In January the average prudential balanced portfolio returned 1.32% (December: 0.40%). Top performer is EMH Prescient (2.19%); while Momentum (0.55%) takes the bottom spot. For the 3 month period Prudential, takes top spot, outperforming the ‘average’ by roughly 1.4%. On the other end of the scale Momentum underperformed the ‘average’ by 1.4%.

What is your investment strategy?

If you followed investment markets more generally and latest investment returns of pension fund portfolios more specifically, you will be forgiven for your concern about the seemingly poor short-term investment returns of your Benchmark Default portfolio or any other portfolio you may have chosen to invest in, for that matter. However before you go off on a tangent because of these disappointing short-term results, you must ask yourself whether you have defined your investment strategy? What is your investment horizon? If you want positive returns for the next 6 to 12 months, do not invest in prudential balanced portfolios but rather in cash!

In December the average prudential balanced portfolio returned 0.42% (November: 0.59%). Top performer is Prudential (1.31%); while Allan Gray (-0.19%) takes the bottom spot. For the 3 month period Prudential, takes top spot, outperforming the ‘average’ by roughly 1.7%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 1.3%.

What will 2017 bring us?

From June 2014 to end of December 2016, the JSE Allshare index made no progress and has been hovering around the 2016 year end level of 50,000. The investor in the JSE Allshare index thus had a return of zero percent. Taking into account dividends of around 3.3% would have still produced a negative real return of 1.4% to end of December with an average inflation rate of 4.7%!

Now consider the above graph. This depicts the performance of the more common investment portfolios employed by pension funds in Namibia. The blue bars to the right represent balanced portfolios comprising of a mix of asset classes with an equity exposure of between 60% and 65%. The grey bars represent more conservative portfolios comprising of a mix of asset classes but an equity exposure of mostly below 40%. Bearing in mind that the investor’s real return on the JSE Allshare index would have been minus 1.4% over the very same period, most pension fund investors should take comfort in the picture presented by the above graph. Over this period the typical balanced pension fund portfolio still returned 2.2% above inflation before asset manager fees, an outperformance of the JSE Allshare index plus dividends by 3.6%. Still, this is a very low real return considering that pension funds are built on the premise of investments returning 5% above inflation, after fees. Clearly this shows that rebalancing is under way in financial markets and this we expect to continue for the next year and longer!

In November the average prudential balanced portfolio returned 0.59% (October: -1.95%). Top performer is Investec (1.56%); while EMH Prescient   (-0.91%) takes the bottom spot. For the 3 month period Metropolitan, takes top spot, outperforming the ‘average’ by roughly 1.7%. On the other end of the scale Namibia Asset Management underperformed the ‘average’ by 1.8%.

As 2016 is drawing to a close

Unlike the usual format of this column I do not comment on investment markets this time around or provide our investment views. They are unlikely to change from our Monthly Review of Portfolio Performance to October 2016. However, by the time the November issue will be released I will be overseas, watching the markets from a different, very cold perspective.

Do refer to our October issue for the last review of investment markets and our investment views for 2016. I trust you find something of interest and something you can personally relate to from time to time in these reviews!

In October the average prudential balanced portfolio returned -1.95% (September: -1.59%). Top performer is Metropolitan (-1.35%); while Namibia Asset Management (-2.80%) takes the bottom spot. For the 3 month period Allan Gray, takes top spot, outperforming the ‘average’ by roughly 1.4%. On the other end of the scale Stanlib underperformed the ‘average’ by 0.9%.

How will the new US president impact global financial markets?

The US elections during October were undoubtedly the most important news event of the last quarter of 2016. Hillary Clinton was credited with a handsome lead over Donald Trump until the day before the elections by the main stream media. Was this based on objective opinion polls or was it just a premeditated campaign against a candidate that is not part of the political establishment in the US? Hillary Clinton of course is firmly entrenched in the political establishment as wife of a former president and as former Secretary of State during President Obama’s first term of office. So these media have clearly betrayed their own bias for the political establishment and cannot lay any claim to independent reporting. I guess these media will quickly sweep this under the carpet and will want the public to quickly forget about their biased reporting.

The fact that president elect Trump is ostensibly not part of the political establishment has raised the hopes, and fears, of many that the US will experience nothing short of a political and economic revolution under his leadership, hopes of those who want to see a change from the past, fears of those who prefer to have the status quo maintained.

Uncertainty of course is not good for financial markets and causes volatility. Analysts are trying to forecast what the consequences might be of the policies they think the new president will adopt or he promoted during the course of the election campaign. If the new presidency proves to be a political and economic revolution, there will be winners and losers and you will not want to be betting on the wrong horse in terms of your investment decisions. So how should you respond to this situation?

In September the average prudential balanced portfolio returned -1.59% (August: 1.86%). Top performer is EMH Prescient (-0.52%); while Stanlib (-2.43%) takes the bottom spot. For the 3 month period Metropolitan, takes top spot, outperforming the ‘average’ by roughly 1.5%. On the other end of the scale Stanlib underperformed the ‘average’ by 1.2%.

Do your grandmother and a burglar only still need cash?

This was the topic of the speech of Carsten Lange of Delta Secondary School who won this year’s German speakers’ competition held amongst various schools in Namibia. He went through various arguments for and against cash as legal tender. He correctly pointed out that internationally crime is generally not committed by means of cash and concluded in saying that for his part, he would like to continue being able using cash.

I am not sure whether this learner had had in mind Bank of Namibia’s declared intention of doing away with cheques when he prepared his talk. Fact of the matter is that internationally central banks are on a mission to do away with cash. Money laundering, crime in general and being in a better position to track the flow of moneys are the arguments used to push this down citizens’ throats. But is this the real reason behind efforts to do away with cash?

In August the average prudential balanced portfolio returned 1.86% (July: 0.61%). Top performer is Allan Gray (3.13%) while EMH Prescient (0.52%) takes the bottom spot. For the 3 month period Metropolitan, takes top spot, outperforming the ‘average’ by roughly 1.0%. On the other end of the scale Stanlib underperformed the ‘average’ by 1.0%.

How should I secure my retirement nest-egg in the face of volatility and turmoil?

Global financial markets are in a sorry state and it is very hard to see a silver lining. The US economy is showing mixed signs, no clear trend to be seen, the European economy is flat, Japan is struggling, so is China, not to speak of Russia and many of the developing countries including South Africa and us. The one thing these countries all have in common is a huge debt burden often substantially higher than the countries’ GDP, at historically low interest rates. China, for example has accumulated total debt of US$ 28 trillion, representing a whopping 255% of its GDP by the end of 2015 (worse evening than Greece) - an increase of 107% over the past 7 years. That is 38% of global GDP and as much as the commercial banking loan books of the US and Japan combined! The Bank of International Settlements is warning that China is facing an escalating risk of a major debt and banking crisis. The BIS is also concerned about a possible spill-over from China to the global economy.

These are prevailing economic threats to the global economy. Of course with the wars going on around the Mediterranean and on the border between Russia and the Ukraine the economic concerns are reinforced by concerns about a possible major military confrontation between Russia and the US with its European allies.

Read part 6 of the Benchtest 08.2016 newsletter to find out what our investment views are.

In July the average prudential balanced portfolio returned 0.61% (June: -2.85%). Top performer is Metropolitan (1.76%); while Allan Gray (-0.30%) takes the bottom spot. For the 3 month period Old Mutual, takes top spot, outperforming the ‘average’ by roughly 1.2%. On the other end of the scale Investec underperformed the ‘average’ by 0.9%.

In our performance review newsletter we present a guest commentary on the direction of interest rates and the outlook of asset classes. For the investor, this article provides an excellent guide to investing under prevailing uncertainties. Read part 6 of the Benchtest 07.2016 newsletter to find out what our investment views are.

In June the average prudential balanced portfolio returned -2.85% (May: 3.44%). Top performer is EMH Prescient (-0.86%); while Namibia Asset Management   (-3.87%) takes the bottom spot. For the 3 month period Allan Gray, takes top spot, outperforming the ‘average’ by roughly 1.7%. On the other end of the scale Investec underperformed the ‘average’ by 1.2%.

Is a bad weather warning on the horizon?

The ‘ZIRP’,  acronym for zero interest rate policy that has been applied by many of the large global economies since the financial crisis, projects some bad weather warnings on the screen of pension investors the consequences of which are not all that clear.

More directly it has been eroding the social security systems of these countries as these systems are to a large extent dependent on fixed interest instruments delivering real returns. Those that are still actively contributing towards their social security systems will be on the losing end of this equation and will either have to pay in ever more or will experience ever declining old age provision and will have to make supplementary provision. Those that are already receiving benefits will be faced with a steadily declining standard of living as the result of the systems not earning real returns anymore.

More indirectly, savers have been turning their backs on fixed interest bearing assets in favour of equities, property and other assets that generate real returns. As the result global equity markets, property and a number of other markets are bloated. At some point in time this imbalance has to correct as no one can afford to invest in an asset returning negative yields in the long-term while flows into such assets will eventually dry up.

In May the average prudential balanced portfolio returned 3.44% (Apr: 0.12%). Top performer is Allan Gray (4.81%); while EMH (1.31%) takes the bottom spot. For the 3 month period Namibia Asset Management, takes top spot, outperforming the ‘average’ by roughly 2.8%. On the other end of the scale EMH underperformed the ‘average’ by 3.0%.

Brexit – I can’t hear it anymore

So the unthinkable happened. The British electorate was wrongfully given the opportunity to express its opinion democratically. The remainder of the EU should never allow a referendum on EU membership anymore as the electorate is not objective in contemplating on such decision, said a renowned French political commentator on TV the evening of the British referendum. What a blatant contempt and disenfranchisement of the European electorate. Can one still be surprised about the electorate’s skepticism towards this construct?

Former Prime Minister David Cameron, who probably tried to blackmail the EU into granting special concessions to Britain, eventually could not go back on his threat of a referendum which he probably was quite convinced, would go his way. He had no choice but to resign after this serious misjudgment of the attitude of his electorate towards the EU. As every coin has two sides the Brexit also has two sides and for anyone to pretend to understand exactly which side economically is the better one is preposterous. At the end of the day it was a decision between regaining and giving up political autonomy.

