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Wednesday, 20 July 2016 - 20:00
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Seed Weekly - Investment Strategy in a Negative Interest Rate Environment

My last article discussed various investment manager styles. Included here were styles such as top down, value, contrarian, growth, quality, momentum etc.

In this article, we explore possible investment strategies and some specific reasons why investors would be explicitly “investing” cash at a negative nominal interest rate, i.e. investing with the guarantee of receiving back less in nominal terms after a defined period of time. Because such an investment approach goes against our normal understanding of investments, it is difficult to believe that an estimated amount of over $10 trillion is already invested into negative yielding assets in the form of mostly government but also corporate bonds.

As an example, last week it was reported that the German Bundesbank issued €4 billion, 10 year bonds at a yield of negative 0.05% p.a. yield. In this instance investors were prepared to part with a substantial sum of money, with the explicit promise that they would receive a haircut of 0.05% each year off their initial capital invested.

This is a classic case of investors being so risk averse that they are more concerned with the return of their capital than their return on capital.

So let’s look at some reasons why investors would adopt this as part of their overall investment strategy.

One investment approach adopted by many pension funds is the matching of their liabilities with assets. This is known as LDI or liability driven investment. This is an investment style that is focused on the liability side of pension funds. It is mostly defined pension funds that will look to adopt this strategy because they have a defined liability in the form of a promise to their retired employees, which can be actuarially calculated on a year by year basis.

In order to immunize this liability, pension funds will set aside a portion of the portfolio investments, investing into lower risk bonds. This worked well when bonds yielded higher rates, but many pension funds continue to invest even as yields drift lower into negative territory. It can be justified if, due to deflation, the pension funds liability is decreasing.

Another buyer of “lower risk” government bonds are insurance companies. Due to increased capital structure regulation, insurance companies own increasingly greater amounts of “less risky” assets. In the past and in order to match their long term liabilities they are “forced” buyers of government bonds.

Therefore, yields are low and governments are able to issue bonds at these low yields and even negative yields, because there is huge demand.

• There is demand from risk averse pension funds.

• There is demand from central banks that are buying bonds issued by government treasuries as a form of quantitative easing.

• There is demand from the risk averse global savings market, which is generally running higher than new issuance. Because of high demand, governments issuing are able to price yields at lower and lower levels.

• Another reason is that global investment managers manage according to benchmarks. Where global bonds make up a portion of the benchmark, the decision to not allocate to bonds, becomes a “risky” investment decision, relative to the benchmark and peers. This becomes especially pronounced where the return on bonds has done well. Therefore despite the low and negative yields, investment funds are “forced” to buy bonds.

According to global bond manager, Pimco, low and negative yields can be pointing to a sharp economic downturn, i.e. a deflationary environment. In this instance investors buying negative yields bonds may still receive a positive real yield, where inflation turns to deflation. For example the real return on a negative 0.05% coupon can translate into a positive 1%, where there is deflation of 1.05%.

The Economist has called this “slow suffocation” because given the preponderance of negative interest rates, banks and other financial services firms’ profitability will ultimately be hit hard. Not only that but virtually all other investment assets are priced off global bond yields, by adding a relevant risk premium. It therefore makes a difference to all global investment assets, when the starting position is a negative.

The chart below reflects the steady increase of global funds now invested into negative interest yielding bonds.

Chart 1: The pool of global negative yielding debt is climbing

Source: The Wall Street Journal 18 June 2016

So while there may be lots of reasons why investors, mostly institutional type investors have lots of reasons to “invest” into negative yielding bonds, they are not necessarily making rational investment decisions.


