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Cash is king, for now

Published

2010

Wed

03

Mar

 

Cash was certainly the place to be invested over the past three years. The domestic money market unit trust sector was the only local unit trust sector to give a double-digit average annual return for the three years to 31 December 2009 with a 10.1% p.a. return as shown in the following table.

3 Year Returns to 31 Dec 2009 — SA Asset Classes
Average Annual Percentage — Unit Trust Sector Averages
3-year average return
SA Inflation
 
8.4%
SA Cash
Domestic--Fixed Interest--Money Market
10.1%
SA Bonds
Domestic--Fixed Interest--Bond
9.6%
SA listed property
Domestic--Real Estate--General
8.8%
SA Equity
Domestic--Equity--Financial
2.6%
Domestic--Equity--Industrial
6.5%
Domestic--Equity--Resources
7.5%
*As Calculated by Profile Data

At Marriott Asset Management, our investment decisions and broad asset allocation during 2009 proved, on the whole, to have been appropriate and in the best interests of the funds and the investors. Over 65% of our assets have been held in South African cash deposits for the past three years.

Although there were times of some anxiety as cash is not an appropriate long term investment, we are pleased to note that cash has produced the best average return of all asset classes in South Africa over the past three years. In addition, we will maintain this cash position until such time as bond yields and property yields reflect our expectation of higher longer term inflation.

Our investment style, “Income Focused Investing”, is the driver behind our investment decisions, both locally and internationally. The search for reliable and ideally growing income streams, purchased at appropriate prices is the foundation of our business. This approach or style, we find, sits comfortably with investors and tends to reduce a complex world of terms and verbal smokescreens to a simple and intuitive modus operandi.

Marriott overall Asset Allocation 
- 31 Dec 2009
Marriott Overall Asset Allocation

2009 also saw South Africa’s first recession in 17 years. Our extraordinary economic success since 1994 may be attributed to the following:

  • The lifting of sanctions thus facilitating participation in world markets.
  • The steady reduction in borrowing rates from 20% levels in the late 1990’s to currently around 10% thus increasing consumption and consumption taxes.
  • China’s extraordinary economic growth and the resultant commodity boom. 

The result of this has been massive consumption expenditure, double digit corporate earnings growth, an unprecedented increase in personal debt, and government budget surpluses. Recession, unknown to a generation of South Africans, means a new experience for so many consumers, asset managers, even leaders of industry. This increases the risk of expected outcomes.

The past year cost South Africa 870 000 jobs. Tax revenues are down by 10% resulting in an expected fiscal deficit of R177bn. Government debt has increased to 28% of GDP and is expected to exceed to 40% of GDP by 2013. The Government in its budget review expects corporate earnings to decline in real terms by 4%. Household debt has not declined and consumer spending remains subdued with December retail sales 3% down on last year. The recovery from recession may take longer than is generally expected.

Much has changed in the macro-economic outlook

Inflation

We consider inflation the most important economic variable as it influences the income yield and income growth prospects of all asset classes. Further to this it has a profound impact on the lifestyle of income dependant investors as well as being the benchmark for real returns. Considering the problems with Eskom, wage increases at around 10%, high service inflation and expensive oil, we remain of the view that inflation over the next 5 years will average around 7% to 8%.

The Rand Exchange Rate

During 2009 net foreign inflows into the South African equity and bond markets were the highest ever recorded, exceeding R75bn. This is in contrast to 2008 where the net flow was negative R48bn. This is a likely explanation for the rand’s strength. There is little reason for foreign investors to continue this trend when considering the current low yields of South African assets and so we look to a weaker trend in the currency.

South African Listed Property

The only asset class that performed better than our expectation was South African listed property. We feel that current yields around 8% reflect an expensive asset class, particularly when relating this to 10-year bond yields of around 9% and poor expected property earnings growth of around 3%.

South African Long Bonds

Throughout the year we avoided long bonds in South Africa. This was appropriate as average returns were poor at -0.2% largely as a result of yields increasing from 7.6% to 9.3%. Our stance will remain until the yields have increased sufficiently to give acceptable real returns relative to our longer term view on inflation. We anticipate further bond weakness due to inflation concerns and the increasing supply of bonds.

South African Money Market

Although cash at 7% is unattractive, the potential return on riskier assets does not warrant a move out of cash. We maintain high cash holdings in the Marriott income funds as a very important source of annuity income for many investors. We are currently including a limited exposure to corporate debt issued by companies where we are comfortable to hold the same company’s equity. We are confident that the income fund returns will be comparable to money market fund returns in the year ahead. A shortage of capital in South Africa’s capital markets could well push longer term interest rates higher which will pave the way for a return to property and bonds.

South African Listed Equities

A re-rating across the board produced good returns during 2009, however the poor expected dividend growth from many companies does not justify the current 2.2% dividend yield. Throughout 2009 we actively promoted equity investing, both locally and internationally. We were strongly biased towards recession-resilient companies where earnings and dividends tend to be more reliable. We remain comfortable that the valuations of select equities are still attractive. The basic industries, like food and clothing, pharmaceutical and healthcare, telecommunication, tobacco and beverage, are still attractive as reliable income streams can still be purchased at dividend yields exceeding 4%.

 
Source: Shirley Williams Communications
 
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