In April the average prudential balanced portfolio returned 0.12% (Mar: 2.76%). Top performer is Metropolitan (0.62%); while Stanlib (-0.45%) takes the bottom spot. For the 3 month period Namibia Asset Management, takes top spot, outperforming the ‘average’ by roughly 2.4%. On the other end of the scale Stanlib underperformed the ‘average’ by 1.1%.

Volatility in global equity markets has declined substantially since the advent of the global financial crisis. The US S&P 500 moved from as high as 80 points volatility to hovering around 20 points since 2012. This indicates that investors believe markets are stable - or does this indicate that we are in the eye of the storm? Well looking at what is happening in the world around us we note that the Chinese economy is slipping further. Interest rates have not turned the corner and are at unsustainably low levels. This in our view is indicative of trouble brewing somewhere in investment markets. There is upheaval all around the Mediterranean, there is the threat of a Brexit, there is the European refugee crisis, an economic and political crisis in Brazil, the Ukrainian crisis, the US presidential elections, the unpredictability of the oil price and more. All of these present uncertainty and thus risk for the investor that should manifest in market volatility.

What should we expect to happen? A distinct possibility is that a Donald Trump as next US president, and as a political outsider, may well have the courage to act as if he was the new CEO, not being loaded with the political baggage of the candidates that participated in previous elections – take the pain now and move forward! Such a scenario really spells doom for debtors whose liabilities of course will retain their value while any assets will experience a decline in value.

In March the average prudential balanced portfolio returned 2.76% (Feb: 0.50%). Top performer is Namibia Asset Management (4.96%); while Allan Gray (0.78%) takes the bottom spot. For the 3 month period Allan Gray, for the 8th consecutive month takes top spot, outperforming the 'average' by roughly 1.3%. On the other end of the scale EMH Prescient underperformed the 'average' by 1.8%.

In February the average prudential balanced portfolio returned 0.50% (Jan: -2.08%). Top performer is Allan Gray (1.76%); while Prudential (-0.29%) takes the bottom spot. For the 3 month period Allan Gray, for the 7th consecutive month takes top spot, outperforming the ‘average’ by roughly 6.4%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 3.3%.

Beware of stepping on the wrong toes

In the years after the financial crisis, when the Fed introduced its large scale asset purchase programme and reduced its repo to 0.25%, when commodities and the oil price were running hot things were going extremely well with many resource driven emerging economies and with oil producing countries. Their interest rates were low, their currencies and bourses appreciated substantially driven by foreign investors looking for yield. Those were the days when many of these countries started to think about how to break the shackles of the global hegemon. There were moves to trade crude in currencies other than the US Dollar in an effort to break the US Dollar monopoly. We read about the BRICS countries having resolved to establish a BRICS Bank in order to break the shackles of the IMF and World Bank.

A number of oil exporting countries that became more outspoken on their anti US sentiments experienced civil uprisings, some experienced regime changes and with the dramatic fall of the oil price, those regimes that survived are at last also experiencing severe economic problems.

In January the average prudential balanced portfolio returned -2.08% (Dec: 0.57%). Top performer is Allan Gray (-0.12%); while Namibia Asset Management (-4.03%) takes the bottom spot. For the 3 month period Allan Gray, for the 6th consecutive month takes top spot, outperforming the ‘average’ by roughly 5.4%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 3.9%.

The winds have changed

For many years Namibia’s big brother SA, and with it Namibia too, has experienced a tidal lift of its entire financial system. It started off with the commodity run that led to SA ALSI growing by a nominal 15.8% per annum from August 1998 to its peak in April 2015, equivalent to a real growth of 8.3%, excluding dividends. And this period includes the financial crisis that saw the index declining from its October 2007 peak of 28,400 to a trough of 16,500 in February 2009.

Foreigners piled into local equities at an annualised rate of between R 60 billion and R 80 billion. For a long time the Rand held up well on an exchange rate to the US Dollar of between 5 and 8 up until the first quarter of 2012. Interest rates were very low as the result of the US Fed’s stabilization of its financial system post financial crisis with its large scale asset purchase programme that had money flowing freely across the globe and in particular into commodity based economies like SA.

These good times have come to an end now, even though much later than we had anticipated where we expected the Fed to start raising interest rates in 2012. As we know now, this only happened in December 2015. The fact that the Fed stopped its large scale asset purchase programme was largely negated by a virtually simultaneous entry by the ECB with a similar programme.

The anticipated increase of the Fed repo rate in 2015 was the turning point for our financial markets and the tail winds our markets experienced have now turned into head winds.

In December the average prudential balanced portfolio returned 0.57% (Nov: -0.32%). Top performer is Allan Gray (3.69%); while EMH Prescient (-2.05%) takes the bottom spot. For  the 3 month period Allan Gray, for the 5th consecutive month takes top spot, outperforming the ‘average’ by roughly 3.6%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 7.3%.

So we are told the oversupply of crude oil is depressing its price – right?

It is a well-known fact that the oil price has a significant impact on global financial markets and hence also on the global investor. It is therefore important to understand what is currently happening and how this may impact markets going forward. Many commentators claim that the collapse of the oil price is due to a global oversupply.

Let us therefore look in more detail at the global supply/ demand situation as illustrated by the below graph. It reflects the 12 month average world oil demand as a ratio of the 12 month average world oil supply, as published in the latest ‘Energy Briefing’ by Yardeni Research Inc.

Clearly if this information is to be believed there is actually still an oversupply of crude up until November 2015 although clearly on a steeply declining trend. So it is probably true that the oil demand is slowing as the result of slower global economic growth. However, the global economy is still growing even if only at a slower pace - China ‘only’ at somewhere around 7% - meaning that the global oil demand should still grow and it does rather liberally as reported by Yardeni . What about oil supply which is said to be increasing? This is also not really a convincing story, if one looks at what is happening in Iraq, Syria and Libya.

In November the average prudential balanced portfolio returned -0.32% (Oct: 5.23%). Top performer is Investec (0.39%); while EMH Prescient (-1.21%) takes the bottom spot. For  the 3 month period Allan Gray takes top spot, outperforming the ‘average’ by roughly 1.8%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 1.6%.

Should your asset manager factor political considerations into investment decision?

When you listen to money managers of pension fund investments, they say their investment horizon is the long-term and they will caution not to be overly concerned about the short-term. They will also tell you that in the long-term you should be invested in equity as equity has historically proven to outperform all other ‘conventional’ pension fund asset classes. But look at this table that reflects returns to 31 October 2015:

The interesting conclusion is that even the worst performing typical pension fund investment manager managed to outperform the JSE Allshare index over all periods barring the 3 months to 31 October where it underperformed and the year-to-date where it performed on par with the JSE Allshare Index. Does this prove the adage wrong that equities outperform all other conventional asset classes over the long-term?
 
No, it does not but what this does show is that by adapting the mix of asset classes in the pension fund investment portfolio in the light of changing market conditions, investment managers manage to outperform equities. How is this possible you may ask? Well the point is that there are the short- and the medium-terms when other asset classes outperform equities and if the investment manager does his job well, as it seems they generally do, he pre-empts swings in fortunes between the different asset classes by switching between these in good time. The best quality investment managers need to possess in this regard is discipline. Set your pointers when to switch out of an asset class and when to switch into an asset class and do this consistently and in a disciplined manner.

But what about the political environment? Can you divorce the political environment from the economic environment?

Read part 6 of the Benchtest 09.2015 newsletter to find out what our investment views are.

Graph of the month

The oil price and its sudden collapse is undoubtedly theme of the year as far as economic issues are concerned. The reason mostly offered for the collapse is the oversupply of crude to the world market. But is this true? Given that it is not easy to measure global supply or global demand, ‘Energy Briefing: Global Crude Oil Demand & Supply’, published by Yardeni Research Inc is probably as good a source as one can get.

Our graph of the month below reflects the crude oil demand/ supply ratio based on 12 month average demand and supply and clearly shows that there is currently still a short supply of crude oil.

In October the average prudential balanced portfolio returned 5.29% (Sep: -0.39%). Top performer is Investec (5.79%); while EMH Prescient 4.21%) takes the bottom spot. For  the 3 month period Allan Gray takes top spot, outperforming the ‘average’ by roughly 3.2%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 1.2%.

Will this cloud have a silver lining?

Bad news both on the economic as well as the political front are currently unfortunately dominating our media and this also manifests in our financial markets of late. Investors are clamouring for good news and each time there is some good news, financial markets also respond positively to these. Where we have seen the FTSE/ JSE Allshare Index increasing steadily since the end of the financial crisis from its low of 21,000 in October 2008 to around 49,000 at the end of April this year, it has been see-sawing since then between 49,000 and 54,000.

We read of South Africa’s economic woes; Namibia ran a trade deficit of N$ 10 billion in the latest reported month, there are reports that our government is running out of cash and has recently had to issue a Eurobond, exposing Namibia to a significant currency risk while at the same time the Rand has depreciated by 26% from 10.5 at the end of April this year to currently around 14.2. Global commodity markets are in the doldrums, which is particularly bad news for commodity based economies such as South Africa and also Namibia. But wait – on the positive side of lower commodity prices is the low oil price which has declined by 65% from just short of US$ 133 per barrel in July 2008 to its current level of around US$ 47 per barrel only which should be good for your pocket and mine.

But is this true? In fact for you and me diesel for example only declined by 4% from N$ 11.31 per litre in July 2008 to N$ 10.85 currently. In Rand terms, one barrel cost R 976, or roughly N$ 6.14 per litre in July 2008, as opposed to R 643 per barrel, or roughly N$ 4.04 per litre the end of October this year, a reduction of 34%. Does this sound as strange to you as it does to me? What this implies is that besides the taxes already built into fuel prices in July 2008 someone is currently cashing in at the rate of N$ 2.1 per litre consumed in Namibia.

Read part 6 of the Benchtest 09.2015 newsletter to find out what our investment views are.