Ian de Lange

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Wed, 20 Jul 2016
Top News
South Africa's rand firmed against the U.S. dollar on Wednesday after data showing inflation quickened in June boosted the case for domestic interest rates remaining high this year.  Full story

Local markets  Full story
President Francois Hollande said on Wednesday three French soldiers were killed in a helicopter accident in Libya during an intelligence-gathering mission in the North African state.  Full story
Five villagers were killed by soldiers during an interrogation in Myanmar's northern Shan State, a senior general said on Wednesday, in a rare admission by Myanmar's still-powerful military which promised to prosecute the perpetrators.  Full story
Germany is likely to face more Islamist attacks, its interior minister said on Wednesday, but played down any link between the government's open-door refugee policy and Monday's axe assault on a train in Bavaria.  Full story
SA Business
South African poultry producer Astral has to cut jobs, it said on Wednesday, under pressure from high feed prices due to drought and from an over-supplied domestic market.. . .  Full story
South Africa's headline inflation pulled further away from the central bank's target range in June, data showed on Wednesday, but analysts said the increase was probably not enough to justify an. . .  Full story
Corruption in South Africa is hampering reforms needed to boost economic growth and greater transparency is needed at state-owned companies, a senior International Monetary Fund (IMF) official said on Tuesday.. . .  Full story
Company News
The General Meetings of Investec plc and Investec Ltd. to consider the special resolution for the off-market purchase of preference shares. . .  Full story
International Finance Corporation (IFC), a member of the World Bank Group, acquired 13 609 213 new ADvTECH shares at R14.01 per. . .  Full story
Shareholders were advised of the appointment of Mr Gerhard Kotze as non-executive alternate director to Mr Mkhuseli Richman Faku effective 1. . .  Full story
* Diamond production decreased by 19% to 6.4 million carats, reflecting the decision to reduce production in response to prevailing trading. . .  Full story

Amplats released a production report for the second quarter ended 30 June 2016. Review of the quarter - Operations Tragically we had three. . .  Full story
In accordance with the FCA's Disclosure and Transparency Rules, the Company announces that, at 6pm on 30 June 2016: - it. . .  Full story
Kumba released its production and sales report for the quarter ended 30 June 2016. Throughout this report, production and sales volumes. . .  Full story
Datatec published an Interim Management Statement (IMS) covering the period from 1 March 2016 to 30 June 2016 ("the Reporting Period"). Group The. . .  Full story
World Markets (Spot Prices)
NameTimeRPMove% Move
JSE Overall17:1052837.86-55.06-0.10%
JSE Top 4017:1046200.63-13.65-0.03%
JSE Gold17:002697.31-111.06-3.95%
JSE Financial17:0041316.97222.990.54%
JSE Industrial17:1079147.87497.900.63%
JSE Indust 2517:1071228.13464.500.66%
JSE Resource17:1030887.71-988.88-3.10%
DJ Futures19:4218534.0054.000.29%
DJ Ind19:5818610.4951.480.28%
SP 50019:582174.5510.770.50%
FTSE 10017:356728.9931.620.47%
All Ords08:405565.9032.000.58%
NZSE 5009:027172.6717.840.25%
NameTimeRPMove% Move
Gold $19:591317.60-14.16-1.06%
Gold R19:5918925.4118925.410.00%
Gold R/kg19:58615161-5232-0.84%
Silver $19:5919.5110-0.3780-1.90%
Platinum $19:591085.72-2.43-0.22%
Palladium $19:59667.0011.501.75%
Brent Crude19:5847.420.460.98%
USD / ZAR19:5914.37120.03610.25%
GBP / ZAR19:5518.86950.10530.56%
EUR/ ZAR19:5515.7916-0.0146-0.09%
NZD/ ZAR19:5910.093010.09300.00%
AUD / ZAR19:5510.7434-0.0111-0.10%
USD / JPY19:59106.85600.80400.76%
EUR / USD19:591.1005-0.0016-0.14%
GBP / USD19:591.31680.00660.51%

