Wednesday, 1 August 2012

Resources: To Buy or Not to Buy. .. That is the Question?

Not all that glitters is gold, or so they say. Perhaps they’re right, since the JSE Resources index is down 7.76% so far this year. Seems strange though, since the JSE ALSI is up 11.09% over the same period. You’d probably guess that’s because the other sectors have performed phenomenally well. Well, you’d be correct, since the JSE Industrial and Financial indexes are up 23.01% and 24.28% respectively year-to-date.

So, who is to blame? One could start by pointing a big finger at Anglo. While thousands of athletes in London might be chasing Gold, I’m afraid it hasn’t done much to boost Anglo’s performance. Anglo contributes 8.2% of the JSE ALSI Top40 Index and is down a whopping 19% this year. While some might speculate the company is a bargain buy at this level, this will very much depend on the prices of the commodities it sells.

The key influence for hard commodities in the short term is the critical support levels of the Euro. The Euro must hold! Policy responses by central banks, predominantly in the form of lowering interest rates, will be the main driver over the medium term. Although commodities are heavily oversold, they may have hit bottom in Euro terms, and that includes Gold.

If Nedbank Capital is to be believed, the JSE ALSI will be trading at a forecast 11.5 times earnings over the next year. This is below the 12.8 times average since the formation of the new South Africa. Financials seem to still hold some value, trading below their averages, while Industrials are slightly higher than their averages. SA Listed Property Index is up 29.97% this year and remains over-valued, just as it has been by skeptics over the past decade.

All in all, the world seems more positive following announcements last week from the European central bank. Perhaps a good time to consider getting some of the action as the market shifts into 2nd gear.

General Update – Interest rate cut...
If you don’t know by now, the repo rate was cut by another 50 basis points. This takes us to the lowest prime lending rate since 1973. This provides some small relief for the average consumer, who statistics show is highly indebted, with a debt-to-disposable income at 74.7%. It seems the average South African can use all the help they can get, since the cost of a basic food basket has increased by an average of 16% year-on-year for the last 5 years.

It seems that even the smallest amount of equity (shares) in your portfolio may now be required to beat inflation over the long term. Not good news for those in a risk adverse position.
Statement of the Month – “Teenagers are people who express a burning desire to be different by dressing exactly alike.”

Food for Thought – Cameron Van Den Burgh’s Olympic Gold is ironically, barely gold at all: in fact, it’s 92.5 per cent silver, with just one per cent gold and the rest copper. Basic Value – around R5,200.

The Tea Break

David te Brake
Pioneer Financial Planning


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