19:59 | 1653.70 | 8.70 | 0.53% | Palladium | 19:59 | 657.25 | -5.55 | -0.84% | R157 | 17:06 | 6.78 | .04 | 0.59% | R204 | 17:06 | 7.66 | .05 | 0.59% | Brent Crude | 19:56 | 125.65 | -.59 | -0.47% | Rand / Dollar | 19:59 | 7.5817 | 0.0019 | 0.03% | Rand / Pound | 19:55 | 12.0664 | -0.0069 | -0.06% | Rand / Euro | 19:55 | 10.1109 | -0.0148 | -0.15% | Rand / NZD | 19:58 | 6.2337 | -0.0094 | -0.15% | Rand / AUD | 19:55 | 7.9485 | -0.0428 | -0.54% | Yen / Dollar | 19:59 | 83.1270 | 0.2800 | 0.34% | Euro / Dollar | 19:55 | 0.7493 | 0.0009 | 0.12% | Dollar / Euro | 19:59 | 1.3341 | -0.0015 | -0.11% | Pound / Dollar | 19:55 | 0.6262 | 0.0003 | 0.05% |
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Click here for the Sharenet Spot Price page
The JSE Today
Trading Statistics
Date | Adv. | Decl. | Unch. | Actives | Volume | Value | Trades | Orders |
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27/03/2012 | 228 | 105 | 78 | 411 | 223,747,030 | R11,802,262,893 | 95391 | 2217780 | 26/03/2012 | 194 | 160 | 76 | 430 | 218,597,092 | R12,294,681,589 | 93389 | 2576901 | 23/03/2012 | 153 | 170 | 88 | 411 | 254,168,259 | R14,659,274,057 | 98272 | 2336760 | 22/03/2012 | 122 | 220 | 74 | 416 | 293,769,839 | R20,975,245,844 | 138858 | 2522530 | 20/03/2012 | 147 | 201 | 71 | 419 | 320,376,263 | R16,326,238,750 | 108234 | 2366351 |
* Includes all listed instruments on the JSE
Index Summary Index Name | RP | Move | % Move | Top 40 | 29,957.44 | 160.88 | 0.54% | Industrial | 37,608.52 | 236.46 | 0.63% | Mid Cap | 47,832.34 | 373.60 | 0.79% | Small Cap | 36,011.71 | 190.89 | 0.53% | Resource 20 | 50,060.42 | 78.04 | 0.16% | Industrial 25 | 31,530.16 | 184.10 | 0.59% | Financial 15 | 9,453.89 | 121.91 | 1.31% | Financial & Ind. 30 | 35,215.75 | 276.71 | 0.79% | All Share | 33,858.22 | 193.76 | 0.58% | Oil & Gas | 28,559.58 | 318.59 | 1.13% | Mining | 32,191.78 | -5.64 | -0.02% | Gold Mining | 2,460.13 | 9.98 | 0.41% | Platinum Mining | 61.40 | .55 | 0.90% | GENERAL MINING | 8,052.16 | -27.27 | -0.34% | Oil & Gas Producers | 15,355.96 | 171.30 | 1.13% | Basic Materials | 27,569.42 | 8.49 | 0.03% | Chemicals | 15,356.92 | -32.88 | -0.21% | Forestry & Paper | 14,460.33 | 96.89 | 0.67% | Industrial Metals | 30,076.33 | 180.32 | 0.60% | Industrials | 33,106.91 | 612.59 | 1.89% | General Industrials | 91,701.78 | 2345.56 | 2.62% | Consumer Goods | 32,265.53 | -77.45 | -0.24% | Automobiles & Parts | 5,357.71 | 240.03 | 4.69% | Household Goods | 180.75 | 3 | 1.85% | Health Care | 40,298.53 | 468.03 | 1.18% | Beverages | 106.02 | -1.07 | -1.00% |