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The JSE Today

Trading Statistics
* Includes all listed instruments on the JSE
Major Moves Up
SharenameSaleMove% MoveVolume
1 SHOPRIT  19498198711.35.%6502204
2 SABVEST  34002909.32.%80
3 CROOKES  63953956.58.%10059
4 NIVEUS  26091596.49.%3242
5 PIKWIK  38302005.51.%680649
6 HOLDSPORT  59232534.46.%86484
7 SASFIN  59002504.42.%22963
8 PICKNPAY  79503254.26.%1079568
9 EQSTRA  282114.06.%1213847
10 TASTE  23494.00.%26602
11 MASSMART  146005553.95.%607989
12 ADAPTIT  1239473.94.%195272
13 ALARIS  270103.85.%130242
14 ITLTILE  1370503.79.%32588
15 SPAR  209717373.64.%621910
16 ISA  11443.64.%10000
17 ATLATSA  15053.45.%5250
18 TRUWTHS  90072903.33.%2368109
19 FINBOND  320103.23.%132285
20 ANCHOR  1180353.06.%79182

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Major Moves Down
SharenameSaleMove% MoveVolume
1 PUTPROP  600-86-12.54.%10000
2 DIAMONDCP  113-13-10.32.%37000
3 CONDUIT  220-25-10.20.%22824
4 DRDGOLD  1005-95-8.64.%759583
5 LONMIN  3870-366-8.64.%354887
6 ANGLOPLAT  36700-3290-8.23.%589502
7 IMPLATS  5000-400-7.41.%2582645
8 TRNSHEX  370-28-7.04.%22848
9 LEWIS  4502-336-6.95.%883513
10 ANGLO  14384-1015-6.59.%6138512
11 KUMBAIO  11985-815-6.37.%1152973
12 PETMIN  123-8-6.11.%109215
13 METAIR  1850-120-6.09.%60253
14 HARMONY  6083-365-5.66.%1287146
15 BRIMST-N  1100-60-5.17.%3210
16 BARWORLD  7601-409-5.11.%1352665
17 SPANJRD  450-24-5.06.%400
18 SOUTH32  1920-99-4.90.%730235
19 ASSORE  17150-850-4.72.%60214
20 TORRE  191-9-4.50.%107695

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New Highs
SharenameSaleHighMove% MoveVolume
1 SHOPRIT  1949819498198711.35.%6502204
2 PIKWIK  383038492005.51.%680649
3 PICKNPAY  795079553254.26.%1079568
4 ALARIS  270293103.85.%130242
5 CLICKS  12725129103152.54.%886978
6 TIGBRANDS  39138397346381.66.%901917
7 ADVTECH  1521153780.53.%273287
8 BIDVEST  1469315204-27-0.18.%1530181

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New Lows
SharenameSaleLowMove% MoveVolume
1 TEX  715703-17-2.32.%294603

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Index Summary
Index NameRPMove% Move
Top 4046,200.63-13.65-0.03%
Mid Cap78,768.32-343.92-0.43%
Small Cap59,592.62-327.61-0.55%
Resource 2030,887.71-988.88-3.10%
Industrial 2571,228.13464.500.66%
Financial 1515,005.25114.200.77%
Financial & Ind. 3073,460.82432.210.59%
All Share52,837.86-55.06-0.10%
Oil & Gas 7,
Mining 22,925.27-1042.81-4.35%
Gold Mining2,697.31-111.06-3.95%
Platinum Mining25.10-1.76-6.55%
GENERAL MINING5,338.71-237.13-4.25%
Oil & Gas Producers 38,689.88.000.00%
Basic Materials 22,013.11-716.18-3.15%
Chemicals 20,451.96-64.36-0.31%
Forestry & Paper 48,585.32-123.69-0.25%
Industrial Metals 8,900.57-605.26-6.37%
Industrials 46,826.61325.840.70%
General Industrials 181.951.500.83%
Consumer Goods 73,533.4417.810.02%
Automobiles & Parts 4,189.25-271.73-6.09%
Household Goods591.50-0-0.01%
Health Care 10,270.60119.931.18%
Beverages 281.89-.88-0.31%
Index NameRPMove% Move
Food Producers 9,820.55104.811.08%
Personal Goods 828.773.390.41%
Consumer Services 18,902.39287.441.54%
General Retailers 7,973.13155.441.99%
Travel & Leisure 6,106.1120.360.33%
Media 493.522.880.59%
Support Services 2,133.86-14.66-0.68%
Telecommunications 7,810.92-49.65-0.63%
Financials 41,316.97222.990.54%
Banks 6,931.9465.520.95%
Non-life Insurance 56,911.97252.670.45%
Life Insurance 38,241.14329.030.87%
General Financial 4,023.0217.080.43%
Technology 51,117.25783.671.56%
SHARIAH TOP40 3,085.77-50-1.61%
FTSE/JSE SHARIAH ALL3,470.87-57-1.60%
COAL MINING10,248.67-181-1.73%
FTSE JSE Fledgling 7,225.30-52-0.71%
FTSE/JSE Alt X 1,461.6110.05%
SA LISTED PROPERTY 658.57.030.00%
CAPPED PROPERTY 550.44-0.05%
RESOURCE 17,564.22-571-3.15%
DIVIDEND PLUS205.8910.26%
FTSE/JSE RAFI 409,561.87-106-1.10%
Capped Top 4024,610.30-15-0.06%
Capped All Share26,963.55-34-0.13%
JSE TABACO 11,570.4400.00%

