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Quarterly Commentary

2009 Q4 Comments from the chief operating officer

When I returned to South Africa from London with my young family in the early part of the last decade, we thought we were trading economic security for a warmer climate and the chance to raise our children around the corner from their grandparents. Looking back, there was no such trade-off. London was one of the riskier places to have invested your savings or to have spent time building a professional career in the last decade. And South Africa one of the safer places, at least economically. In common with many other emerging markets, South Africa has enjoyed a steady pace of growth and strong capital markets driven by a re-rating by global investors. To quote my colleague Ian Liddle, South Africa has been ‘the place to be’ in the last decade from an investment perspective.

Our firm is full of committed South Africans. We have ended the decade, however, on what we consider to be overly optimistic market valuations, given where we are in the economic cycle. The price/earnings (P/E) multiple on both local and global stock markets demands a recovery in earnings that seems to us to be unrealistic, especially since current JSE earnings remain above their long-term trend line. And our fiscus is in for a bruising as we borrow from future generations to fund massive (and overdue) infrastructure investment.

The 90s was a tough decade for our country and some of our success in the last 10 years can be attributed to reaping the benefits of earlier sacrifices. But some of the good times will also have to be paid for in the next decade. The paradox of markets is that valuations at the end of 1999 should have been optimistic and, we think, those at the end of 2009 pessimistic, not the other way round.

The financial crisis

Long-standing clients will know that this firm encourages diversity of opinion. In this issue, Sandy McGregor can see positive signs in the aftermath of the 2008 crisis, while Duncan Artus is a convincing bear.

Sandy points out that, while it is popular to claim the markets have failed investors over the past two years, the errors of individual bankers, economists and politicians do not constitute market failure. He explains how, over the last two years, market forces have imposed necessary adjustments which the political system would never have done. This is not a failure but a ‘triumph’ of the markets, and the world economy is now building foundations for the next up cycle.

However, there is some doubt about whether the global programmes of fiscal and monetary stimulus will improve the real economy sustainably, and it is unclear what effect the stimuli will have on equity valuations. Duncan Artus questions whether investors are being compensated sufficiently for the uncertainty of the success of the stimuli and the potential side-effects on capital markets.

As Jonathan Brodie and Trevor Black of our global partner Orbis discussed in the Q2 2009 Quarterly Commentary, investor success in the market depends on both investor and manager behaviour. This quarter the pair turn the spotlight on money manager behaviour over time. This is a well-timed piece as Orbis’ flagship Global Equity Fund (US$) recently celebrated its 20th birthday, having achieved average growth of 13% over the last 20 years, versus its benchmark’s 6.2%.

Look to the long term

The principles surrounding the growth of financial or human capital have a lot in common, and both benefit from a longterm strategy, as Anthony Farr discusses in the Allan Gray Orbis Foundation update.

Finally, thank you sincerely for your support over the last 10 years. You have our commitment to making the next decade a prosperous one, and we wish you well for the new year.

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