market volatility Table of Contents Understanding volatility 3 4 - - PowerPoint PPT Presentation
Protect and build your wealth in market volatility Table of Contents Understanding volatility 3 4 Method #1: Avoid volatility 6 Method #2: Manage volatility 8 Method #3: Ignore volatility 13 What happened last year? Emerging markets
Protect and build your wealth in market volatility
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13 6 8 4 18 Local and global investment themes Method #3: Ignore volatility Method #2: Manage volatility
Table of Contents
What happened last year? Method #1: Avoid volatility Emerging markets versus developed markets Understanding volatility 4 17 Three stock picks 21
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JSE Power Hour: Profiting in a volatile market
“Volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of
change dramatically over a short time period in either direction. A lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.” - Investopedia
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Method #1: Avoid volatility
The linear payoff profile Stick you cash in the money market. Currently you’ll get just over 7.5% on your cash. Your payoff profile is linear so after one year, so you’ll have exactly 7.5% more than you did the year before. SARB says inflation (CPI) is growing at 7%. The risk of course is that your personal inflation basket is growing at more than 7.5%. But it does take the volatility out of investing.
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Method #2: Manage volatility through uncorrelated investments and diversification
Hedge funds, alternative investments, etc. A hedge fund's purpose is to maximise investor returns and eliminate risk, hence the word "hedge." The name "hedge fund" came into being because the aim of these vehicles was to make money regardless of whether the market climbed higher or declined. This was made possible because the managers could "hedge" themselves by going long or short stocks (shorting is a way to make money when a stock drops).
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Warning: These are not
provide valuable portfolio diversification.
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Method #3: Keep calm and carry on
Volatility is almost synonymous with “sell-off” The share market is prone to volatility, but sell-offs provide a valuable entry point for new money. The only time you should panic in the stock market is if don’t have the time to wait out the dip. And if you have an investment time horizon of less that two years you’re in the wrong product!
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Long only exposure
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The detailed version
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The simple version
And so most stockbrokers eventually become psychologists
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What happened last year? “U.S. stocks are now about 80%
Andrew Smithers warns, July 18th 2014 “The public is walking into a trap again as they did in 2007.” - Billionaire Carl Icahn, June 14th 2015 … even the Royal Bank of Scotland says the markets are flashing stress alerts akin to the 2008 crisis. They told their clients to “Sell Everything” because “in a crowded hall the exit doors are small.” January 11th 2016
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WARNING LABEL: We’re talking about relative management and economies are complex adaptive systems and forecasting their behaviour is incredibly tricky.
First flag: Central Banks have little room to work with Second flag: The European debt situation Third flag: The unemployment picture is not as rosy as it seems Fourth flag: The China bubble? Fifth flag: Commodity price surge… collapse? Sixth flag: Economic data shows patterns similar to right before the last recession Sticking your head in the sand is not always the best solution.
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What’s happening in the US, Europe and China The world has changed significantly.
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Central Banks are running out of ammunition Rate hiking cycle does not look as aggressive as people expected… The world has changed significantly.
with Basil III.
the Fed.
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Emerging markets versus developed markets Strong rebound in Q1.
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US interest Monetary policy divergence: We see lopsided economic growth, US leading GDP growth in the developed world whilst other economies are muted with dissimilar trajectories. US rates rising and strengthening the dollar: increasing demand for the dollar due to potential rate hikes in 2016 by the Fed – short-term weakness on Fed outlook can change quickly. FOCUS ON COMPANYS WITH INTERNAL REVENUE GENERATION Weak commodity prices: Fundamentals haven’t changed. Strain on commodity exporters and benefit to importers FOCUS ON CONSUMER STOCKS European and Asian central banks continue to be accommodative but revenue not growing AVOID HIGH PE GROWTH STOCKS AS UNCERTAINTY INCREASES Worries over Chinese stock market volatility have stabilized but growth persist. EMBRACE TECHNOLOGY & DEMOGRAPHIC DIVIDEND Emerging markets vulnerable to developed world currencies and asset flows PORTFOLIO APPROACH – BECOME A “GLOBAL NEUTRAL INVESTOR”
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Weak currency importing higher inflation NEED PRICING POWER and MOAT/FEW SUBSTITUTES AVAILABLE Interest rate hiking cycle BULLISH BANKS/FINANCIALS – BEARISH RETAIL Drought putting pressure on food prices TRANSITORY Consumer discretionary income squeeze NOT CONSUMER FOCUS INSTEAD DEFENSIVE/B2B with CASH Unemployment
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Fundamental, technical and quantative
View investments from different angles
“You don’t have to be a genius to know what a good company is” – David Shapiro
competitive advantage that will assist it in growing and maintaining higher margins? The moat?