Click here for the Sharenet Index Summary page
Latest Consensus Changes**
CodeCompany NameStatusUpdated
Results Expected**
ExpectedCompany NameFin. Date
22/07/2016GIYANIMarch 2016 (Q)
22/07/2016HULISANIFebruary 2017 (Final)
22/07/2016MINERESIFebruary 2016 (Final)
25/07/2016AMPLATSJune 2016 (Interim)
25/07/2016ANGLDMarch 2016 (Q)

Recent Dividends**
Share NameDec-DateLDTPay-DateAmount
IMPL CONV19/07/1616/08/1622/08/16ZAR 250.0000
NAMPAK 6.512/07/1626/07/1601/08/16ZAR 0.0650
NAMPAK 6%P12/07/1626/07/1601/08/16ZAR 0.0600
HUDACO01/07/1608/08/1615/08/16ZAR 1.7000
ARGENT29/06/1626/07/1601/08/16ZAR 0.0900
Ex Div**
Share NameDec-DateLDTPay-DateAmount
AEG CONV30/06/1619/07/1625/07/16ZAR 362.5000
ILPREF230/06/1619/07/1625/07/16ZAR 14.5978
ILRPREF130/06/1619/07/1625/07/16ZAR 14.5978
TFG26/05/1619/07/1625/07/16ZAR 3.8500
LEWIS25/05/1619/07/1625/07/16ZAR 3.0200

Upcoming AGMs**
CodeCompany NameDateStatus
EQUEquites Property Fund Ltd.20/07/2016Confirmed
MEIMediclinic International plc20/07/2016Confirmed
CRGCargo Carriers Ltd.21/07/2016Confirmed
VUNVunani Ltd.21/07/2016Unconfirmed
KBOKibo Mining Plc21/07/2016Confirmed

