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Tuesday, 15 October 2013 - 20:00
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Seed Weekly - The Pitfalls and Power of PPP
Investing offshore is often an emotive subject, particularly in South Africa where many investors got burnt at the turn of the century. In the early 2000’s the rand weakened considerably against most global currencies and investors sent large portions of their hard earned savings into developed market equities at exactly the wrong time. From the end of 2001 until now we have seen both the rand strengthening AND the local market outperforming in local currency terms, i.e. investors who sent money offshore lost out both from a currency AND a stock market perspective. These investors are therefore very sceptical about sending any more money out of the country as they don’t want to get burnt again. On the other side of the coin you have those investors that are worried that South Africa is ‘going down the tubes’ and will take ANY opportunity to get money out of the country.
The reality is, as always, somewhere in between and at Seed we attempt to take an unemotional look at where the opportunities lie. We realise that we will make mistakes, but if we consistently invest where the probabilities are the greatest then our clients will enjoy superior returns over time.
In our view, investors taking money offshore need to answer two explicit questions:
1. Is the rand over or under valued?
2. Are the offshore assets (equities, property, bonds, etc) over or under valued?
This report will look solely at the first question.
Purchasing Power Parity, more commonly known as PPP, is a common method of valuing currencies that is popular among academics and investment practitioners alike. Essentially PPP estimates the fair value of a country’s currency based on inflation differentials and the law of arbitrage. While this relationship often doesn’t hold over the short term, it has a good predictive power over the longer term.
All models have potential pitfalls where human intervention and logic are important to ensure that sound theoretical reasoning doesn’t result in illogical results. One potential pitfall of PPP is that the output is highly dependent on the starting date. One can get wildly different estimations of fair value by using the same model, but different starting dates. When looking at the fair value of the rand vs the US dollar one can calculate PPP anywhere between R 6.90 (1995 start) and R 17.72 (2002 start). Blindly inputting a starting date can therefore produce an output that is far removed from (what we perceive to be) reality.
The model’s output is extremely useful, and a powerful predictor of future movements, for investors who apply an element of logic when making their initial assumptions. At Seed we look at PPP from two viewpoints. The first looks at the average PPP for periods between 5 and 20 years (i.e. 180 observations). This method gives a current fair value of R 9.44 / USD. The second method uses the end of 1984 as a starting date, and the result is below. This model’s fair value is R 9.47 / USD compared to the current rate (as at 30 September) of 10.03.
When the rand is above or below the dotted line (1 standard deviation) we are fairly confident that it’s trading significantly away from fair value and make investment decisions accordingly (send ZAR offshore when it’s too strong and bring USD back to South Africa when it’s oversold).
We used this model to reduce our foreign currency exposure at the end of 2008, and then again to take it to its maximum at the end of 2010. The rand is currently fairly close to fair value and we therefore aren’t making investment decisions solely based on an expectation of currency movements.
Take care,
Mike Browne
www.seedinvestments.co.za
info@seedinvestments.co.za
021 914 4966
Top News
![[IMAGE]](image.php@width=300&height=150&cropratio=2%253A1&image=%252Fnews_images_sn%252F1376481030.jpg "5pm market wrap") Local markets
The JSE All Share gained 1.31% on Tuesday, with resources rising 1.89%, financials up 1.41%, industrials 1.02% higher, and gold miners down 0.14%. Full story ![[IMAGE]](image.php@width=300&height=150&cropratio=2%253A1&image=http%253A%252F%252Fwww.sharenet.co.za%252Fimages%252Fprofile%252Fvalue_group.gif) Revenue increased to R946.6 million (R936.1 million). Gross profit declined to R380.2 million (R385.4 million) and operating profit was slightly higher at R69.8 million (R69.7 million). Net attributable profit was up 13% to R42.1 million (R37.4 million). In addition, headline earnings per sh Full story |
 A senior Iranian negotiator
cautioned it was too early to say whether the Islamic Republic
and six world powers made progress on Tuesday towards resolving
the decade-old standoff over Tehran's disputed nuclear
ambitions. Full story  The Social Democrats (SPD)
bemoaned a lack of concessions from Angela Merkel, while her
conservative allies accused the SPD of trying to dictate policy
despite losing last month's election. Full story  A powerful
earthquake measuring 7.2 struck islands popular with tourists in
the Philippines on Tuesday, killing at least 74 people, some as
they prayed in a centuries-old church, and causing widespread
damage to infrastructure, officials said. Full story |
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Markets |
U.S. stocks were down on
Tuesday in light trading as prospects for an agreement to end
the U.S. government's fiscal impasse shifted from. . . Full story |
Mixed signals from Washington
on progress in the budget and debt talks left markets confused
on Tuesday, boosting the dollar, but U.S. stocks. . . Full story |
European shares rose on Tuesday,
with some benchmark indexes hitting multi-year highs, bolstered
by indications that a deal could soon be clinched in. . . Full story |
Britain's top share index rose to
its highest level so far in October on Tuesday, buoyed by signs
of a deal on the. . . Full story | |||
Gold prices steadied on Thursday
as an early drop to three-month lows tempted some buyers back to
the market, but stayed under pressure. . . Full story |
U.S. stocks slightly pared
earlier losses on Tuesday after Republican lawmakers in the U.S.