your own expectations and know what others are expecting.
trust them with your money?
the shareholder? Buybacks and dividends?
Checklist 3 year total return +20% Increasing revenue over 5 years Increasing earnings over 5 years Increasing dividends Increasing gross margin Increasing ROE Outstanding shares stable or decreasing PE, P/B, P/S, PEG, FPE in range Current ratio, LT-Debt/Equity Management quality
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22 Adapt IT Holdings Limited is engaged in providing information technology (IT) services and solutions. The company provides solutions and services to the manufacturing, education, financial services and energy sectors. The company also provides packaged and custom application development services on the Oracle, Microsoft, SAP and IBM platforms. The company operates through four divisions located in Johannesburg, Pretoria, Durban and Cape Town. The company
Financial Services, Energy and Other. Its subsidiaries include Adapt IT Pretoria, Adapt IT Durban, ApplyIT (Pty) Ltd and Adapt IT
Primary School in Amaoti. Fundamental Metric’s PE: 24.34 (EOH 28.58) 12M Total Return: 36.18% Dividend Yield: 0.89% Mcap: R1.72 bn EOH R19.26 bn) CEO: Sibusiso Shabalala
Stock Pick #1: AdaptIT
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Stock Pick #2: Steinhoff International
Steinhoff International Holdings NV is a Germany-based company that is active in the retail of household goods, apparel, as well as in the automotive industry. The household goods business area includes the retail of furniture, building materials and consumer electronics through the Company's subsidiaries Lipo Einrichtungsmaerkte, Poco and Conforama. In the apparel business area the Company operates, among others, through Pepco and is engaged in retailing of women's, men's and children's wear, shoes, and accessories. The Automotive business area includes car rental activities through its subsidiary Hertz, as well as logistics services, warehousing and distribution, agricultural services, supply chain consulting, mining services and passenger transport through its subsidiary
Fundamental Metric’s PE: 14.45 12M Total Return: 12.28% Dividend Yield: 1.87% Mcap: €22.07 bn (R363.75 bn) CEO: Markus Jooste
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Investment case
Asset Managers e.g. Today Citi Group resumes coverage with a Buy rating on Steinhoff with a price target of €5.5
Key Risks
28 Starbucks Corporation is the roaster, marketer and retailer of specialty coffee. The Company purchases and roasts coffees that it sells, along with coffee, tea and other beverages, and a range of fresh food items, through Company-operated stores. It also sells a range of coffee and tea products and licenses its trademarks through other channels, such as licensed stores, grocery and national foodservice accounts. It operates through four segment: Americas, which includes the United States, Canada, and Latin America; Europe, Middle East, and Africa (EMEA); China/Asia Pacific (CAP), and Channel Development. In addition to its Starbucks Coffee brand, it also sells goods and services under the brands, including Teavana, Tazo, Seattle's Best Coffee, Evolution Fresh, La Boulange and Ethos. Its Americas, EMEA, and CAP segments include both Company-operated and licensed stores. The Americas and EMEA segments include certain foodservice accounts, primarily in Canada and the United Kingdom. Fundamental Metric’s PE: 36.91 12M Total Return: 25.71% Dividend Yield: 1.33% Mcap: $86.95 Bn CEO: Howard Schultz Exchange Nasdaq
Stock Pick #3: Starbucks
Investment Case
the US.
margin of 20%.
the customers wallet.
volumes. 29 Key Risks
correctly.
trading at all time average price earnings.
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