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Global Economy

The International Monetary Fund said in its World Economic Outlook that the global recovery will gain strength this year but it trimmed its growth forecast amid a sharp increase in Japan's sales tax and a slowdown in emerging markets.

An accelerating U.S. recovery will help the world economy grow 3.6% this year, the IMF said, up from 3% in 2013 but down slightly from its 3.7% projection in January. Growth will pick up to a 3.9% pace in 2015, the Fund said.

"A recovery which was starting to take hold in October is becoming stronger but also broader," IMF chief economist Olivier Blanchard said, but he added, "the recovery remains uneven."

The IMF's 2014 growth forecast for the U.S. was unchanged at 2.8%. That is the highest among advanced economies, which according to the IMF, are responsible for driving the global expansion.

"A major impulse to global growth has come from the United States," the IMF stated, adding that U.S. growth will pick up to 3% next year. The IMF cited more modest federal government spending cuts this year, higher household wealth, a recovering housing market and banks that are more willing to lend.

The Eurozone economy recently began expanding - following the Great Recession - and is projected to grow 1.2% this year, which is an increase from the IMF's 1.1% forecast in January. Underpinning the modest upswing are stronger consumer and business spending in Germany and reduced government spending cuts across the euro area, the IMF said. Still, "growth is projected to remain weak and fragile" in countries beset with high government debt, such as Italy and Spain.

Excessive low inflation throughout the euro area threatens to reverse the progress and could lead to deflation, or decreasing wages and prices, which will prompt consumers to put off purchases and make it more difficult to pay off debts.

"One reason to worry about Europe is deflation," Blanchard said. He urged the European Central Bank to adopt stimulus measures, such as negative short-term interest rates or bond purchases to lower long-term rates. "I think they should all be looked at," he said. "Sooner is better than later."

EDITOR HANNES BARNARD | BLOEMFONTEIN STOCKBROKERS | 087 820 4844 | [email protected]

Bloemfontein Bloemfontein Stockbrokers

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Services: Stockbroking Financial Planning Investments Portfolio Management

March 2014

Quote of the Month

If Americans ever allow banks to control the issue of their currency, first by

inflation and then by deflation, the banks will deprive the people of all property

until their children wake up homeless.

- Thomas Jefferson -

“

”


Another mini-stimulus in China if

PMI’s drop below 50

Japan has experienced a turnaround after years of economic stagnation as a result of higher government spending and a massive bond-buying program to push down interest rates. But the country's consumption tax this month jumped from 5% to 8% and it's set to rise to 10% late next year. The IMF cut its 2014 growth forecast for the country to 1.4% from 1.7% in January.

Emerging markets such as China, Brazil, India and Russia are expected to expand by 4.9% this year (up from 4.7% in 2013) and contribute to more than two-thirds of global growth. But the IMF sliced its forecast by two-tenths of a percentage point since January, in part because the U.S. Federal Reserve's decision to gradually reduce its bond-buying stimulus program has pushed up U.S. interest rates and made emerging-market investments less attractive. The flight of foreign capital from the countries last year pushed down their currencies and forced their central banks to raise interest rates, dampening growth.

"I think we can expect the bumps we saw (last year) to happen again," Blanchard said.

China's growth is expected to slow to 7.5% this year from 7.7% in 2013. The IMF has urged the country to shift its economy more towards domestic consumption and less towards exports and business investment.

Russia's growth forecast was chopped from 1.9% to 1.3%. Foreign investors have fled the country following Russia's recent incursions into the Ukraine, which led to U.S. and European sanctions.

Euro Area Consumer Price Index

Source: Bloomberg

Source: J.P Morgan calculations, Bloomberg

Source: IMF


Previous

Difference

6.79

(Long-term

Difference

2.17)

Current

Difference

5.44

(Long-term

Difference

2.17)

Markets and Your Portfolio

Last month we highlighted the relative and absolute value we identified in the banking sector, with Nedbank and Standard Bank being our preferred holdings. We confidently forecasted a total return of 15% for the next 12 months on both companies. However, at the time of writing we already had a total return of 8.2% and 17.6% on Nedbank and Standard Bank respectively. No doubt the turmoil between Russia and the Ukraine made our banks a beneficiary of the outflows from Russian markets We again include last month’s graphs for your referral, as well as the latest graph, indicating how the “value gap” has closed significantly over the last month, but has further to go.

Dated: 11 April 2014

Dated: 3 March 2014

Source: McGregor BFA



Previous

Difference

5.67

(Long-term

Difference

2.93)

Current

Difference

3.93

(Long-term

Difference

2.93)

Our discretionary portfolios benefited in a big way with overweight positions in both banks. Nedbank and Standard Bank both remain attractively priced on forward price/earnings ratios. We also feel that the initial 100 - 150bps of rate hikes will be beneficial for both banks, impacting revenues positively with limited impact on asset quality. Is there still value in the market? Yes, we continue to find pockets of value. General Mining and Platinum are still attractive and we remain confident long term investors in BHP Billiton, Anglo American Plc and Anglo Platinum Ltd.