In September the average prudential balanced portfolio returned -0.39% (Aug: -0.83%). Top performer is Allan Gray (1.04%); while Momentum (-1.01%) takes the bottom spot. For the 3 month period Allan Gray takes top spot, outperforming the 'average' by roughly 3.5%. On the other end of the scale EMH Prescient underperformed the 'average' by 2.9%.

Don't lose perspective

With information technology having managed to create a network of information flow across the globe, it is commonly accepted that we all suffer from information overload. We are losing perspective and in consequence are exposed to making conclusions and decisions based on a distorted view of developments in global financial markets. Take the following graph:

It depicts the movement of a number of large global stock exchanges. It's a very busy graph despite only covering 6 stock exchanges. But at first sight it may lead one to identify 3 trends. Firstly on the downside, the Nikkei that has not moved anywhere over this period of over 20 years and secondly, on the upside, the JSE Allshare Index that was in a flying mode. But look at the next graph for perhaps a bit more perspective.

Here we have only the Allshare measured against the US S&P 500 that is in the middle of the crowd in the top graph.

Read part 6 of the Benchtest 09.2015 newsletter to find out what our investment views are.

In August 2015 the average prudential balanced portfolio returned -0.83% (July: 1.53%). Top performer is Allan Gray (0.80%); while Momentum (-1.53%) takes the bottom spot. For the 3 month period Allan Gray takes top spot, outperforming the ‘average’ by roughly 1.9%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 3.7%.

In times like this, stick to your investment strategy

Global investment markets have disappointed investors of late. So, where are we heading and are we likely to experience more disappointment and pain going forward? The typical incriminating question then being directed at the consultant or adviser often rings – “why did you not pro-actively have us switch to a conservative portfolio”? Well, history has shown time and again, if you switch to last year’s top performer every year, you will end up with under performance. Switching investment portfolios to avoid poor or even negative returns always consists of two legs – switching ‘out of the market’ and switching back into the market.

Very often it seems obvious that the market has overheated and that a correction is imminent, yet timing the correction to avoid getting out half way down is the first challenge that even astute investors are likely to get wrong by a far stretch like one year, two years or even longer. When the Fed instituted its monetary easing and large scale asset purchasing programs, reducing nominal interest rates to close on zero and pumping up to US$ 90 billion into markets monthly to prevent the US economy from stalling as the result of the financial crisis, it was actually a ‘no-brainer’ that it will only convert a collapse of markets to a long drawn out and painful recovery. Had the investor abandoned the market at the trough and moved into cash at the time, he would have sacrificed a return on equities of 13.5% per annum to earn 6.4% per annum on his cash investment over a 7 year period, or in absolute values, his initial investment of N$ 100 in equities, that would have grown to N$ 240 by now, has now only grown to N$ 153.

O.K. you may say, this is a flawed argument because one should have moved back into the market. Well, most of this recovery actually happened over the first 5 years that returned 17% per annum and would have produced an absolute value of N$ 217 by October 2013 already. Again this second leg is difficult to time, much more so than the first leg. 7 years ago you may have expected markets to go down even further yet they recovered with vengeance over the first 5 years with a very pedestrian subsequent growth of 5% per annum over the next 2 years!

So where are we heading and what should the investor do from here onwards? Let’s look at some interesting data. The following graph measures the Rand: US$ exchange rate against the FTSE/JSE Allshare Index. Evidently they are very closely correlated over this period from 1987, barring the two periods of a sudden violent swing in the exchange rate. But look at the recent past where the Allshare Index is turning down while the Rand continues to weaken – a deviation from the general trend depicted by this graph. What may be the relevance of this deviation for the investor?

Read part 6 of the Benchtest 08.2015 newsletter to find out what our investment views are.

In July the average prudential balanced portfolio returned 1.53% (June: -0.95%). Top performer is Stanlib (2.69%); while EMH Prescient(-1.18%) takes the bottom spot. For the 3 month period Stanlib takes top spot, outperforming the ‘average’ by roughly 1.5%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 2.6%.

The tides have changed

Undoubtedly the two subjects that currently feature most prominently in financial circles, is the rapid depreciation of the Rand and the dramatic decline in the price of oil. For the investor, these are important indicators and the question begs to be answered whether we will see a reversal of these developments or whether these represent new norms.

The graph below depicts the depreciation of the Rand against the Euro, the British Pound and the US Dollar since October 2000. Over this period to end of July the Rand depreciated by 67% against the US Dollar, by 80% against the British Pound and by 117% against the Euro.

Read part 6 of the Benchtest 07.2015 newsletter to find out what our investment views are in the light of these dramatic developments.

In June the average prudential balanced portfolio returned -0.95% (May: -1.01%). Top performer is Momentum (-0.44%); while Namibia Asset Management (-1.52%) takes the bottom spot. For the 3 month period Allan Gray takes top spot, outperforming the ‘average’ by roughly 1.4%. On the other end of the scale Stanlib underperformed the ‘average’ by 0.7%.

The beauty of prudential balanced portfolios

Looking at the performance of prudential balanced portfolios from another perspective, namely their performance relative to that of the local equity market (JSE Allshare Index), where equities are typically the preferred asset class with the highest expected returns over the long-term, the following table also reveals interesting results for periods to 30 June 2015:

This table shows that over all periods in the table from 3 months to 15 years, the average prudential balanced portfolio managed to outperform the JSE Allshare Index. Most local individual investors will find it very difficult to achieve the returns that the average prudential portfolio has achieved. As the above tables show, had he been invested in cash, the winning asset class for the latest quarter, he would have had the lowest returns for the past 12 months. Had he been in property the winning asset class for the past year, he would have had the lowest return for the latest quarter.

In May the average prudential balanced portfolio returned -1.01% (Apr: 2.36%). Top performer is EMH Prescient (-0.38%); while Metropolitan (-1.41%) takes the bottom spot. For the 3 month period EMH Prescient takes top spot, outperforming the ‘average’ by roughly 2.1%. On the other end of the scale Momentum underperformed the ‘average’ by 1.4%.

Life remains interesting as the banal saying goes. Not too long ago we first heard about the ‘peak oil’ theory and were made to believe that from now on the supply of oil will start to decline. This was of course supported with scientific analyses of the largest oil producing areas in the world. On 14 June 2015, Moneyweb posted an article ‘the world is facing its longest oil glut in at least 3 decades', vividly underpinned with colourful graphs, of course. Just using another source, the picture looks quite different. ‘Energy Briefing: Global Crude Oil Demand & Supply’ by Yardeni Research, Inc shows that there are different measures that produce different results. Measuring demand and supply on a 12 month average, rather than a monthly basis, as the latter report does, is a more convincing reflection. This does not really support the story of a huge oil glut. In fact it shows that there is still a small short supply on a 12 month average basis, given though that the gap between demand and supply has declined.

A few years ago global media focused our attention on the life threatening ozone hole. Have you heard anything about this phenomenon recently? The last I heard, as recent as last week, is that the ozone hole has virtually disappeared. Nowadays  the topic everyone talks about is climate change, caused by carbon emissions, and of course it is once again threatening the existence of mankind! I really became deeply troubled when I read this headline ‘A child borne today may live to see humanity’s end’. My goodness I thought to myself, I am O.K. but what about my grandchildren? Yes, the world is evidently experiencing climate change, just think how mild our current winter has been, so it can only go to support the apocalyptic prognoses that we are approaching the end of mankind. So do not worry to save up for retirement because you will not live to enjoy the fruit of your hard work!?

Well, what can we believe? Are we experiencing a media supported global strategy to unsettle mankind? Why do we experience an on-going war all around the Mediterranean? On the one side we are watching on-going wars waged for the sake of a better world, of good against evil of course - whichever side you take - that uproots millions of people and exposes them to untold hardship. At the same time we are witnessing European countries buckling under the siege of refugees uprooted in the war torn Middle East. Just a few years ago all these countries were peaceful. But in the eyes of some beholders, this was not the point. The point was that these did not have a democratic government, were ruled by oppressors and possessed weapons of mass destruction. Are the oppressed and democracy deprived better off today, would you want to be one of them? What has happened to our morals, if we support wars for the purpose of installing democracy, if we drag some leaders to the ICC for crimes against humanity while others of much greater relevance get away unscathed?

Now what does this have to do with investing and financial markets?

Read ‘Be on the winning side and keep out of the cross fire’ in part 6 of the Benchtest 05.2015 newsletter to find out how these and other developments impact on our investment views.

In April the average prudential balanced portfolio returned 2.36% (Mar: 1.28%). Top performer is Allan Gray (3.97%); while Stanlib (1.25%) takes the bottom spot. For the 3 month period Investec takes top spot, for the sixth consecutive month, outperforming the 'average' by roughly 1.6%. On the other end of the scale Prudential underperformed the 'average' by 0.80%.

As in the previous month, there has once again been very little change in some of the key global economic indicators during April. WTI (West Texas Intermediate) oil price in US$ increased by 17%, but as the result of the strengthening of the Rand against the US$ by 2% from 12.14 to 11.91, it only increased by 15% in Rand terms from R 593 to R 681. 12 Month foreign investment portfolio flows and the SA trade balance have changed insignificantly over the month, but represent a significant outflow of R 105 billion over the past year. Of course we know that interest rates have not changed either overseas or in SA, and the imminence of the US repo rate changing is as far or as close as it was 6 months ago.

Investment markets are currently very much a hostage of global monetary policy and market movement is a function of how much money is pumped into the system, for how long, by central banks. Although the US economy started to respond positively to the Fed's stimulus measure, it seems as if the phasing out of these measures has put the economic recovery into a wobble the final direction of which is not clear at this stage.

In March the average prudential balanced portfolio returned 1.28% (Feb: 2.56%). Top performer is Investec (2.96%); while Namibia Asset Management (0.19%) takes the bottom spot. For the 3 month period Investec takes top spot, for the fifth consecutive month, outperforming the 'average' by roughly 3.5%. On the other end of the scale Allan Gray underperformed the 'average', for the fourth consecutive month, by 2.4%.

