DRW Investment Research Market Performances and Indicators April 2015
1-year 2-year 3-year 4-year 5-year 6-year 7-year 8-year 9-year 10-year 11-year 12-year 13-year Annualised return 1. FTSE JSE Indices Performances Annualised Return ALSI ALSI TRI SWIX SWIX TRI One-year 11.4% 14.8% 17.4% 21.0% Two-year 18.6% 22.2% 20.9% 24.7% Three-year 16.5% 20.1% 18.2% 22.0% Four-year 13.5% 17.0% 15.5% 19.4% Five-year 13.7% 17.2% 15.3% 19.0% Six-year 17.5% 21.0% 18.7% 22.4% Seven-year 8.5% 11.8% 10.3% 13.9% Eight-year 8.6% 11.8% 9.3% 12.8% Nine-year 11.1% 14.3% 11.8% 15.3% Ten-year 15.8% 19.2% 16.2% 19.9% Eleven-year 16.3% 19.6% 17.2% 20.8% Twelve-year 17.9% 21.4% 18.9% 22.7% Thirteen-years 13.1% 16.5% 14.5% 18.2% Annualised return TRI = Total return index, dividends re-invested 27.5% 25.0% 22.5% 20.0% 17.5% 15.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% FTSE/JSE Total Index Returns (dividends re-invested) End of April 2015 ALSI TRI Holding period SWIX TRI 2
Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Log scale 10,000.00 FTSE/JSE All Share Index Total return Index (dividends re-invested) June 1995 - April 2015 1,000.00 100.00 3
30 April 2015 Performance J200T J210T J212T J211T J253T over Top40 Resi 20 Fini Indi Property 1 Month 4.9% 7.3% 4.7% 4.2% 0.0% 3 Months 7.6% 6.7% 9.9% 6.7% 5.6% 6 Months 9.3% -4.5% 16.4% 12.3% 15.4% 12 Months 13.3% -20.2% 33.4% 26.7% 38.3% 24 Months * 22.5% 4.3% 29.8% 29.6% 15.4% 36 Months * 20.2% -0.8% 28.3% 31.3% 24.2% 48 Months * 16.5% -3.1% 25.8% 28.4% 22.8% 60 Months * 16.8% 0.2% 22.1% 28.2% 21.8% 84 Months * 10.8% -3.2% 18.0% 21.8% 21.5% 120 Months * 18.8% 11.4% 18.0% 25.1% 22.1% Since January 2015 11.1% 7.6% 16.0% 10.6% 13.7% * Annualised Returns Top40 = Resi20 = Top 40 shares by market capitalisation Top 20 resources sector shares by market capitalisation Fini = Top 15 financial sector shares by market capitalisation Indi = Top 25 industrial sector shares by market capitalisation Property = SA listed property 4
Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Return Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Cumulative Return 1000.0 900.0 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 FTSE/JSE Total Return Indices Cumulative Return April 2005 - April 2015 Date Top40 Resi 20 Fini Indi Property 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% FTSE/JSE Total Return Indices 12-month Rolling Returns March 2003 - April 2015 Date Resi 20 Fini Indi Property 5
Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Correlation Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Correlation Correlations of sector performances with market index performances Based on 12-month rolling returns April 2015 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% -100.0% RESI Cor FINI Cor INDI Cor Cross-correlations of sectors Based on 12-month rolling returns April 2015 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% -100.0% FINI/RESI INDI/RESI FINI/INDI 6
Jan-60 Jan-63 Jan-66 Jan-69 Jan-72 Jan-75 Jan-78 Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 PE Multiple 2. Market Indicators Price / Earnings Ratio The most common valuation ratio; current share price relative to the historical earnings per share (EPS) An alternative and perhaps more useful indicator; share price relative to normalised earnings per share whereby historical earnings, adjusted for inflation, are smoothed out over rolling 7-year and 10-year periods. The P/E Rating of the FTSE/JSE All Share Index January 1960 - April 2015 27.5 25.0 22.5 20.0 17.5 15.0 12.5 10.0 7.5 5.0 Year 7
Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 PE Multiple The P/E Rating of the FTSE/JSE All Share Index January 1995 - April 2015 22.5 20.0 17.5 15.0 12.5 10.0 7.5 5.0 Year 8
