Tuesday, 15 October 2013 - 20:00
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.
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Tue, 15 Oct 2013
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%.
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
A senior Iranian negotiator
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World Markets (Spot Prices)
|JSE Top 40||17:00||39592.96||572.79||1.47%|
|JSE Indust 25||17:00||50925.35||572.13||1.14%|
|Rand / Dollar||19:59||9.9375||0.0222||0.22%|
|Rand / Pound||19:55||15.8484||0.0271||0.17%|
|Rand / Euro||19:55||13.4147||-0.0366||-0.27%|
|Rand / NZD||14/10||8.2364||0.0434||0.53%|
|Rand / AUD||19:55||9.4685||0.0506||0.54%|
|Yen / Dollar||19:59||98.4800||-0.1730||-0.18%|
|Euro / Dollar||19:55||0.7407||0.0035||0.47%|
|Dollar / Euro||19:59||1.3498||-0.0060||-0.45%|
|Pound / Dollar||19:55||0.6256||0.0001||0.02%|
Click here for the Sharenet Spot Price page
The JSE Today
* Includes all listed instruments on the JSE
|Index Name||RP||Move||% Move|
|Financial & Ind. 30||54,126.33||699.20||1.31%|
|Oil & Gas ||37,989.39||767.34||2.06%|
|Oil & Gas Producers ||20,426.19||412.58||2.06%|
|Basic Materials ||26,779.90||440.82||1.67%|
|Forestry & Paper ||28,191.44||271.26||0.97%|
|Industrial Metals ||24,435.58||-57.64||-0.24%|
|General Industrials ||129.92||1.11||0.86%|
|Consumer Goods ||52,949.40||309.84||0.59%|
|Automobiles & Parts ||8,944.61||226.44||2.60%|
|Health Care ||75,016.57||225.61||0.30%|
|Index Name||RP||Move||% Move|
|Food Producers ||71,540.73||350.00||0.49%|
|Personal Goods ||1,001.26||.00||0.00%|
|Consumer Services ||10,355.87||232.22||2.29%|
|General Retailers ||65,979.90||905.06||1.39%|
|Travel & Leisure ||5,602.73||-13.56||-0.24%|
|Support Services ||2,634.35||18.90||0.72%|
|Non-life Insurance ||50,125.62||612.54||1.24%|
|Life Insurance ||30,634.52||704.25||2.35%|
|General Financial ||2,997.77||15.36||0.52%|
|SHARIAH TOP40 ||3,747.13||61||1.66%|
|FTSE/JSE SHARIAH ALL||3,869.31||54||1.42%|
|FTSE JSE Fledgling ||6,011.13||-26||-0.43%|
|FTSE/JSE Alt X ||1,036.50||-3||-0.25%|
|SA LISTED PROPERTY ||503.10||0.26%|
|CAPPED PROPERTY ||424.13||0.16%|
|FTSE/JSE RAFI 40||8,783.02||133||1.54%|
|Capped Top 40||20,978.84||306||1.48%|
|Capped All Share||22,442.42||290||1.31%|
|JSE TABACO ||6,555.24||-51||-0.77%|
Click here for the Sharenet Index Summary page
Latest Consensus Changes**
|TKG||TELKOM SA LIMITED||BUY||14/10/2013|
|RBP||ROYAL BAFOKENG PLATINUM L...||HOLD||11/10/2013|
|BTI||BRITISH AM. TOBACCO PLC||BUY||11/10/2013|
|ATL||ATLATSA RESOURCES CORP||HOLD||10/10/2013||
|Expected||Company Name||Fin. Date|
|16/10/2013||AQUARIUS||September 2013 (Q)|
|16/10/2013||AQUARIUSCVT||September 2013 (Q)|
|16/10/2013||DATATEC||August 2013 (Interim)|
|16/10/2013||FORBES||August 2013 (Interim)|
|16/10/2013||ODERSON||August 2013 (Interim)|
|NTC PREF||01/10/13||25/10/13||04/11/13||ZAR 3.5159||
|ADW||African Dawn Capital Ltd.||15/10/2013||Confirmed|
|DST||Distell Group Ltd.||16/10/2013||Confirmed|
|WSL||Wescoal Holdings Ltd.||16/10/2013||Confirmed|
|CVH||Capevin Holdings Ltd.||17/10/2013||Confirmed|
Stock Exchange News Service
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