As the result of the strengthening of the US$ against most global currencies, the expansion of the US economy has lost some steam, expanding at only 2.2% over the third quarter of 2014, as opposed to 5% over the 3rd quarter. The following graph depicts this trend:

Source: Factsheet

Conversely, the weakening of the Euro has aided the European economy, growing at 0.9% in 2014, compared to 0.5% in 2013, despite the negative impact of sanctions imposed on Russia in the earlier part of 2014.

US inflation, another key economic indicator for the determination of the US repo rate, besides the state of the economy, shows no clear trend despite an upturn since the beginning of the year as depicted by the following graph.

Source: Factsheet

Based on these parameters, it seems that the US economy is not 'ripe' yet for an increase in the repo rate, there being neither a clear indication of a sustainable expansion of the economy nor of clear upward trend of inflation.

In February the average prudential balanced portfolio returned 2.56% (Jan: 1.69%). Top performer is Stanlib (3.59%); while EMH Prescient (1.22%) takes the bottom spot. For the 3 month period Investec takes top spot, for the fourth consecutive month, outperforming the ‘average’ by roughly 2.1%. On the other end of the scale Allan Gray underperformed the ‘average’, for the fourth consecutive month, by 1.8%.

I have started to read the book ‘Currency Wars’ by James Rickards. I did not get very far yet but the message is clear and frightening for me as an investor. It makes one realize how vulnerable the investor is, not to the market forces but really to the goings on behind the scenes – or is this just being naïve to believe that there is anything else but economic interests and power play using the political system to advance these interests. Hasn’t this been with human beings ever since they have been around on this globe? Currency wars are part of economic warfare, which in turn is part of asymmetric warfare where all warfare is aimed at control of resources.

The relevance to me as an investor is that I should understand what the strategies of the warring parties are to know how this will impact on investment markets and on my investment decisions, besides also taking cognisance of the impact of domestic, and more particularly the US domestic, economic necessities on these markets.

Of course we mortals will never be in the position of understanding and knowing. We can speculate and hope that we are right and have consequently taken the right decisions regarding the investment of our hard earned savings.

In January the average prudential balanced portfolio returned 1.69% (Dec: 0.94%). Top performer is Investec (2.75%); while Stanlib (0.41%) takes the bottom spot. For the 3 month period Investec takes top spot, outperforming the ‘average’ by roughly 2.5%. On the other end of the scale Allan Gray underperformed the ‘average’, for the third consecutive month, by 4.7%.

In our previous newsletter we expressed our opinion that the dramatic decline in the oil prices from its peak of close to US$ 140 in June 2008, to currently around US$ 60, is unlikely to have been the result of a decline in demand and a simultaneous increase in production primarily through fracking in the US. We further pointed out that from a starting point of US$ 16 at the beginning of 1987, inflation adjusted the oil price should now be in the region of US$ 35. At its current level, the oil price is realistic in the context of production cost and, probably provides for some premium for the steady increase in demand and production costs over this period. We therefore believe that without a renewed speculative bubble being blown up we should see current oil prices representing the new normal.

We have concluded that the rapid swings we have seen are the result of speculative trading on a massive scale. In this context it is interesting that the value of derivative financial instruments represent approximately the 10 fold of global GDP at over US$ 700 trillion at the end of 2013, certainly large enough to make an impact on the price of any commodity or exchange rate. In contrast the total value of these financial instruments only amounted to US$ 95 trillion at the end of 2000.

The question is what could be the purpose of such large scale market intervention? James Rickards an American lawyer,  regular commentator on finance, and  the author of The New York Times bestseller Currency Wars first acquainted the editor of this newsletter to the concept of financial war games, defined by James as a branch of 'asymmetric or unrestricted warfare'. Are these seemingly inexplicable developments perhaps part of this ‘asymmetric warfare’ rather than random market events?

Is there indeed a close linkage between politics and economic interests that one must be cognisant of when trying to interpret and understand economic events?

Read our full commentary in part 6 of the Benchtest 01.2015 newsletter, and find out how these and other developments impact on our investment views.

In December the average prudential balanced portfolio returned 0.94% (Nov: 1.46%). Top performer is EMH Prescient (1.36%); while Momentum (0.41%) takes the bottom spot. For the 3 month period Investec takes top spot, outperforming the 'average' by roughly 1.5%. On the other end of the scale Allan Gray underperformed the 'average' by 3.4%.

Oil and its impact on the local economy and the local investor

In our December 2014 Newsletter we deliberated on the possible reasons and the implications of the oil price on global financial markets. We noted a close correlation between longer term trends in the oil price and the FTSE/JSE Allshare index, given that the SA Allshare Index is heavily resources weighted. Of course, oil being a major import component of SA's trade balance, its price changes will also impact on the Rand everything else being equal.

Oil will have a major impact on local equities and the Rand

The graph below shows a surprisingly high correlation between the Allshare index and the spot oil price in Rand barring the times when there was a rapid change in the oil price, such as over the last few months, where the Allshare index responds more cautiously.

One may thus rationally conclude that what is happening to the oil price will have a major impact on local equities and the Rand if it becomes a longer term trend. The question is - will it become a longer term trend? An indicator for this becoming a longer term trend is the demand/ supply situation. It would not become a longer term trend if the previous price levels were driven by the demand/ supply situation rather than speculative trading.

What can one expect the oil price to be?

The graph below reflecting oil prices shows a long term increasing trend in the oil price and a few steep and rather rapid changes where we believe these were the result of speculative trading rather than any fundamentals. Without speculative trading the peaks would be reflective realistic price levels, else one would expect a more slowly increasing line that will be somewhere between the peaks and the troughs.

Source: vox.com

The graph below provides an interesting picture of the demand/supply balance of oil. At first sight one might conclude the gap between demand and supply is rapidly opening up. However looking more closely at the demand line one notices that an annual peak demand occurs in the 4th quarter where after the demand drops off significantly for 2 quarters only to move up again in a pretty consistent fashion. If one were to extend a straight line from the latest 3 demand peaks, one will conclude that demand should be pretty close to supply again by the end of 2015 assuming no drastic increase in supply, which cannot be foreseen, certainly not at today's price. In other words it appears unlikely that supply will significantly outpace demand even in the short term and that the current price level is unsustainable over a longer period.

Source: vox.com

The question then is, what is a realistic price of oil? Read our full commentary in part 6 of the latest Benchtest newsletter (above).

In November the average prudential balanced portfolio returned 1.46% (Oct: 0.12%). Top performer is Investec (2.41%); while Allan Gray (0.11%) takes the bottom spot. For the 3 month period Investec takes top spot, outperforming the 'average' by roughly 1.2%. On the other end of the scale Allan Gray underperformed the 'average' by 2.0%.

The Geopolitics of the oil price

The topic of the day for the investor must be the sudden and sharp decline in the oil price.  The following graph was published in Efficient Select news brief of 4 December. This was the time when the oil price was still at US$ 71.49 per barrel. At the time of writing this piece, it has dropped to below US$ 60 per barrel. As difficult as we found it to comprehend the sharp increase since the beginning of this century to a peak of US$ 140 a barrel, it is to comprehend the steep decline in the oil price since the first quarter of this year.

We have seen the increase in the oil price pulling along commodities and the broader market as depicted in the lower graph reflecting the FTSE/JSE Alsi 40.

The broader market has maybe not been as volatile and has not had as sharp a peak and a trough before and after the financial crisis, as the oil price, the close correlation, however, is quite evident. On its way down, the broader market is also likely not to bottom out as low as the oil price, but where will the oil price bottom out?

As little as we were convinced then of the peak oil theory suggesting that declining resources and increasing consumption caused the increase, we are convinced that the sharp increase in US production through  fracking is the reason for the sudden decline in the oil price. US production is still minute relative to global production and it is produced at a cost making it in many instances already uneconomical at today's oil price.

Fracking, by the way is not such a revolutionary new method of extracting oil where it was never thought possible, that it could have caught all by surprise. A couple of years ago we already came across an article suggesting that Vietnam has become virtually self-sufficient, producing oil by means of Russian fracking technology.

Oil is a weapon used in the economic warfare of global hegemonies. What we see today, we believe, is the reversal of what happened with the oil price on its way up, as we opined upon in our newsletter of March 2008 . What will the consequences of the great unwinding of super profits in the production and distributions chain of oil be for the investor and how far will this unwinding go?

Read our full commentary in paragraph 6 of the Benchtest 11.2014 newsletter.

In October the average prudential balanced portfolio returned 0.12% (Sep: 0.25%). Top performer is Prudential (0.91%); while Allan Gray (-1.50%) takes the bottom spot. For the 3 month period Stanlib takes top spot, outperforming the 'average' by roughly 1.1%. On the other end of the scale EMH Prescient underperformed the 'average' by 0.9%.

Our graph of the day below depicts the R: US$ exchange rate as the blue line, the scale shown on the right hand of the graph, overlaid by the SA Allshare index as red line, its scale shown on the left side of the graph. This graph shows a few interesting trends. Firstly it shows a close correlation between a weakening Rand and a growing Allshare index.

The trend lines overlaid on the two lines run virtually parallel. This means in broad terms the Rand has been weakening virtually at the same rate as the rate of growth of the SA Allshare index, over the period of over 27 years. A foreign investor on the trend line would thus have had no return on his investment in the SA Allshare index other than dividends (averaging 3% over the past 27 years). Bringing inflation into this picture, from a foreign investor perspective US inflation averaged 2.8% p.a. over the past 27 years), his return over this 27 year period would have been very close to zero. Not exactly a convincing investment case for a US investor.

Of course, right now a foreigner who invested in March 1987 would have had the index return him 6% per annum in US$, had he sold his investment in October 2014, and this excludes dividends. Based on the trend lines, the Rand is significantly undervalued while the Allshare index is significantly over valued right now, however the investor would currently receive more US$ for his investment in the SA Allshare index then he would if both indices were to return to their trend line. For both foreign and local investors this indicates that it should be a good time to exchange an investment in the Allshare index with an offshore investment.

In September the average prudential balanced portfolio returned 0.25% (Aug: 0.29%). Top performer is Allan Gray (1.23%); while Namibia Asset Management (-0.58%) takes the bottom spot. For the 3 month period EMH Prescient takes top spot for the second consecutive month, outperforming the 'average' by roughly 1.3%. On the other end of the scale Momentum underperformed the 'average' by 0.60%.