Stock Exchange News Service
20/07/201617:47THE DB X-TRACKER COL INVEST SCHEME - Distribution finalisation announcement for ...
20/07/201617:46THE DB X-TRACKER COL INVEST SCHEME - CANCELLATION OF S374172 Distribution Finali...
20/07/201617:44THE DB X-TRACKER COL INVEST SCHEME - Distribution finalisation announcement for ...
20/07/201617:43THE DB X-TRACKER COL INVEST SCHEME - CANCELLATION OF S374167 Distribution Finali...
20/07/201617:00BRITISH AMERICAN TOBACCO PLC - Notification and public disclosure of transaction...
20/07/201616:37ARCELORMITTAL SOUTH AFRICA LIMITED - Appointment of non-executive directors
20/07/201616:37MUSTEK LIMITED - Disposal of securities by Old Mutual Investment Group Proprieta...
20/07/201616:09THE DB X-TRACKER COL INVEST SCHEME - Distribution Finalisation Announcement For ...
20/07/201616:08THE DB X-TRACKER COL INVEST SCHEME - Distribution Finalisation Announcement For ...
20/07/201616:07THE DB X-TRACKER COL INVEST SCHEME - Distribution Finalisation Announcement For...
20/07/201616:06THE DB X-TRACKER COL INVEST SCHEME - Distribution Finalisation Announcement For ...
20/07/201616:05THE DB X-TRACKER COL INVEST SCHEME - Distribution Finalisation Announcement For ...
20/07/201616:00EQUITES PROPERTY FUND LIMITED - Results of annual general meeting
20/07/201615:56FIRSTRAND BANK LIMITED - FRJ21-Listing of Tap Issue
20/07/201615:55OLD MUTUAL PLC - Form 8.3 - Public Opening Position Disclosure - RPC Group Plc
20/07/201615:45DISTRIB. AND WAREHOUSING NETWORK LD - Directors dealing in securities
20/07/201615:15INVESTEC PLC - General Meetings of Investec Limited and Investec plc held on 20 ...
20/07/201615:00SACOVEN PLC - Withdrawal of cautionary announcement
20/07/201614:17GROWTHPOINT PROPERTIES LIMITED - GRT09 - Interest Rate Reset
20/07/201614:00MURRAY & ROBERTS HOLDINGS LIMITED - Cautionary announcement
20/07/201613:55ADVTECH LIMITED - IFC Share Issue
20/07/201613:00BRAIT SE - Results of Annual General Meeting
20/07/201612:48RAUBEX GROUP LIMITED - Results of General Meeting
20/07/201612:15TRANSNET SOC LIMITED - TSP216; TSP217 Short Term Issue
20/07/201612:15OLD MUTUAL PLC - Total Voting Rights and Shares in Issue
20/07/201611:45GRINDROD LIMITED - Change in Directorate
20/07/201610:30SIRIUS REAL ESTATE LIMITED - Directors Shareholding
20/07/201610:08FINBOND GROUP LIMITED - Dealings in Securities by a Director
20/07/201610:07FINBOND GROUP LIMITED - CANCELLATION OF S374111 Dealings in securities by a dire...
20/07/201610:00AFRICAN BANK LIMITED - African Bank appoints Mr Sydney Mhlarhi as a non-executiv...
20/07/201609:59ARGENT INDUSTRIAL LIMITED - Dealing in Securities by Director
20/07/201609:50GOLD FIELDS LIMITED - Gold Fields to release results for the six months ended ...
20/07/201609:12ASTRAL FOODS LIMITED - General Operational Update
20/07/201609:00SABMILLER PLC - Rule 2.10 announcement
20/07/201609:00ANGLO AMERICAN PLC - Production Report for the second quarter ended 30 June 2016
20/07/201608:34PRECINCT FUNDING 1 (RF) LIMITED - Precinct Funding 1 (RF) Limited_PRE1A2 & PRE1A...
20/07/201608:07ANGLO AMERICAN PLATINUM LIMITED - Production report for the second quarter ended...
20/07/201608:00DATATEC LIMITED - Interim management statement
20/07/201608:00HUGE GROUP LIMITED - Renewal of cautionary announcement
20/07/201608:00KIBO MINING PLC - MCPP: O&M Expression of Interest for Mbeya Power Plant
20/07/201608:00KUMBA IRON ORE LIMITED - Kumba Iron Ore Limited production and sales report for ...
20/07/201607:59ARGENT INDUSTRIAL LIMITED - Dealing in Securities by a Director
20/07/201607:25TIGER BRANDS LIMITED - Appointment of Chief Financial Officer
20/07/201607:05INTERNATIONAL HOTEL GROUP LIMITED - Notice Of Results For The Nine Months Ended ...
20/07/201607:05ITALTILE LIMITED - Binding Offer to Acquire Shares in Ceramic, Rights Offer Decl...
20/07/201607:05BHP BILLITON PLC - Operational Review for the Year Ended 30 June 2016
20/07/201607:05ERIN ENERGY CORPORATION - Filings of statements of changes in beneficial ownersh...

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