| | Index Name | RP | Move | % Move | Food Producers | 59,142.78 | 479.42 | 0.82% | Personal Goods | 475.01 | 1.00 | 0.21% | Consumer Services | 63,672.91 | 651.20 | 1.03% | General Retailers | 53,633.25 | 989.53 | 1.88% | Travel & Leisure | 3,714.46 | 37.51 | 1.02% | Media | 93.05 | .00 | 0.00% | Support Services | 2,437.08 | -39.17 | -1.58% | Telecommunications | 68,871.47 | 757.10 | 1.11% | Financials | 24,945.16 | 278.53 | 1.13% | Banks | 47,323.43 | 771.42 | 1.66% | Non-life Insurance | 40,878.92 | 298.61 | 0.74% | Life Insurance | 19,961.89 | 194.34 | 0.98% | General Financial | 2,348.87 | 34.33 | 1.48% | Technology | 28,323.21 | -38.33 | -0.14% | SHARIAH TOP40 | 3,072.82 | 13 | 0.43% | FTSE/JSE SHARIAH ALL | 3,183.05 | 15 | 0.48% | COAL MINING | 27,349.46 | 407 | 1.51% | FTSE JSE Fledgling | 5,320.94 | -18 | -0.33% | FTSE/JSE Alt X | 1,205.83 | 9 | 0.74% | SA LISTED PROPERTY | 415.22 | | -0.06% | CAPPED PROPERTY | 336.96 | | -0.01% | RESOURCE | 27,666.44 | 43 | 0.15% | DIVIDEND PLUS | 197.51 | 2 | 1.13% | FTSE/JSE RAFI 40 | 7,097.56 | 50 | 0.70% | Capped Top 40 | 15,824.56 | 88 | 0.56% | Capped All Share | 17,129.85 | 98 | 0.58% | JSE TABACO | 4,957.96 | -25 | -0.51% |
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Click here for the Sharenet Index Summary page
Latest Consensus Changes** Code | Company Name | Status | Updated | SAB | SABMILLER PLC | HOLD | 23 Mar | APN | ASPEN PHARMACARE HLDGS | HOLD | 23 Mar | MTN | MTN GROUP LIMITED | BUY | 23 Mar | AEG | AVENG LIMITED | BUY | 23 Mar | CMP | CIPLA MEDPRO SA LTD | BUY | 22 Mar |
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Results Expected** Expected | Company Name | Fin. Date | 28 Mar 2012 | ANOORAQ | December 2011 (Final) | 28 Mar 2012 | BLACKSTAR | December 2011 (Final) | 28 Mar 2012 | CAPITEC | February 2012 (Final) | 28 Mar 2012 | CAPITEC-P | February 2012 (Final) | 28 Mar 2012 | DON | December 2011 (Interim) |
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Recent Dividends** Share Name | Dec-Date | LDT | Pay-Date | Amount | ILIAD | 12-03-27 | 12-04-13 | 12-04-23 | R 0.2000 | DELTA | 12-03-27 | 12-04-13 | 12-04-23 | R 0.2500 | PUTPROP | 12-03-23 | 12-04-13 | 12-04-23 | R 0.1500 | METAIR | 12-03-23 | 12-04-13 | 12-04-23 | R 0.7200 | CASHBIL | 12-03-20 | 12-04-04 | 12-04-16 | R 2.9600 |
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Ex Div** Share Name | Dec-Date | LDT | Pay-Date | Amount | MWNT | 12-03-26 | 12-03-23 | 12-04-02 | R 55.0000 | ABSABANK-P | 12-02-10 | 12-03-23 | 12-04-02 | R 28.2720 | EXXARO | 12-02-23 | 12-03-23 | 12-04-02 | R 5.0000 | MTN GROUP | 12-03-07 | 12-03-23 | 12-04-02 | R 4.7600 | ABSA | 12-02-10 | 12-03-23 | 12-04-02 | R 3.9200 |
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Upcoming AGMs** Code | Company Name | Date | Status | REB | Rebosis Property Fund Ltd. | 28/03/2012 | Confirmed | RAC | RACEC Group Ltd. | 29/03/2012 | Confirmed | MMP | Marshall Monteagle PLC | 29/03/2012 | Confirmed | MTE | Marshall Monteagle PLC | 29/03/2012 | Confirmed | AMSP | Anglo American Platinum Ltd. | 30/03/2012 | Confirmed |
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