Our graph of the day below depicts a few interesting trend lines. Firstly, the blue line depicts one year rolling foreign investment flows into equities. Do these flows actually impact the JSE Allshare Index? Tracking the red line which depicts a 'blown up' movement of the JSE Allshare Index relative to the blue line, a close correlation between these two trend lines becomes very evident.

When foreigners withdraw from the JSE the JSE declines and vise versa. Foreigners have evidently withdrawn their support of local equities and have taken a neutral position. Can there be any expectation of this changing soon? Our view is that this is unlikely to change soon and will not be impacted even if the SARB raised its repo rate.

Tracking the black line which depicts the one year rolling total of net foreign equity flows, net foreign fixed interest flows and the SA trade balance against the green line that depicts a 'blown up' movement of the Rand: US Dollar index one can also see a correlation between these two trend lines. A negative black trendline lifts the green trend line, meaning that an outflow of capital weakens the Rand relative to the US Dollar. We can also see a decline of these capital flows since the end of the financial crisis and a virtual collapse since October 2013.

This negative trend has been caused for one by a decline in world commodity market but most likely also by a decline in SA's competitiveness as the result of the strong Rand. The decline in commodity markets was clearly impacted by the financial crisis and since then by reduced demand for commodities from China as the result of it restructuring its economy. The Rand of course has been weakening steadily over the past 4 years.

Can there be any expectation of this to improve?

In August the average prudential balanced portfolio returned 0.29% (July: 0.84%). Top performer is Namibia Asset Management (0.80%); while Metropolitan (-0.15%) takes the bottom spot. For the 3 month period EMH Prescient is top performer outperforming the ‘average’ by roughly 1.0%. On the other end of the scale Stanlib underperformed the ‘average’ by 0.60%.

In last month's newsletter we provided a graph depicting the recovery of the US industrial production to levels last seen 4 years before the financial crisis struck. Year-on-year growth now stands at arounda 5%, up from its trough of minus 15% in the middle of 2009. Capacity utilization improvement correlates very closely with industrial production, having improved to 79%, up from 67% in the middle of 2009.  The graph below is further evidence of the improvement of the US economy. It shows that unemployment has declined from around 10% at its peak at the end of 2009 to 6% while non-farm payroll improved from losing 300,000 jobs in a single month to currently adding around 200,000 jobs monthly.

Financial media no longer talk about monetary stimulus but rather speculate about when the Fed will start raising interest rates, after warnings having been uttered by the Fed. 10 Year US bond yields have turned up recently in anticipation of such an increase. Is this the reason why bond purchases by foreigners on the FTSE/JSE have declined from net purchases of R 21.8 billion in July to net sales of R 237 million in August? Most likely so.

If this trend continues, our local currencies will remain under pressure while local interest rates will also be under upward pressure. The 0.25% increase in SARB’s repo rate in the middle of July that followed the first rise for a long time of 0.5% at the end of January has not done much to support our currencies. Further local interest rate increases are inevitable once the Fed announces its first increase.

In July the average prudential balanced portfolio returned 0.69% (June: 1.81%). Top performer for the second consecutive month is Metropolitan (1.13%); Stanlib (0.29%) takes the bottom spot. For the 3 month period Namibia Asset Management is top performer outperforming the ‘average’ by roughly 1.5%. On the other end of the scale Sanlam underperformed the ‘average’ by 1.1%.

The US economy appears to be out of the doldrums having had only two quarters of negative GDP growth since the beginning of 2011, year-on-year GPD recording 2.4% at the end of quarter 2 of 2014. The following graph, from Efficient Select newsletter of 18 August, provides this interesting review of the change in US GDP since 2005:

The Fed’s large scale asset purchase program has been reduced steadily from its high of US$ 90 bn per month, and will probably fade out by the end the end of the year or early in 2015.

Developing economies such as South Africa are still disappointing. These countries depend on the export of commodities to a significant extent and China has been one of, if not the biggest export market for their commodities. The restructuring of the Chinese economy will no doubt impact negatively on China’s demand for commodities and therefore on the South African and Namibian economies. Our economies are thus likely to grow sluggishly over the next year or two. South Africa is expected to grow at only 3% or less over the next 5 years, while the Namibian economy is expected to average around 4.5%.

In June the average prudential balanced portfolio returned 1.81% (May: 1.52%). Top performer is Metropolitan (2.52%); Investment Solutions (1.49%) takes the bottom spot. For the 3 month period Namibia Asset Management is top performer outperforming the ‘average’ by roughly 0.6%. On the other end of the scale Stanlib underperformed the ‘average’ by 0.8%.

Over most periods measured, from 3 months to 10 years, our performance graphs show that equities outperformed the best performing prudential balanced portfolio. Adding in dividends of somewhere between 2% and 4%, equities have in fact outperformed over all periods. Barring a few exceptions our performance graphs also show that high equity portfolios have outperformed low equity portfolios as the result of equities having outperformed the other lower risk asset classes such as property, bonds and cash.

The following shows that SA equities have passed their peak at the end of 2007 in real terms, much more so in nominal terms. They are now significantly above the trend line of the index since the beginning of 1988 which represents a normalised commencement date and covering a period of 26 ½ years. This graph also shows that the index has been pausing below the trend line regularly.

The investor should in the first instance be wary of investing when the market is above the trend line as it currently evidently is. It is thus not the right time to increase one’s equity exposure to the local equity market now but to rather wait for the market to retract. What about foreign markets though?

In May the average prudential balanced portfolio returned 1.52% (April: 1.36%). Top performer is Namibia Asset Managers (2.74%); Investment Solutions (0.75%) takes the bottom spot. For the 3 month period Investment Solutions is top performer outperforming the ‘average’ by roughly 0.6%. On the other end of the scale Investec underperformed the ‘average’ by 1.2%.

At this stage local and offshore equity may be expected to remain the best performing asset class for the next 12 months as the result of monetary stimulus measures being maintained globally, despite the fact that markets are already expensive. There is a chance of interest rates being raised in the US later this year although the US government will not really be able to shoulder anything but a minute increase in interest rates due to its high indebtedness, unless this was accompanied by increasing inflation. 

Local interest rates may well be increased again soon by the SA Reserve Bank particularly in view of the down grading of SA’s credit rating by Standard & Poors to BBB-, one level above junk, while Fitch lowered the outlook on its BBB grading from stable to negative. This will impact negatively on returns on interest bearing investments and on property but will lend support to the Rand. It is therefore likely that the Rand will maintain its current position and may be expected to move sideways for the next 12 months.

In April the average prudential balanced portfolio returned 1.36% (March: 0.86%). In a turn of tables, Sanlam, for once in a long time takes top spot (2.02%), while Namibia Asset Managers (0.73%) has taken up the bottom spot. For the 3 month period Metropolitan is top performer outperforming the 'average' by roughly 1.5%. On the other end of the scale Allan Gray underperformed the 'average' by 0.8%.

Our performance ranking for the 3 months ended 30 April displays a significant change of fortunes of the various managers from just 3 months ago. Under performing managers Metropolitan, Sanlam and Investment Solutions now take top spots while out performing managers Allan Gray and Namibia Asset Management take bottom spots. This begs the question - what has changed in the market?

As we commented in the previous newsletter, the uncertainty in global investment markets as a consequence of the policy of the US Federal Reserve, has subsided and it is now 'back to business' for the global investor community. The result of the turnaround in investor sentiment has evidently also resulted in the turnaround of fortunes of the various portfolio managers as depicted in the 3 month performance ranking graph.

The question now is whether the past 3 months are an indicator of what to expect over the next 12 to 36 months? Will we see the Rand strengthening further and interest rates declining as the result of foreign investment flows, inflation declining and equities continuing to steam ahead?

In March the average prudential balanced portfolio returned 0.86% (February: 2.06%). Top performer is Investment Solutions (1.92%), Metropolitan (-0.19%) takes the bottom spot. For the 3 month period Sanlam is top performer outperforming the ‘average’ by roughly 1.4%. On the other end of the scale Metropolitan underperformed the ‘average’ by 1.2%.

Interest rates in the US are still extremely low and money is still pumped into the system on a large scale through the Fed’s asset purchase programme, even though this has been reduced from a peak US$ 80 billion per month to now ‘only’ around US$ 65 billion. This is still a lot of money made available on excessively easy terms, representing around 5% of US GDP, for every 12 months it continues. To put this into a Namibian perspective, it would be like the Bank of Namibia pumping around N$ 7 billion into our financial system every 12 months, to raise its total assets by one third in the coming year!

In February the average prudential balanced portfolio returned 2.06% (January: -0.34%). Top performer is Investec (3.19%), Allan Gray (1.09%) takes the bottom spot. For the 3 month period Investec is top performer outperforming the ‘average’ by roughly 1.1%. On the other end of the scale Stanlib’ underperformed the ‘average’ by 1.2%.

Since the start of 1989, the S&P 500 index gained an average 7.6% per year, over this 25 year period. US inflation over this period was an average of 2.7% per year, thus producing a real return of close to 4.8 %, excluding dividends. The FTSE/JSE Allshare index gained an average of 13.4% per year while Namibian inflation over this period was an average of 8.3%, producing a real return of 4.7%, excluding dividends, on par with the real return of the S&P 500 index.

What this indicates is that despite the local ‘bull run’ over the past 5 years that produced a real return of 14.4% per annum, this has largely been a catch-up exercise of our local bourse when measured against the US market. It also shows that over the past 25 years, local equity markets have produced returns close to the 8% generally expected of equities in the long run, when one adds dividends of between 2% and 4% to the real return of 4.7%.

In January the average prudential balanced portfolio returned -0.34% (December: 2.77%). Top performer is Allan Gray (1.17%), Metropolitan (-1.23%) takes the bottom spot. Allan Gray, top performer for the quarter outperformed the ‘average’ by roughly 1.9%, primarily through their maximum exposure to offshore investments paired with the significant decrease of the Rand against the USD. On the other end of the scale Investment Solutions’ underperformance of the ‘average’ by 1.7% was caused primarily by sector and asset allocation.

