Nedgroup Investments Rainmaker comment - Sep 12 - Fund Manager Comment25 Oct 2012
The FTSE/JSE All Share (ALSI) gained 1.6% in September. After posting weak returns for July (-2.4%) and August (-1.7%), the Basic Materials sector rebounded sharply in September (+6.2%). As a consequence, our holdings in Anglogold (+11.2%) and BHP Billiton (+7.1%) aided our performance. Whereas our holdings in Imperial (-6.3%), Mediclinic (-6.3%) and British American Tobacco (-4.8%) detracted from overall performance.
Over the quarter, the ALSI recorded a total return of +6.1%. In terms of sector performance, Industrials (+10.5%) outperformed, followed by Financials (+6.5%) and Resources (+2.9%) lagged the broad index - a pattern well established in 2012. Equity markets worldwide were boosted in September by further announcements of monetary authority stimulus. In the US, this took the form of QE3, in Europe further commitments to buy distressed sovereign debt and in China additional spending on infrastructure. It is unclear whether this will be sufficient to boost global growth and end the debt crisis in Europe - leading economic indicators have not turned higher yet.
In South Africa, the strike activity that originated in the platinum and gold sectors, extended to other mining operations as well as the transport sector. This year could mark the worst strike action the country has seen since the apartheid era. This prompted Moody's to downgrade SA's sovereign credit rating, saying its decision reflected the government's diminished capacity to handle its political and economic challenges. Finance Minister Pravin Gordhan also cited concerns, summing up the cost of the instability in the mining sector as follows; lower growth, lower exports, lower employment, and lower confidence in our country and our economy. The ongoing strike activity together with our concerning current account deficit (6.4% of GDP in the second quarter of 2012), has seen the rand depreciate sharply after the month end.
The optimism, as evidenced by rising equity markets, may seem at odds with the stream of negative economic newsflow, ie soft conditions in the US and Chinese economies, and repeated speculation that the euro system may collapse. However, highly accommodative monetary policy, which will likely remain for several years, is a powerful offset to a slowing world and is supportive of risk assets. Thus in the context of very low returns investors earn (before and after tax) on bank deposits in comparison to the dividend yields offered by many of our holdings we find this supportive of those share prices. Where we can find businesses on relatively attractive dividend yields (versus cash) and where we have high degrees of confidence of those businesses ability to grow profits and dividends we are comfortable shareholders. The Fund currently trades on a forward rolling Price/Earnings (P/E) ratio of 10.2x and a dividend yield of 3.3%, with an anticipated 12-month forward earnings per share growth of 16.5%.