Friday, 30 September 2011

Schwab: Retail Investors Warming To ETFs

Schwab: Retail Investors Warming To ETFs

Thursday, 22 September 2011

Offshore (outside SA) investing: The lost decade

Offshore Investing - The Lost Decade

By Jeremy Gardiner, director, Investec Asset Management

If I had written ten years ago that in 2011 the common investment themes would be that the rand has been too strong for too long (and looks set to continue); that the SA equity market has outperformed most other markets over the past ten years, including the US, the UK and Europe; and that the developed world would be grappling with a financial crisis, with many countries teetering on the brink of bankruptcy, I would have been accused of looking through even rosier-tinted spectacles than the ones I was accused of wearing back then, when I merely stressed that South Africa actually wasn’t in such bad shape and that fundamentally things were looking OK.

The nineties were the glory years for the US and indeed developed markets and their currencies. Thanks to exchange controls, this was a party to which South African investors were not invited. It was a party that looked like enormous fun and one that went on for most of the decade.

Finally, in 1998, then Finance Minister Trevor Manuel allowed South Africans to take some money offshore. Eager to join the celebrations, they squirreled what they could offshore and invested it into the developed equity markets and their currencies, primarily the UK, US and Europe, content in the belief that they had finally invested in stock markets and currencies that seemingly only appreciated in value.

The rush offshore was exacerbated even further by a dismal 2001, which saw the rand start the year at R7.70 to the US dollar, plunging to R10.26 by December and plummeting even further to R13.84 towards the end of the month, as the chart below illustrates. This caused even the most bullish South Africans to run for the door, resulting in a mass exodus of South African investment flows into the developed world.

Chart 1: Rand depreciation in 2001

Source: Morningstar, daily data from January 2000 to July 2002

The rush offshore couldn’t have been more ill-timed – the South African currency was weak and SA and emerging markets were trading at deep discounts to their developed market peers. This meant that investors were not only buying Dollars and Euros expensively, but they were selling out of undervalued markets and buying into markets that were trading at large premiums not only to emerging markets but to their own history as well.

For these investors (and there were many) – spurred on both by the emerging markets equity collapse and the rand collapse – who invested offshore over the period between 1999 and 2002, the past ten years have been pure hell from an investment perspective. Chart 2 below illustrates that R100 invested in the FTSE/JSE All-Share Index at the end of 2001 would be worth roughly R400 by the end of June this year, versus only around R94 if invested in the MSCI World Index over the same period. The S&P500 is today still roughly 10% below its peak in 2000 in rand terms. The combination of developed market stock markets yielding zero returns for a decade and the US dollar losing roughly half of its value has had a devastating impact on these portfolios.

Chart 2: SA Equities relative to Global Developed Market Equities - cumulative returns in SA Rand since December 2001

Source: Morningstar

The motivation for most of that investment was driven by both fear and greed, with scant regard for investment fundamentals. Had one at the time invested according to valuations, it would have been clear that the South African equity market and the rand were cheap relative to developed markets and their currencies, which were overpriced and expensive.

The tragedy is that a lot of these investors, having watched with horror over the last ten years as the rand doubled in value and the JSE delivered enormous returns, are once again considering switching at the wrong time – this time out of developed markets back into South African equities and the rand. Yet again, this decision is made on the basis of emotional frustration rather than recognising that both South African equities and the rand are now relatively overvalued.

Yes, emerging markets and their currencies are currently in vogue. Yes, the South African equity market and the rand have performed well, and yes, this may continue for some time to come. However, no financial asset goes up or down forever. A lot of bad news is currently priced into developed markets and their currencies and from a valuation perspective there are probably more opportunities offshore.

One of the quickest ways to lose money is by investing emotionally and when it comes to our own money we are all guilty in this regard. Stop yourself each time before you make an investment decision and ask yourself if it is an emotional or fundamental decision. If it’s the former, make sure you’re aware of the risks.

U.S. stocks drop hard after Fed move - Market Snapshot - MarketWatch

U.S. stocks drop hard after Fed move - Market Snapshot - MarketWatch

Tuesday, 13 September 2011

Problems in Europe and markets plunging

The reports:

Last Friday Chief Economist Jurgen Stark surprisingly resigned from his position at the European Central Bank (ECB). Stark, Germany’s top representative at the ECB, claimed that his departure was due to “personal” reasons but it is assumed that his decision was fueled by his frustration over the bank’s expanding role in backstopping the eurozone’s peripheral members.

Stark is the second senior German official to leave the ECB in recent months over ideological differences. These resignations couldn’t come at a worse time for the ECB as they deal with southern Europe’s sovereign debt issues. Which is why some economists are now predicting a major ” shake up” in the eurozone in the near future.

“The announcement fuels two paths of speculation,” writes BTIG chief global strategist Dan Greenhaus. “Either the Germans are slowly laying the groundwork for removing themselves from the eurozone or pressure from Germany will eventually lead to the ouster of Greece from the zone.”

Personally, I think it’s more likely that Greece leaves the euro. The country is once again teetering on insolvency and it’s already been bailed out. Yet the concern is what the repercussions will be for the global economy if this were to happen.

As a result investors from around the world are getting increasingly nervous. On Friday the Dow Jones Industrial Average dropped 304 points, or 2.7%, the German DAX fell 4%, and Italy’s FTSE MIB finished down 4.9%. The euro had its worse one-day drop since July 11 and is trading at 7 months lows and the 10-year Treasury tumbled below 1.90% intraday, the lowest level since World War II, before settling at 1.92%.