Global investment markets have not changed since our previous newsletter. Positive economic trends are still being registered in the US, a number of European countries, Japan and China. In accordance with the 1741 Asset Management global equity valuations as of December 2013, global equity markets currently present ‘fair value’, with fairly wide disparities between overvalued markets such as the US market (+45%) and undervalued markets such as Japan (-25%). To achieve superior equity returns, investors would have to find pockets of value outside the traditional developed markets, which would usually be associated with higher investment risks. Emerging markets have fallen out of favour with investors in developed countries who now prefer to put their money on their own markets, in particular the US market.

Despite this trend having led to a correction and even to overly optimistic views of equity markets in the developed world, we believe that this trend will persist for a while.

In December the average prudential balanced portfolio returned 2.77% (November: -0.08%). Top performer is Prudential (3.31%), Investment Solutions (2.06%) takes the bottom spot. Investec, top performer for the quarter outperformed the 'average' by 0.8%, primarily through sector allocation and stock picking. On the other end of the scale Investment Solutions' underperformance of the 'average' by 1.4%, was caused primarily by its underweight exposure to offshore assets. Its offshore allocation was 18% versus 30% for the 'average' (end September).

Despite strongly declining inflows of foreign investment capital from local markets in 2013, its impact was neutral on equities, but still provided good support to the local fixed interest markets, thereby aiding a low local interest rate environment. The FTSE/JSE Allshare returned 18% ex dividends (21.4% incl. dividends).

Around 6% of the total equity performance of 2013 resulted from the rerating of equities while the balance of 15% represents earning growth. For this year we would not see foreign portfolio flows to produce much downward pressure on local equities, currently being at around zero. However, a rising interest rate environment, the advent of which may well be forced by further weakening of the Rand, should put a damper on local equity markets as the result of which we would not expect any further rerating of equities in 2014, as we have seen in 2013.

We see no reason at this stage though why company earnings growth in 2014 should not equal the 15% of 2013. As the result, we would expect local equities to return around 15% in 2014, with some upside potential.

In November the average prudential balanced portfolio returned -0.08% (October: 2.70%). Top performer is Namibian Asset Managers (0.35%), Investment Solutions (-0.94%) takes the bottom spot.

Tapering of the Feds asset purchase programme is pretty much a given, only the time is still a bit nebulous at this stage although consensus is that it will commence in 2014.

To counter another panic reaction when this happens, the Fed has already indicated that it will maintain an accommodative monetary policy and that it will continue with its zero interest rate policy. Markets seem to have started to discount these developments towards the end of November. As the result the SA Allshare index hardly moved in November and declined by nearly 6% from end of October to middle of December. Graphs 5.2 and 5.3 clearly evidence the panic response of foreign investors in local markets and indicate an 'overshoot' scenario that has also lead to the Rand being undervalued at 10.19 to the US$, by our measure.

How much further markets may decline is anybody's guess. The Fed does not seem to be keen on equity markets turning negatively as this will impact negatively on consumer sentiment, which in turn will counter its intention of boosting the US economy. In such a situation however, sentiment is likely to lead to markets overshooting to then correct again after a while when the real impact of the tapering combined with a low interest rate environment filter through.

We would expect the current negative trend in equity markets and the depreciation of the Rand to continue for a couple of months as the result of prevailing negative sentiment and the uncertainty about the impact of the tapering on financial markets.

With an expectation that this will correct again, we believe that it will not be the right time to get out of the equity market now without a very clear objective when to get back into the market, or for the specific purpose of short-term parking of money. It is usually easier to foresee a decline in the equity market, other than as the result of panic reaction by investors, than it is to foresee a correction. Corrections typically happen rather rapidly. Missing out on a correction can seriously affect investment returns.

In October the average prudential balanced portfolio returned 2.70% (September: 3.42%). Top performer is Metropolitan (3.42%), Allan Gray (2.10%) takes the bottom spot.

We have previously been reporting and have placed a lot of emphasis on the impact that global quantitative easing, or asset purchase programmes undertaken by reserve banks, had on emerging economies and more specifically on commodity based economies. These measures have and are still producing a strong flow of capital into emerging economies. This flow presents an artificial support of the currencies of emerging countries, artificial support of their equity markets and an artificially low interest rate environment. This artificial support will fall away as soon as these programmes are reduced and eventually withdrawn.

At this stage it seems that the Fed will put the brakes on its asset purchase programme in the next year but that it will continue with its zero interest rate policy. If this will be the case, one may expect the further bloating of global equity markets to recede although a low interest rate environment will still result in an investor equity bias.  The investor needs to now look beyond the tapering by the Fed. For South Africa and Namibia, being commodity based economies, our economies and markets are highly sensitive to movements in global commodity markets.

Against this backdrop, it is interesting to study global commodity markets and how this impacted on our currencies and markets. This can also provide a queue to how our local equity markets are likely to develop over the next few years. The graph below lucidly presents some interesting correlations with the 'Economist Continuous Commodity Index' (Com Ind).

In September the average prudential balanced portfolio returned 3.42% (August: 1.58%). Top performer is Metropolitan (4.32%), Allan Gray (2.40%) takes the bottom spot.

As we reported in our previous newsletter, we expect global commodity and equity markets including local markets, to move sideways over the medium term. Global commodity prices are at fairly elevated levels and we do not expect much support for the Rand and local miners from that source.

While foreign investors can still borrow extremely cheaply overseas and can still earn attractive returns on low risk investments in SA and other developing countries, we will continue to see foreign investment flows into local markets supporting local equities and a low interest rate environment.

The investor should however not expect returns much higher than the dividend yield, with very little or no capital appreciation in the medium term although in the short-term the more speculative investor may still be able to make hay while the sun shines. Ignoring the scenario of deflation, interest rates will in the medium term rise slowly and buying opportunities will arise provided one invests to maturity. As interest rates drift upwards, presenting buying opportunities in fixed interest instruments equities will lose some of their shine.

1741 AM Fair Value indices are always an interesting read. For end September, they still indicate great buying opportunities in foreign equity markets, primarily EMU markets (Austria -48%, Italy –53%, Portugal -22%, Spain -31%) but also Japan on -29%. The US is considered overvalued by 35%. A weak Rand, and by our measure currently just slightly undervalued at its current value around 9.78 to the US versus fair value at around 9.65, suggests that one can invest offshore again.

A globally well diversified portfolio, comprising of value companies in the industrial, financial and technology sectors with strong cash flows and high dividend yields. Listed property is likely to track the performance of equities in the short-term, implying short-term opportunities but are likely to feel the impact of an increase in interest rates more severely than equities. In terms of the weighting of the equity exposure we believe that foreign equity should be overweight relative to local equity, considering that local investors will hold the major portion of their assets locally.

In August the average prudential balanced portfolio returned 1.58% (July: 2.70%). Top performer is Allan Gray (2.31%), Prudential Namibia Managed (1.11%) takes the bottom spot.

Ardent followers of our newsletter, and more specifically our comments on the world of investments will be forgiven for their conclusion that the 'fiscal easing measures' of the US Fed must be our pet topic. It's not really though, however, it probably is the one intervention by a global regulator that currently has the biggest impact on global financial markets. How does this now gel with the principle of the free market mechanism? Are we acknowledging that the free market philosophy is a relic of the past?

Fact of the matter is that players in global financial markets, and investors, are in the hands of the Fed and if you have any inside information about the next moves of the Fed you can become very rich in a very short time, obviously at the expense of someone else, those that do not have inside information.

We have seen the violent negative reaction of markets when Ben Bernanke indicated that the Fed was contemplating to taper its massive bond buying programme and we have seen the exuberance following the latest meeting of the Fed where Ben Bernanke announced that the Fed will continue with its asset purchase programme for a while.

So for the next couple of months it could still be a matter of making hay while the sun shines for the aggressive equity investors. As James Downie once observed, "in a hurricane even turkeys can fly", and this is likely to be the case even with the turkeys amongst equities while this hurricane lasts.

For pension fund investments this is unfortunately not a conducive environment because they have to be focused on the long-term and in the long-term, everything that goes up will come down and every bubble will burst some time or other.

To protect pension fund assets against the negative impact of the bursting of a bubble, the investor needs to know what assets represents a bubble. A more speculative investor (or growth/momentum investor) would still attempt to ride the bubble and to get off just in time while a conservative investor (or value investor) would rather try to avoid investing in a bubble. We certainly are proponents of the latter and this should be borne in mind by our readers when considering when, how and where to invest.

So with this background, we know that interest rates will remain low and equity will continue to be carried in the storm, but we do not know for how much longer this will continue. It is unlikely though that the Fed will consciously do serious harm to global financial markets, so it is likely to taper in initially small, later increasing steps, depending on how markets respond.

In July the average prudential balanced portfolio returned 2.70% (June: -3.42%). Top performer is Namibia Asset Managers (3.54%), Allan Gray (1.69%) takes bottom spot.

Since the steep fall in global financial markets in June, in consequence of a comment by Fed Chairman Bernanke of a tapering of the Fed’s large scale asset purchase (LASP) programme, nervousness in markets has subsided. However, traders and investors have taken a cue and are a lot more cautious. This manifests more prominently in the fixed interest markets where interest rates have moved off their lows already. US benchmark 10 year notes are currently hovering around 2.4%, off a low of 1.65%. This may not seem much in absolute terms, however for the investor this represents a capital loss of 32%! Equity markets are currently wavering between fear and the hope that the Fed’s LASP programme will continue.

The question in the investor’s mind will be when the Fed will start tapering its LSAP programme. Until such time as this becomes clearer, equity markets are likely to remain volatile, fertile ground for the speculator but a time where a long-term investor needs to sit tight and ‘turn a blind eye’ to any downturn in the markets. At this stage, the Fed is unlikely to change direction until a new board of governors under a new chairperson has taken the reigns and has settled in. This will possibly only be early next year, while chairman Bernanke is likely to be replaced in the next 2 months or so.

Local indicators also evidence the expectation of a tapering of the LSAP programme. Interest rates have started to tick up in the face of declining foreign flows into local bonds. Foreign investment flows into local equities have virtually dried up with an inflow in July of a mere N$ 463 million. These developments have no doubt also contributed to the weakening of the Rand.