Jan-67 Jan-70 Jan-73 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Trailing P/E multiple 30.0 Shiller's P/E [CAPE] (Real ALSI Index divided by 7-year normalised real earnings) April 2015 27.5 25.0 22.5 20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 - Period Source: JSE, SARB, DRW Investment Research 9
Jan-70 Jan-73 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Trailing P/E multiple 32.5 30.0 27.5 25.0 22.5 20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 Shiller's P/E [CAPE] (Real ALSI Index divided by 10-year normalised real earnings) April 2015 Period 10
Jan-60 Jan-64 Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Real Stock Market Price Index Real Stock Market Dividends Index Dividend Growth Stock prices follow dividend growth; sometimes price lags dividend growth typically a value proposition but when prices are running far ahead of dividend growth one should take a more cautious stance. 60,000.0 50,000.0 40,000.0 30,000.0 20,000.0 10,000.0 - Stock Price and Dividend growth End of April 2015 1,800.00 1,600.00 1,400.00 1,200.00 1,000.00 800.00 600.00 400.00 200.00 - Real Price Real Dividends Source: JSE, SARB, DRW Investment Research 11
Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 ALSI Index Dividend Index 60,000.00 50,000.00 40,000.00 Dividend Growth & ALSI Index Jan 1990 - April 2015 1,800.00 1,600.00 1,400.00 1,200.00 30,000.00 20,000.00 10,000.00-1,000.00 800.00 600.00 400.00 200.00 - Dividends Period ALSI Index 12
Jan-60 Jan-64 Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Real Stock Market Price Index Real Stock Market Earnings Index Earnings Growth A primary component of equity returns in the long run that is linked to the overall growth in the economy, which in turn is affected by inflation rate (and interest rate) trends. 60,000.0 50,000.0 40,000.0 30,000.0 20,000.0 10,000.0 Stock Price and Earnings growth End of April 2015 3,500 3,000 2,500 2,000 1,500 1,000 500 - - Real Price Real Earnings Source: JSE, SARB, DRW Investment Research 13
Jan-61 Jan-64 Jan-67 Jan-70 Jan-73 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-61 Jan-64 Jan-67 Jan-70 Jan-73 Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Nominal Earnings Growth 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% Annual Earnings Growth JSE ALSI Jan 1960 - April 2015 Date Nom Earnings Growth LT Average Real Earnings Growth JSE ALSI Jan 1960 - April 2015 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Real Earnings Growth LT Average Source: JSE, SARB, DRW Investment Research 14
Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Ratio 10y Bond Yield to Dividend Yield Equity Income Yield versus Long-term Bond Yield The dividend and earnings yield of the stock market are compared with the long-term bond yield. The spread (difference) between the respective yields is used to gauge the relative expensiveness of the equity market versus the capital market. 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Equities and Bond Yields Relative Valuation January 1995 - April 2015 Equities over-valued 1.0 0.0 Equities under-valued Date 15
Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Yield Spread (Bonds - Earnings Yield) 12.0% 10.0% Yield Spread Equities vs Bonds Relative Valuation January 1995 - April 2015 Equities over-valued 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Equities under-valued Date 16
Volatility (based on a rolling 12-month period) Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 12-month stock market rolling return Stock Market Volatility The short-term volatility trend is calculated by the annualised standard deviation of the daily returns of the stock market index. The long-term volatility trend is calculated by the annualised standard deviation of the monthly returns of the stock market index. 45.0% Stock Market Returns & Volatility Measured on a daily basis June 1995 - April 2015 100.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% Date Annual market return (rhs) Volatility (lhs) 17