House of Representatives said they hope to pass their. . . Full story |
S&P 500 futures turned negative
in low volume in early trading on Tuesday after Citigroup
reported a marginal fall in adjusted quarterly profit. . . Full story |
Britain's top share index rose to
its highest level so far in October on Tuesday, buoyed by signs
of a deal to fix. . . Full story | ||||
SA Business |
South Africa's Harmony Gold said on Tuesday July-September production likely increased by 12 percent from the previous quarter, helped by an. . . Full story |
Overstretched South Africans are further cutting back on spending, hit by higher fuel prices and tighter credit in Africa's top economy,. . . Full story |
Diageo, the world's biggest spirits group, should see sales growth in Africa accelerate as it expands into new markets like Ethiopia. . . Full story |
Barclays Africa said on Monday veteran banker Louis von Zeuner had retired from the boards of two of its South African. . . Full story | |||
South Africa's Liberty Holdings expects its African business outside of South Africa to contribute up to 9 percent of profit in. . . Full story | Overstretched South
Africans are further cutting back on spending, hit by higher
fuel prices and tighter credit in Africa's top economy, the
chief executive. . . Full story | South Africa's Treasury sold a total 2.35 billion rand of its 2026, 2031 and 2037 government bonds on Tuesday.. . . Full story | South Africa's Kumba Iron Ore said on Tuesday the expansion of its Sishen pit may be impacted by a delay or. . . Full story |
South Africa's rand was largely steady against the dollar early on Tuesday with ongoing U.S. debt ceiling negotiations the main driver of sentiment in the absence of market-moving domestic news.. . . Full story |
Company News |
Old Mutual will enter a close period under the Model Code on Securities Dealing and a quiet period for Investor Relations. . . Full story |
PPC announced that Mr Peter Esterhuysen, Director, Business Development, has resigned from PPC and from the board on 15 October 2013,. . . Full story |
Shareholders were advised that Mr J F Malherbe, non-executive director of Shoprite, will not be standing for re-election as a director. . . Full story |
The board of Stefstock announced that the group's results for the six months ended 31 August 2013, being earnings and headline. . . Full story | |||
Anglo announced the appointment of Mr Ruben Fernandes as CEO of its Nickel, Niobium and Phosphates businesses, with effect 1 December. . . Full story |
Shareholders are advised that at the AGM of Afdawn held today, 15 October 2013, ordinary resolutions number 5 and number 9. . . Full story |
According to Business Day, Zurich now owns 100% of BnB Sure, a transaction that will allow the insurer to provide insurance. . . Full story |
Anglo draws attention to an announcement issued by Kumba Iron Ore Ltd., the text of which is set out below:. . . Full story | ||||
Company Results | Revenue increased to R434.6 million (R400.7 million). Gross profit declined to R62 million (R68.3 million) and operating profit was also lower. . . Full story | Revenue from sale of goods shot up to R2.7 billion (R655.4 million) and gross profit jumped to R401.6 million (R86.7 million).. . . Full story | These the first full-year results since Beige changed its year-end to June each year from March and are therefore incomparable to. . . Full story | Revenue grew 24% to R263.5 million (R212.9) and gross profit rose 20% to R103.2 million (R85.7 million). Operating profit was 11%. . . Full story |
World Markets (Spot Prices)
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The JSE Today
| Date | Adv. | Decl. | Unch. | Actives | Volume | Value | Trades | Orders |
|---|---|---|---|---|---|---|---|---|
| 15/10/2013 | 247 | 139 | 55 | 441 | 194,371,679 | R14,389,272,808 | 155182 | 926176 |
| 14/10/2013 | 191 | 158 | 60 | 409 | 178,331,180 | R16,071,548,547 | 113456 | 1403098 |
| 11/10/2013 | 217 | 119 | 78 | 414 | 214,453,690 | R12,794,680,588 | 128610 | 1321378 |
| 10/10/2013 | 240 | 116 | 55 | 411 | 167,665,025 | R12,244,938,259 | 143518 | 1561294 |
| 09/10/2013 | 129 | 250 | 50 | 429 | 188,700,753 | R13,489,839,915 | 146438 | 858179 |
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Index Summary
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Stock Exchange News Service