Are we now moving into the ‘muddle through’ phase of global economies? Despite some positive economic indicators coming out of the US and Europe, it is unlikely that we will see a dramatic improvement of global economies. There will likely be a slow shift of investment flows from equity markets to bond markets as investors see value in higher interest levels and try to capitalise on mispricing of assets that is likely to occur. A concerted global recovery will most likely only happen in a year or two and is likely to be slow.

The general expectation of commentators is that deleveraging of bloated balance sheets will happen through inflation, i.e. asset values blown up through excessive money supply will depreciate in real terms, through inflation. The article ‘The pressing need to deleverage raises spectre for deflation’ in this link, hints towards another scenario for deleveraging. The last time this happened was long before most of us were born and we would therefore find it difficult to relate to such a scenario. Deflation would imply negative inflation coupled with very low interest rates, rather than high inflation coupled with high interest rates, i.e. the value of assets and incomes would decline, the end result being the same though. Psychologically, deflation is likely to be perceived much more negatively than inflation and the impact on consumption and the economy is likely to be much worse than in an inflationary environment.

Those who kept an eye on global financial markets, will have taken note of the severe impact a ‘casual remark’ by the governor of the Federal Reserve Bank had on these markets in June, when shares took a knock of around 6%, while interest rates responded with an immediate increase, albeit a fairly modest increase. Was this vicious response not foreseen by the governor to have tried to put his comment in a more rosy perspective shortly afterwards?

In any event, this ‘oral refurbishment’ again impacted strongly on global equity markets in July, this time with a strong upward movement. So where does this leave the investor, more particularly trustees who are charged with the responsibility of overseeing the investments of their funds?

It seems that the US Fed is in quite a predicament as shown by the recent violent swings in global financial markets. Equity investors and borrowers are praying that the Fed, in particular may not withdraw its bond buying programme while fixed interest investors are hoping that it will, so that they once again may earn positive real interest rates.

Most probably global investors are more and more coming to expect that the Fed will taper off its bond buying programme in the foreseeable future and are starting to adjust their investment strategy on the basis of this expectation.

It is also likely that the Fed will not splash their intentions across the media in future after the recent scare effect. Listening to statements made since, there are now more ‘ifs’ and ‘buts’ that seem to be designed to be less dogmatic about what steps to take when. These can be interpreted to be ‘cautionary announcements’ for investors not to place too much reliance on the Fed keeping up its programme unchanged.

What appears to happen as far as local financial markets are concerned is that foreign portfolio flows are declining. As the result, interest rates are on the increase, consistent with a more cautious stance of global investors and the general expectation that the Fed’s bond buying programme will start tapering off in the foreseeable future.

An article on the same topic, ‘Investing after Bernanke’, that our reader may find of interest appeared in Moneyweb of 2 July 2013. If the topic interests you, click here...

In May the average prudential balanced portfolio returned 6.25% (April minus 0.59%). Top performer is Namibia Asset Management (8.33%), Investment Solutions (4.56%) takes bottom spot.

We have been concerned about the exaggerated growth of local equity markets as the result of fiscal and monetary intervention by governments and reserve banks across the globe for some time. This intervention has resulted in large flows of capital into emerging markets such as South Africa, in search for higher yields outside the low interest rate environments of the developed world.

For us in Namibia, equity and equity investors benefited from a strong Rand and borrowers from low interest rates. Those that invested offshore or in fixed interest instruments suffered.

It becomes ever more evident that the tide is busy turning. Interest rates  will increase further over time and the trend of the Rand will remain negative.

In April our average prudential balanced portfolio returned minus 0.53% (March 2.15%). Top performer is Sanlam (0.43%), Stanlib (minus 1.12%) takes bottom spot.

Besides our usual graphs presenting index and portfolio performances,  the Rand: US Dollar exchange rate, foreign portfolio flows, in this edition of our monthly newsletter we will refrain from commenting on financial markets. Instead we refer our readers to the article ‘A view on equity investment and commodity prices’ that provides a view we fully subscribe to. Read it here...

In March our average prudential balanced portfolio returned 2.15% (February minus 0.44%). Top performer is Allan Gray (3.78%), Sanlam (1.53%) takes bottom spot.

In February our average prudential balanced portfolio returned minus 0.12% (January 3.98%). Top performer is Namibia Asset Management (0.31%), Momentum (minus 1.10%) takes bottom spot.

In February key foreign bourses continued to out-perform the SA Allshare Index, the Nikkei being best performing index seemingly achieved by a mere comment by newly elected Japanese PM Abe that the Bank of Japan needs to relax fiscal policy. Since the beginning of 2012, the Nikkei produced 36.7%, and the DAX 31.3% versus the SA ALSI at 24.2%. Over this period the Rand depreciated by 10.3% against the US$ and by 11.1% against the Euro.

Together these two elements would have produced a return of 56% and 49.8%, respectively, for an SA (US Dollar) investor in the Nikkei, respectively in the DAX, returns that compare favourably with the top performing sectors of the FTSE/JSE. Foreign investors in the SA ALSI in contrast, would have had a return of 11.4% (US investor) and 10.4% (Euro investor) since the beginning of 2012.

Foreign investors in SA bonds and other fixed interest instruments would have earned negative returns since the beginning of 2012. The attractiveness of borrowing cheap money offshore to benefit from higher interest rates in SA is therefore no longer an argument unless the investor were to hope for the Rand to strengthen again which appears unlikely at this stage. In the light of these developments, a declining trend in net bonds purchases by offshore investors is not surprising.

Despite these negative developments for foreign investors in SA, total foreign portfolio flows are currently still at a fairly high level of over R 100 billion measured over rolling 12 month periods, still providing support to the Rand. We would expect the influence of foreign portfolio flows on our local financial markets to slowly fade away.

Local fundamentals and investor sentiment should in time, however, become a much stronger determinant for our local financial markets. Consensus amongst equity investors seems to be that SA equities are not cheap by historical measures and in relative terms when compared to other African and offshore investment opportunities. Such foreign investment opportunities are therefore likely to be pursued with more vigour by local investors going forward, which also will impact negatively on local equity markets.

A changing tide of portfolio investment flows out of  SA, the continuing negative inflation differential between SA and its major trading partners, negative SA current account data and the fact that SA Reserve Bank in March once again kept the Repo rate unchanged, is likely to weaken the Rand further and dampen the interest in local bonds. A weaker Rand is likely to lift the inflation level. This environment is bound to lead to an increase in the Repo rate in the next 12 to 24 months and to higher interest rates generally.

In January our average prudential balanced portfolio returned 3.98% (December 1.24%). Top performer is NAM Prudential Managed (5.69%), Old Mutual (1.41%) takes bottom spot.

The past year to end January, for the first time in a while saw some foreign equity indices outperforming the SA ALSI. In this category fell the Nikkei that produced 26.5%, the DAX produced 20.4% versus the SA ALSI at 19.8%, not far behind the DAX, while the Rand depreciated by 14.4%. Together these two elements would have produced a return of 47.8% and 40.7%, respectively, for an SA investor in the Nikkei, respectively in the DAX, returns that compare favourably with the top performing sectors of the FTSE/JSE. Foreign investors in the SA ALSI in contrast, would have had a return of 2.6% (US investor) and minus 2.9% (Euro investor).

This no doubt hurts when viewed in the context of what a foreign investor could have earned in their local bourses. Foreign portfolio flows into SA equity appear to mirror this disappointment of foreign investors. Since the SA Reserve Bank kept its repo rate unchanged in February, SA also no longer offers such an attractive investment opportunity for foreign investors in SA bonds, who would in fact have experienced negative returns over the past year in most instances. Another factor that has been benefiting SA was the huge demand for its natural resources but with the steep decline in global consumer confidence and consumption, it will take some time before the consumption driven demand for our commodities will recover again.

The question is whether these trends will continue. Our expectation is that they will. This should continue to dampen the enthusiasm of speculative foreign investors as will the continuing negative inflation differential between SA and its major trading partners and the fact that SA Reserve Bank kept the Repo rate unchanged. Foreign investment flows are likely to subside and this should impact negatively on our local equity and bond markets. We therefore expect continued Rand weakness and upward trending inflation that should in time to come lead to inclining interest rate levels locally.

In December our average prudential balanced portfolio returned 1.24% (November 1.8%). Top performer is Metropolitan (2.57%), Investec (- 0.6%) takes bottom spot.

After the down grading of South Africa’s debt rating by international rating agencies, the Rand weakness continued, it briefly breaching the R 9 to the US$ hurdle. This should dampen the enthusiasm of short-term foreign investors as will the continuing negative inflation differential between SA and its major trading partners and the fact that SA Reserve Bank kept the Repo rate unchanged. Foreign investment flows, particularly the more speculative flows, are likely to subside which should impact negatively on our local equity and bond markets.

A weaker Rand obviously benefits local exporters and local manufacturers and will make them more competitive against imports. Imports, including fuel, will become more expensive and this should filter through to raised inflation levels and to higher interest rates eventually.

In November our average prudential balanced portfolio returned 1.8% (October 2.79%). Top performer is Stanlib (2.70%), Allan Gray (1.21%) takes bottom spot.

Since our previous newsletter no significant changes have occurred in global financial markets that would make us change our views on investment strategy. In our view, we are experiencing artificial market conditions that underpin global equity markets at a cost still to be amortised in future at the expense of the man in the street. While these conditions prevail, equities will do well. These conditions will only change once global consumer sentiment has turned positive, which is likely to still take a while.

Under these circumstances the investor will have to ask himself, will I be cautious and continue suffering from underperformance for the sake of greater peace of mind, while still earning respectable inflation beating returns or should I rather trust in the current artificial environment prevailing for the foreseeable future and therefore drop my cautious position?

In October our average prudential balanced portfolio returned 2.79% (September 1.13%). Top performer is Namibia Asset Management/Coronation (3.49%), Investec (2.38%) takes bottom spot.