Percentage of trading days Percentage of trading days 60.0% 55.0% 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Daily movement in JSE ALSI Index prices Abolute changes (+/-) Trading days June 1995 to April 2015 More than 3% More than 2% More than 1% Less than 1% 100% 90% Movement in daily prices FTSE JSE ALSI index Absolute changes (+/-) June 1995 - April 2015 80% 70% 60% 50% 40% 30% 20% 10% 0% More than 3% More than 2% More than 1% Less than 1% Past month Past year Long-term average 18
Jan-63 Jan-66 Jan-69 Jan-72 Jan-75 Jan-78 Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Ann Std Deviation (rolling 36-month volatility) 35.00% Stock Market Volatility Long-term Trend January 1960 - April 2015 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% Volatility Median Volatility Statistics: Statistics Bottom Half Volatility Top Half Volatility Percentage of months positive return 88% 63% Percentage of months negative return 12% 37% Average Annual Return 21.6% 10.2% Positive periods only, Average Annual Return 26.2% 26.1% Negative periods only, Average Annual Return -10.4% -16.8% 19
Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Moving Averages (MA) The relative price movement of 55-day and 233-day MAs; crossovers of these trendlines often indicate buy or sell opportunities. For example, if the 55-day trendline breaks out above the 233-day trendline it represents a bullish market period or if the 55-day trends below the 233-day it represents a bearish market period. 60,000 Moving Averages of FTSE/JSE All Share Index June 2005 - April 2015 50,000 40,000 30,000 20,000 10,000 - FJA-ALSH 55-day MA 233-day MA 20
Asset Class Returns Historical returns of the major asset classes YEAR EQUITIES PROPERTIES BONDS CASH 1989 56% 49% 22% 14% 1990-5% 5% 16% 15% 1991 31% 21% 14% 14% 1992-2% 1% 28% 12% 1993 55% 16% 32% 11% 1994 23% 17% -9% 10% 1995 9% 10% 30% 11% 1996 9% -9% 7% 12% 1997-5% 13% 29% 17% 1998-10% -4% 5% 17% 1999 61% 44% 30% 16% 2000 0% 26% 20% 11% 2001 29% 6% 18% 11% 2002-8% 18% 16% 12% 2003 16% 37% 18% 12% 2004 25% 41% 14% 8% 2005 47% 50% 11% 8% 2006 41% 28% 5% 8% 2007 19% 27% 4% 9% 2008-23% -5% 17% 12% 2009 32% 14% -1% 9% 2010 19% 30% 15% 7% 2011 3% 9% 9% 6% 2012 26% 36% 16% 5% 2013 21% 8% 1% 5% 2014 11% 27% 10% 6% Average Equities Properties Bonds Cash Ann Return Ann Volatility 16.5% 18.7% 14.1% 10.6% 22.0% 16.6% 10.4% 3.5% Source: Investec Asset Management, DRW Investment Research 21
YEAR BEST 2ND 3RD WORST 1989 EQUITIES PROPERTIES BONDS CASH 1990 BONDS CASH PROPERTIES EQUITIES 1991 EQUITIES PROPERTIES BONDS CASH 1992 BONDS CASH PROPERTIES EQUITIES 1993 EQUITIES BONDS PROPERTIES CASH 1994 EQUITIES PROPERTIES CASH BONDS 1995 BONDS CASH PROPERTIES EQUITIES 1996 CASH EQUITIES BONDS PROPERTIES 1997 BONDS CASH PROPERTIES EQUITIES 1998 CASH BONDS PROPERTIES EQUITIES 1999 EQUITIES PROPERTIES BONDS CASH 2000 PROPERTIES BONDS CASH EQUITIES 2001 EQUITIES BONDS CASH PROPERTIES 2002 PROPERTIES BONDS CASH EQUITIES 2003 PROPERTIES BONDS EQUITIES CASH 2004 PROPERTIES EQUITIES BONDS CASH 2005 PROPERTIES EQUITIES BONDS CASH 2006 EQUITIES PROPERTIES CASH BONDS 2007 PROPERTIES EQUITIES CASH BONDS 2008 BONDS CASH PROPERTIES EQUITIES 2009 EQUITIES PROPERTIES CASH BONDS 2010 PROPERTIES EQUITIES BONDS CASH 2011 BONDS PROPERTIES CASH EQUITIES 2012 PROPERTIES EQUITIES BONDS CASH 2013 EQUITIES PROPERTIES CASH BONDS 2014 PROPERTIES EQUITIES BONDS CASH Source: Investec Asset Management, DRW Investment Research 22
Heat Map: Real returns from equities over time Based on real (after-inflation) annual equity returns from 1960 to 2014 Start of investment = vertical axis Investment period = horizontal axis Source: DRW Investment Research Interpretation of graph: Negative real returns = red areas 0-5% real returns = light-brown areas 5-10% real returns = light-green areas >10% real returns = dark-green areas Returns from equity investing are certainly volatile over short-term periods and may easily yield negative outcomes, as shown by the red-coloured areas on the chart. Yet, long-term equity investors historically experienced most of the time more than 5% real return per annum, as depicted by the light and dark green shaded areas on the chart. 23
