Seeing the stock for the flow - Kagiso Asset Management Chief Investment Officer Gavin Wood

As financial analysts, much of our energy is spent assessing current information with the objective of valuing assets. It is very important for us to think about the sustainability of recent results we observe from the economy.

For this, it is vital to maintain a long-term perspective and to identify where changes in ‘stock’ items are impacting temporarily on ‘flow’ items. As a precursor to comments on some specific market features that look unsustainable, I re-look at the basic economic concepts of ‘stock’ and ‘flow’.

‘Stock’ and ‘flow’ economic variables

‘Flow’ economic variables can be identified by the fact that a time dimension is required to give them meaning. That is: the variable has a value that is so much per unit of time. Some examples (per annum/per month/per week) are: your earnings from work, the profit achieved by a company and the budget deficit of a country. ‘Stock’ variables, on the other hand, have no time dimension - they are just so much (as measured on a given day). Examples are: the amount of petrol in your car, the amount of grain in a silo and the foreign exchange reserves of the central bank.

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by Aslam Dalvi, Equity Analyst

Mentioning Brazil conjures up different ideas and emotions for people. For some, perhaps the first thing that jumps to mind is the world renowned Rio Carnival. For others, it may be the world famous “Cristo Redentor”, which overlooks the beautiful city of Rio.

Typical of an analyst, what defines Brazil for me is the story of the country’s political transition, its recent economic success and the important role of agriculture in its economy.

Brazil enjoys significant agricultural advantages relative to South Africa. We believe this has allowed downstream industries such as the Brazilian poultry producers to emerge among the lowest cost producers in the world. Given these cost and competitive advantages, we view poultry imports from Brazil as a key threat to the local poultry industry.

Brazil

Brazil, South Africa’s largest trading partner in Latin America, is known for its remarkable economic turn-around over the last ten years as well as its socio-economic policy model. It is one of the fastest growing emerging economies in the world with large and expanding agricultural, mining, manufacturing and services sectors.

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by Abdul Davids, Kagiso Asset Management Head of Research

Barring the financial meltdown in 2008, the last decade has been a very fruitful period for industrial companies - with record earnings levels achieved immediately before the 2008 crisis. A confluence of three key macro variables, all moving in stimulatory unison, has contributed to the exponential growth in earnings.

However, South African industrial companies are facing unprecedented challenges in their attempts to deliver continued earnings growth to their increasingly demanding shareholders: an absence of key macro stimulus, increased competition and slower economic growth is inhibiting revenue growth, whilst cost pressures from rising utility price increases threaten to exacerbate the inevitable deterioration in profit margins.

The importance of earnings

Most valuation methodologies are based on an application of a discount factor or price earnings (PE) multiple to an assumed level of earnings or cash flow. As such, a thorough understanding and appreciation of earnings levels and the related drivers of these earnings is essential before any attempt at a valuation can be made. In addition, the industrial sector comprises around 45% of the broader market and is therefore a larger component of our market than the financial and resources sectors.

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By Gavin Wood, Kagiso Asset Management Chief Investment Officer

We end the first decade of the 21st century with markets booming, having recovered strongly from the great meltdown that (perhaps coincidentally) followed the Beijing Olympics in 2008.

Our sense is that the recent economic tumult has left us with an imbalanced world with below par growth prospects. Markets, however, seem to be addicted to powerful doses of stimulants of the fiscal and monetary kind and move ever higher after each “fix”.

Our clients’ portfolios remain defensively positioned as we worry that the symptoms from stimulus withdrawal may be severe.

Looking back

As can be seen from the table below, the past decade has seen tremendous volatility and has ended with some new extreme highs, yet some prices hardly moved (US equities and the rand).

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By Jihad Jhaveri, Kagiso Asset Management Equity Analyst

The outlook for Lonmin Platinum, the world’s third largest platinum producer with a sustainable target of over  750 000 ounces of platinum in the medium-term, is positive as it is supported by all key performance indicators (kpi’s) - tonnage, grades and recoveries - which have steadily started to improve from their lows reached in 2009.

Tonnage refers to rock mined out of the ground while grades refer to how much platinum is inside the rock mined out. Recoveries refer to how much platinum is extracted after a mine’s downstream chemical mining processes have been completed.

Efficiency cocktail

With tonnage set to increase for Lonmin, along with grades and recoveries, platinum ounces will rise.

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