On the basis of fundamentals and the prevailing economic environment, foreign equities should outperform foreign bonds and property and in addition, a number of foreign bourses offer high discounts on fair value for political reasons that should fade away. In the face of a depreciating Rand, such investments would of course experience that benefit as well. Locally we would expect equity to remain the top performing asset class, followed by property, bonds and cash over the next one to two years. Bonds and cash face the real prospect of negative returns should interest rates be raised over the next 1 to 2 years.

In September our average prudential balanced portfolio returned 1.13% (August 2.30%). Top performer is Namibia Asset Management/Coronation (1.56%); Sanlam (0.37%) takes bottom spot.

For investors the question one needs to find an answer to is how the current financial crisis and the stimulus measures will pan out? Stimulus measures will remain in place until such time as developed economies start picking up steam again and this will not be soon. Until then consumer sentiment in the developed world will remain low. Demand for our resources in the developing world, including our natural heritage, will thus remain depressed for some time to come. The economic growth government had bargained on, and which is necessary to contain our debt and sustain its servicing, will not be as rosy as hoped for. Austerity measures will not be avoidable even for us in Namibia, and is likely to become a necessity as from 2013 onwards, to last for a while.

In August our average prudential balanced portfolio returned 2.3% (July 2.37%). Top performer is Namibia Asset Management/Coronation (3.04%), Old Mutual (1.8%) takes bottom spot.

Economic stimulus measures taken by the ECB and more recently once again by the US Fed, will continue for quite a while and are likely to lead to further repo rate reductions by the SA Reserve Bank and a further decline in general interest rates. Despite the latest US stimulus package, we believe that inflow of foreign capital both into equities and bonds is likely to ebb, which should lead to a weaker Rand. As the result our equity markets are unlikely to show any significant growth over the next year or even longer but should still produce inflation hedging returns. Stocks that will benefit from a weakening Rand such as industrials and Rand hedge companies should outperform the Alsi. With our expectation of a further decline in interest rates, bonds should benefit in the medium term, while cash returns will be zero, more likely negative in real terms. Property under current circumstances is also likely to produce respectable returns for the medium term.

In July our average prudential balanced portfolio returned 2.42% (June minus 0.47%). Top performer is Investec (2.84%), while Allan Gray (1.48%) takes bottom spot.

In earlier newsletters we made reference to the tail winds that benefited local financial markets, caused by the financial crisis in developed countries. Exceptionally low interest rates offshore have produced a flood of money flowing into our and other developing countries in search of yields, resulting in a strong currency and low interest rates. Low interest rates no doubt encouraged the consumer to over extend his debt which in turn would have resulted in high property prices and unsustainable consumption levels. In the article ‘Running out of luck Down Under’ Jonathan Trepper provides a review of the Australian economy. The Australian situation as described, can be mirrored upon our economies and should be food for thought for any investor with a longer-term investment horizon. Download the exceptionally interesting article here...

In June our average prudential balanced portfolio returned 0.47% (May minus 0.65%). Top performer is Stanlib (1.41%), while Investec (minus 0.40%) takes bottom spot.

The severe economic woes of Europe just do not seem to end and will be around for quite some time. The US is in no better position and is still alternating between recession and some green shoots in the economy while every now and then, prospect of further monetary stimulus raising its head. Consumer sentiment has certainly shown little signs of improvement in the US while it is still in reverse gear in Europe. China which has enjoyed double digit growth over an extended period has experienced a significant decline in economic growth’ to an official 7.5% for the latest quarter, and this is said to be ‘faked growth, the real growth estimated to have only been 7.1%. This after economists earlier this year expected the Chinese economy to cool to around 9% growth, everything lower at that stage seen as a ‘hard landing’. In short what has driven our economy and that of other developing countries is in reverse gear and is unlikely to improve for an extended period of time.

In May our average prudential balanced portfolio returned minus 0.65% (April 1.32%). Top performer is Allan Gray (1.33%), while Stanlib (minus 1.74%) takes bottom spot, both having switched their log positions from the previous month.

Going by the general tone in Europe and recent utterances by President Obama, the likely direction of monetary and fiscal policy in Europe is one of more stimulation as the road out of the financial crisis. This implies more ‘fiscal easing’, more printing of money and more short-term capital looking for yields in developing countries such as South Africa. The scenario of declining foreign portfolio flows, a weakening Rand and rising interest rates, is therefore likely to only materialise in the next 2 to 3 years and the current Rand weakness is likely to be of a temporary nature.

In April our average prudential balanced portfolio returned 1.32% (March 0.86%). Top performer is Stanlib (1.99%), while Allan Gray (0.33%) takes bottom spot.

Stimulating European economies is likely to provide an impetus to European equities and foreign  capital is likely to prefer depressed European equity markets above those of the developing world who have returned to pre-crisis levels. As the result, our equity markets are unlikely to show the type of growth we have seen since the start of 2009. We would still expect our markets to produce reasonable  returns while interest rates are likely to remain low, cash probably negative in real terms. Any recovery of the Rand should be used as an opportunity to diversify offshore and to invest in equity markets that were particularly hard hit by negative sentiment. These can mainly be found in Europe.

In March our average prudential balanced portfolio returned 0.86% (February 1.12%). Top performer is Allan Gray (1.43%), while Momentum/ Metropolitan (0.44%) takes bottom spot.

Taking a longer term view, the SA Allshare Index has grown by 12.6% p.a. since March 1997, not taking into account dividends of somewhere between 2% and 4% p.a. Namibian inflation over this period was 7.2% p.a. Evidently, the SA Allshare Index has grown in real terms over this nearly 15 year period by around 5.4% excluding dividends and by between 7% and 9% p.a. including dividends, which is representative of the long term real return of around 8% p.a. For a local investor this indicates that the SA Allshare Index is currently around its long-term trend line which is not a particularly compelling case for investing in this index but promises long-term returns equal to what the market is expected to deliver. 

In February our average prudential balanced portfolio returned 1.12% (January 2.92%). Top performer is Stanlib (1.68%), while Allan Gray (0.55%) takes bottom spot.

For Namibian funds, the weakening of the Rand vs the US$ by 6.9% over this 12 month period was more than offset by the poor performance of the MSCI World Free Index that produced -1.1% including dividends, in US$. Comparing the 12 month performance of managers with a high off-shore exposure, such as Investec (31.5%), Allan Gray (30.4%) and Prudential (29.7%),  with that of managers with a low offshore/high local equity exposure such as Stanlib (18.4%/50.6%), OM Balanced Growth (23.5%/49.8%) and IS Balanced Growth (19.7%/46.8%), the latter group should have and have outperformed the former group with the exception of Allan Gray that in fact produced the 3rd best performance of these 6 managers, trailing IS Balanced Growth and Stanlib just slightly.

In January our average prudential balanced portfolio returned 2.93% (December minus 0.14%). Top performer is Investment Solutions Multi Manager (3.74%), while Allan Gray (1.31%) takes bottom spot.

At this point we do not see much excitement coming from our local financial markets over the next year or two, although an expected continuation of foreign portfolio flows, as the result of the fiscal easing in the Eurozone, is likely to ensure that this asset class should outperform other asset classes. Diversifying offshore, more specifically to the US would appear worth a consideration for the investor with a time horizon of 3 years and longer. European markets also offer great opportunities if you are brave and if you can be patient. In the short term, local equity markets may well still outperform offshore markets over the next 3 years.

We do not see much excitement coming from our local financial markets over the next year or two. Under these circumstances, diversifying offshore, more specifically to the US would appear worth a consideration. European markets also offer great opportunities if you are brave and if you can be patient.

For the next year or two, interest rates and inflation in the developed world are likely to remain at current levels.  Bourses and economies will be sluggish, particularly in the Eurozone, while there is a fair chance of US rates to start rising over the course of the next year. As US consumer sentiment improves, taxes are likely to be raised dampening any emerging renewed interest in investment markets and equities.

In October our average prudential balanced portfolio returned 5.31% (September 0.56%). Top performer is Prudential (6.61%), while Allan Gray (3.84%) once again takes bottom spot.

Local consumer goods and consumer services had an excellent run over a period of nearly 6 years to October 2011. Consumer Goods rose by 19.2% and Consumer Services by 15.6% per year, before dividends, over this period. Basic Materials, Industrials and Financials, in contrast, produced relatively pedestrian returns of 9.1%, 8% and 4% per year, before dividends, over this period. We do not expect too much more joy out of Consumer Goods and Consumer Services anymore and these should hence be underweight.

On the basis of fundamentals, one should now move to an overweight position in local Industrials and Financials that have not seen the growth of the consumer sectors. Basic Materials should now also offer some buying opportunities. An expected further depreciation of the Rand in the medium term would favor exposure to Rand hedge shares locally and an increase in foreign holdings.

In September our average prudential balanced portfolio returned 0.56% (August minus 0.2%). Top performer once again is Allan Gray (3.57%), while longer term log leader Stanlib (minus 1.24%) takes bottom spot.

Participating employers who are invested in the Benchmark default portfolio will be aware that we have raised the risk profile of the default portfolio since the beginning of 2011 by replacing Metropolitan Absolute Return Fund with Allan Gray. With this combination, its risk profile is still considerably lower than that of the average prudential balanced portfolio. We would therefore expect the default portfolio to sacrifice around 1% for the benefit of lower volatility, thus an expected real return before management fees (typically 0.75%), of around 5% per year. Since this change was effected at the beginning of this year, the default portfolio returned 7.5% compared to 2.5% for the average prudential balanced portfolio.

Financial markets particularly in Europe are still in great turmoil and will remain so until a viable solution can be worked out that removes all uncertainty. In the mean time it appears that things are starting to look up in the US. As the result, there appears to be a de-coupling of consumer sentiment between the US on the one side and Europe on the other side. It appears US economic indicators and sentiment is turning up while sentiment in Europe appears to take the opposite direction. Global inflation appears to have peaked for the time being, that of the US for July year-on-year standing at 3.5% (August 3.8%), Euroland at 3% (August 2.5%), China at 6.1% (August 5.3%), SA at 5.7% (August 5.3%) and Namibia at 5.3% (August 5.4%). We do believe though, that this is a short-term lull and that inflation will pick up again as consumption starts gaining steam.