Yield Yield Curve (Bond Exchange of South Africa) The yield curve derived from the yields of government bonds with different maturities traded on the Bond Exchange of South Africa. 9.20 8.80 Yield Curve Bond Exchange of South Africa April 2015 8.40 8.00 7.60 7.20 6.80 6.40 6.00 5.60 5.20 4.80 4.40 4.00 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Term Structure (years to duration) 2015-04-30 1 Month ago 3 mnths ago 6 mnths ago One year ago 24
Yield (per annum) 13.20 12.80 12.40 12.00 11.60 11.20 10.80 10.40 10.00 9.60 9.20 8.80 8.40 8.00 7.60 7.20 6.80 6.40 6.00 5.60 5.20 4.80 4.40 4.00 Changes in interest rates of different term maturities Bond Exchange of South Africa April 2015 Date Call One-year 5-year 10-year 25
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Y-o-Y change Inflation, Money Supply and Credit CPI Jan 1998 - March 2015 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Period Source: Statistics SA, DRW Investment Research Major Categories of Inflation Basket Year-on-year changes March 2015-5.0% 5.8% 5.7% Food Housing Transport Source: Statistics SA, DRW Investment Research 26
Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Y-o-Y change Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Y-o-Y change M3 End of March 2015 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Source: SARB, DRW Investment Research 30.0% Private Sector Credit Extension End of March 2015 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% Source: SARB, DRW Investment Research 27
Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Foreign Portfolio Flows Foreign portfolio flows (the purchasing and selling of shares and bonds by non-residents) directly influence the direction of the rand exchange rate and overall investor sentiment on the local bourse. 50,000 40,000 30,000 20,000 10,000 - -10,000-20,000-30,000-40,000-50,000-60,000 Net Purchasing of Shares and Bonds by Non- Residents End of March 2015 Monthly net purchases & six-month trendline Source: SARB, DRW Investment Research 28
R millions 120,000 100,000 80,000 60,000 40,000 20,000 - -20,000-40,000-60,000-80,000 Net purchasing of shares and bonds by non-residents March 2015 The year-to-date and previous years 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Shares Bonds Source: SARB, DRW Investment Research 29
Index Return 3. Return expectations Equity returns over the short term are predominantly driven by market ratings (P/E ratio) and earnings growth. The most likely market returns over the next twelve months are depicted below based on possible combinations of earnings growth and market ratings. 30% 20% 10% 0% -10% -20% -30% -40% Possible ALSI Index Return One Year Forward as at end of April 2015 P/E = 18 P/E = 16 P/E = 14 P/E = 12-50% -10% 0% 10% 20% 30% Current index value = 54,440 Current P/E = 19.2 Earnings Growth 30
ALSI Index Value 70,000 65,000 60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 Possible ALSI Index Values One Year Forward as at end of April 2015 P/E = 18 P/E = 16 P/E = 14 P/E = 12 20,000-10% 0% 10% 20% 30% Current index value = 54,440 Current P/E = 19.2 Earnings Growth 31
Disclaimer: Please note that all the material, opinions and views herein do not constitute investment advice, but are published primarily for information purposes. The author accepts no responsibility for investors using the information as investment advice. Please consult an authorised investment advisor. Unless otherwise stated, the author is the sole proprietor of this publication and its content. No quotations from or references to this publication are allowed without prior approval. 32