| Date | Time | Headline |
| 15/10/2013 | 17:30 | OLD MUTUAL PLC - Conference participation by the Group during forthcoming close ... |
| 15/10/2013 | 17:30 | NETCARE LIMITED - Voluntary disclosure of short term extension of GHG PropCo 1 d... |
| 15/10/2013 | 17:00 | PPC LIMITED - Resignation of a Director of PPC Limited |
| 15/10/2013 | 17:00 | SHOPRITE HOLDINGS LIMITED - Change to the board of directors |
| 15/10/2013 | 16:40 | STEFANUTTI STOCKS HOLDINGS LTD - Trading statement |
| 15/10/2013 | 16:35 | IVUZI INVESTMENTS LIMITED - Full Capital Redemption - IVA342 |
| 15/10/2013 | 16:35 | MINE RESTORATION INVESTMENTS LTD - Update on the Commissioning of the Coal Briqu... |
| 15/10/2013 | 16:32 | RMB HOLDINGS LIMITED - Dealings in securities by a director |
| 15/10/2013 | 16:30 | NICTUS BEPERK - Change to the board of directors |
| 15/10/2013 | 16:30 | HOSPITALITY PROPERTY FUND LIMITED - Interest Rate Reset - HPF02 and HPF03 |
| 15/10/2013 | 16:20 | HULAMIN LIMITED - Dealing in securities by a director |
| 15/10/2013 | 16:15 | VALUE GROUP LIMITED - Unaudited Interim Results for the 6 months ended 31 August... |
| 15/10/2013 | 16:05 | NUTRITIONAL HOLDINGS LIMITED - Updated Trading Statement and Appointment of Comp... |
| 15/10/2013 | 16:01 | ASTRAL FOODS LIMITED - Disclosure of beneficial interests securities |
| 15/10/2013 | 15:48 | BLUE LABEL TELECOMS LIMITED - Director's Dealings |
| 15/10/2013 | 15:43 | HARMONY GOLD MINING COMPANY LIMITED - Harmonys quarterly production guidance |
| 15/10/2013 | 15:32 | RMB CIS MANCO (PTY) LIMITED - Partial delisting of RMB inflation-x securities |
| 15/10/2013 | 15:08 | INVESTEC BANK LIMITED - Expiry SPXIID |
| 15/10/2013 | 15:01 | JUBILEE PLATINUM PLC - Director's trade in securities |
| 15/10/2013 | 14:55 | RCS INVESTMENT HOLDINGS LTD - Interest Rate Reset - RCSB03 |
| 15/10/2013 | 14:40 | GROWTHPOINT PROPERTIES LIMITED - GRT03 - Interest Rate Reset |
| 15/10/2013 | 14:38 | RMB HOLDINGS LIMITED - Joint media release: executive succession |
| 15/10/2013 | 14:30 | TIMES MEDIA GROUP LIMITED - Dealing in Times Media Group Limited shares by an As... |
| 15/10/2013 | 14:00 | ANGLO AMERICAN PLC - Anglo American appoints Ruben Fernandes as CEO of its Nicke... |
| 15/10/2013 | 13:53 | RMB HOLDINGS LIMITED - Executive succession planning |
| 15/10/2013 | 13:48 | RAND MERCHANT INSURANCE HLDGS LTD - Executive succession planning |
| 15/10/2013 | 13:30 | INGUZA INVESTMENTS (RF) LIMITED - Full Capital Redemption - ING46 |
| 15/10/2013 | 13:30 | FIRSTRAND BANK LIMITED - New Instrument Listing-FRC184 |
| 15/10/2013 | 12:42 | AFRICAN DAWN CAPITAL LIMITED - Results of Annual General Meeting |
| 15/10/2013 | 12:30 | COMBINED MOTOR HOLDINGS LIMITED - Interim Results for the six months ended 31 Au... |
| 15/10/2013 | 12:27 | ELB GROUP LIMITED - Dealing in securities by a director |
| 15/10/2013 | 11:08 | JOHN DANIEL HOLDINGS LIMITED - Cautionary Renewal Announcement |
| 15/10/2013 | 11:02 | COMPU-CLEARING OUTSOURCING LIMITED - Director's dealings in securities |
| 15/10/2013 | 11:00 | ISA HOLDINGS LIMITED - Renewal of cautionary announcement |
| 15/10/2013 | 10:53 | MORVEST BUSINESS GROUP LIMITED - Results of the General Meeting |
| 15/10/2013 | 10:51 | TASTE HOLDINGS LIMITED - Change to the Board of Directors - Retirement of Direct... |
| 15/10/2013 | 10:47 | AFRICAN DAWN CAPITAL LIMITED - Shareholder update |
| 15/10/2013 | 10:20 | ANGLO AMERICAN PLC - Anglo American update re. Kumba Iron Ore |
| 15/10/2013 | 10:00 | SEKUNJALO INVESTMENTS LIMITED - Renewal of cautionary announcement |
| 15/10/2013 | 09:51 | TASTE HOLDINGS LIMITED - Unaudited condensed consolidated results for the six mo... |
| 15/10/2013 | 09:30 | NEW GOLD ISSUER LIMITED - NGPLT - Listing of additional NewGold Platinum Debentu... |
| 15/10/2013 | 08:32 | BHP BILLITON PLC - Macquarie Western Australia Forum |
| 15/10/2013 | 08:30 | CONDUIT CAPITAL LIMITED - Disposal By Conduit Capital Of Its Investment In Amalg... |
| 15/10/2013 | 08:30 | THE STANDARD BANK OF SA LTD - The Standard Bank of South Africa Limited New Fin... |
| 15/10/2013 | 08:15 | KUMBA IRON ORE LIMITED - Sishen Western Expansion Project |
| 15/10/2013 | 08:00 | COAL OF AFRICA LIMITED - Vele Colliery Update |
| 15/10/2013 | 07:05 | BRITISH AMERICAN TOBACCO PLC - Transaction in own shares |
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