CAPITAL REPORT Q1 – 2017

18/04/2017
Posted in Blog
18/04/2017 Mduduzi Luthuli

The Art of Investing

We’ve certainly had a busy 1st quarter to 2017. What began as a year of hope, which saw the Rand strengthen significantly against the dollar to test exchange levels of R12.50/ $ and somewhat restore investor confidence in the ability of markets to provide above inflation growth, has quickly turned into turmoil and negative sentiment. The recent political events of the South African markets have made investors think, and feel, now is a time to dis-invest and turn to cash. How do you take the emotion out of such decisions and make an informed investment decision? Well, that’s where we come in. Over the upcoming months, we will be sharing with our clients the necessary tools to master the art of investing and it begins with our 2017 Q1 report. Luthuli Capital is proud to share our world-class tutorial, developed by our investment team, with you. We’ve done the homework, we’ve spoken to the industry players and leaders and we’ve developed the go to programme for you, our valued client.

Do you know that you should invest, but don’t know where to start? The world of finance can be extremely intimidating, but we firmly believe that the equity market and greater financial world won’t seem so complicated once you learn some of the lingo and major concepts. We want to emphasize, however, that investing isn’t a get-rich-quick scheme. It’s a journey, a very long road with multiple obstacles and unforeseen events to plan for and conquer. Like any long journey, all you need is the right map and plan. After all, no one is in a better position than you are to know what is best for you and your money. Regardless of your personality type, lifestyle or interests, this tutorial will help you to understand what investing is, what it means and how time earns money through compounding. This tutorial will also teach you about the building blocks of the investing world and the markets, give you some insight into techniques and strategies and help you think about which investing strategies suit you best. Let’s start at the beginning.

What is investing and the Compounding Effect

The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit. It’s that simple: investing means putting your money to work for you. You can’t create a duplicate of yourself to increase your working time, so instead, you need to send an extension of yourself – your money – to work. That way, while you are putting in hours for your employer, or even mowing your lawn, sleeping, reading the paper or socializing with friends, you can also be earning money elsewhere. Quite simply, making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime or look for a higher-paying job.

It’s pretty easy to understand that people invest because they want to increase their personal freedom, sense of security and ability to afford the things they want in life. The days when everyone worked the same job for 40 years and then retired to a nice fat pension are gone. For average people, investing is not so much a helpful tool as the only way they can retire and maintain their present lifestyle. Almost without exception, the responsibility of planning for retirement has shifted away from the government and employer towards the individual.

Albert Einstein called compound interest “the greatest mathematical discovery of all time”. Just like investing maximizes your earning potential, compounding maximizes the earning potential of your investments – but remember, because time and reinvesting make compounding work, you must keep your hands off the principal and earned interest. Compounding can be simply defined as the potential of other assets to provide a higher rate of return from an increase in value. A long-term investor’s main aim should be to seek the possibility of longer-term growth. Growth of capital is most closely associated with the purchase of common stock, particularly growth securities, which offer low yields but considerable opportunity for increase in value.

In our next article, we’ll look at basic investment objectives and principles. Keep reading. Now let’s look at the local market in greater detail over the last quarter.

Local & Emerging Markets

We approach the local equity market with a disciplined bottom-up research process, combined with rational decision making, in order to add value to our clients over time.  Our disciplined bottom-up research process when buying a listed entities equity helps us to: –

  1. Identify exceptional management teams,

  2. If the entity has strong operations and is in a competitive position in its industry,

  3. Has strong cash flows

Given this assessment, we look for opportunities to buy substantial lines of shares in companies, on behalf of our clients, that offer double-digit growth in headline earnings per share over a 5-year period or longer. One such strategy has been our focus on rand-hedged shares. The recent political events in South Africa had a tangible impact on the market climate. We have seen a sharp decline in the rand in recent weeks and financial shares (especially banks) have been hit hard. Rand hedges have, on the other hand, enjoyed strong price appreciation. There is a case to be made that the rand remains undervalued on many measures and could strengthen materially in the event of more stable and predictable management of the economy.  Nonetheless, the weak rand has underpinned strong improvements in the trade balance and the tourism sector has been booming. When sentiment is really poor, we tend to get opportunities to buy quality businesses at significant discounts to their intrinsic value. This goes a long way to achieving our investment objective but requires a long-term view. Our view on local equity remains cautiously positioned with majority of our equity allocation weight remaining offshore.

We remain optimistic about our local market and the emerging markets space. We feel many of the factors that originally attracted investors to emerging markets such as ours may be coming back into play, including stronger earnings growth, higher economic growth and robust consumer trends. Even in regions that are still going through adjustment and re-balancing, we are seeing improved visibility and increasing signs of robust underlying economic conditions such as low debt, stabilizing commodity markets, reduced currency volatility and improving consumer confidence. We believe the recent improvement in emerging-market fundamentals should be helpful for continued strength in emerging-market equities, and we also believe valuations in these markets appear attractive relative to developed markets. Nonetheless, we are mindful of potential volatility and remain watchful for risks, some of which include the potential of further increases in US interest rates, uncertainty about the new US administration’s policies, and potential currency moves. We believe the fundamentals of emerging-market equities remain attractive.

Subscribe NowA monthly exploration of our relationship with money

Any fool can know. The point is to understand - Albert Einstein