Dated: 3 March 2014

Dated: 11 April 2014




As can be seen from the graph below, the General Mining sector on a P/Book relative to the All Share Index remain at levels lower than the 2009 financial crisis. Having already earned a handsome return from especially Amplats, we are confident that mining stocks will mean revert to the long term P/Book average and produce above average returns for our clients.

Construction is another sector offering value.

Having steered clear of any construction stocks since late 2009, we recently started allocating capital to probably the most unpopular sector of them all. With government being long on promises and short on delivery, it is understandable. South Africa has now reached a stage where delaying the implementation of large scale infrastructure development, will have dire consequences.

PPC is the most defensive way to expose capital to the construction sector.

Extracts from their latest results:

PPC’s South African cement sales volumes rose by 7% while industry sales for the nine months ending June 2013 increased by 4,2%. Strong volumes were recorded in the Gauteng and inland regions despite increased industrial action in the markets in the region. Volumes in the coastal regions also recorded growth despite rising imports and a particularly wet winter season.

Imported cement, which is not subject to import duties and is excluded from national statistics, accounted for an estimated 7, 6% of national demand for the first six months of 2013. While cement imports have, to date, been limited primarily to KwaZulu-Natal, the effects are also being felt in the Eastern and Western Cape. PPC’s average cement selling price per ton has increased by 4% during the financial year, while costs increased 6% on a rand per ton basis. Lower coal and maintenance costs assisted in keeping cost growth contained. Slurry finishing mill 4, the largest mill in the PPC group which was commissioned in 1974, was upgraded in May 2013 at a cost of R100 million. This has improved mill reliability and production output, while reducing energy consumption by 15%.

PPC’s cement volumes in Botswana contracted as construction and industrial demand fell, mainly as a result of government infrastructure projects being scaled back. Privately funded developments in the new central business centre in Gaborone are beginning to increase which should stimulate demand.

Cement sales in Zimbabwe recorded double-digit growth for the period, with retail demand remaining the key driver. Increased competitor activity has, however, constrained cement price increases. Cost of production was well contained, aided by increased production output. To ensure optimal efficiency levels, a voluntary separation process was undertaken and 120 people elected to apply.

FTSE/JSE General Mining P/Book relative to FTSE/JSE

Source: I-Net, J.P Morgan calculations


Exports to Mozambique were reduced by logistical challenges after flood damage to the rail line between South Africa and Maputo. Exports into the Tete region from their Zimbabwe operations have improved and plans to install a bulk-handling facility will further enhance efficiency.

Lime sales were affected by major customers encountering operational interruptions. This led to a drop in burnt product sales of 8% while limestone sales reduced by 15%. Declining volumes have reduced EBITDA 14% to R162 million (2012: R188 million). Aggregates revenue grew 12% to R335 million (2012: R299 million) as volume growth in Botswana partially offset marginally lower volumes in South Africa.

Strategy:

Their strategic objective to ‘keep the home fires burning’ was given further impetus by purchasing a majority stake in Safika Cement Holdings. Safika, with its well-known brand IDM, is a blended cement producer manufacturing over 20 million bags of cement per annum.

In support of their ‘rest of Africa’ strategy, they increased their investment in Ethiopia’s Habesha Cement Company to 30% from 27% at an additional cost of R16 million. Earlier in the year, they bought a majority stake in Rwanda’s CIMERWA Ltd, which has a 100 000 ton per annum cement-producing plant, and construction of an additional 600 000 ton facility is well advanced.

Material progress has been made with the project in the Democratic Republic of the Congo (DRC) and construction starts in the first quarter of 2014.

Prospects:

Growth and confidence in the South African economy is critical to ensure improved demand for their products. Due to modest growth, the domestic trading environment remains tough and highly competitive. We believe their strategies have positioned PPC well in a challenging market.

PPC expects continued growth in cement demand in Zimbabwe. The market has been dominated by retail clients and they look forward to increased infrastructure investment. They continue to monitor the cement market in Botswana and anticipate that government spending on infrastructure will gradually begin to improve.

PPC remains confident about prospects for strong growth in the rest of Africa, and believe they are on track to meet a strategic objective of generating 40% of revenues from the rest of the continent by 2017.

PPC remains a high quality company with a high ROE, strong margins, historically good cash generation, and provides a decent historic dividend yield of 4.2%.

At current levels the share is trading on a historical PE of 14 times. We feel that PPC is fairly valued and we are buying on a 5 year view of more than doubling our money.

PPC relative to All Share Index


Source: Company Data


A quick note on the Rand:

We have not moved any funds offshore on behalf of our clients since the 3rd quarter of last year, having felt the Rand depreciated too sharply and was undervalued. Looking at the graph below, trendline A indicates a fair value of $/Rand 9.46. With inflation in Developed Markets remaining extremely low and South africa in a tightening cycle, renewed increase in the “Carry Trade” could easily push the Rand back below $/Rand 10.

I am confident that our patience will be rewarded.

Conclusion

Europe to implement Quantitative Easing to prevent possible deflation

China might also need more stimulus to achieve the 7.5% growth target. This is positive for miners.

We are looking for a stronger Rand, alleviating some pressure on the consumer.

It is getting much tougher, but opportunities of value can still be found. Free State Greetings

Hannes Barnard

Dollar/Rand History (1990-2014)

Source: South African Reserve Bank

$/R 9.46

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