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H O W T O M A K E I T, H O W T O K E E P I T, H O W T O S P E N D I T

THE BEST OF THE INTERNATIONAL FINANCIAL MEDIA

2 OCTOBER 2009 SOUTH AFRICA EDITION 114

How high can the market go?

Our experts make their forecasts, page 16

“An essential and enjoyable part of my weekend reading” Juliette Shields, investment manager, Charles Stanley

Four of the best value stocks in Asia

The weak pound could finish Britain

The case for Buy-To-Let

SECTOR

GLOBAL VIEW

PROPERTY

7

14

15

from the editor

The unemployment hurdle Did President Jacob Zuma really promise 500 000 new employment opportunities by June 2010? The short answer is “yes he did!” But you don’t have to be a rocket scientist to know that the ‘promise’ is undeliverable.

2 OCTOBER 2009 ISSUE 114 ISSN 1995-4476

South Africa Gareth Stokes – Editor Julie Brownlee – Deputy Editor Annabel Koffman – Publisher Editorial & Production Gary Booysen, Karin Iten, Jeremy Miles Subscriptions and marketing Tel: +27 11 699 6530 Advertising sales Shaun Besarab – Tel: +27 82 725 8355 Paul Vidas – Tel: +27 82 926 3429 MoneyWeek is published in South Africa by Fleet Street Publications (Pty) Ltd, Unit 2, Block B, Northlands Business Park, Newmarket Street, Northriding.

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Information in MoneyWeek is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decisions. Fleet Street Publications (Pty) Ltd and its staff do not accept liability for any loss suffered by readers as a result of any such decisions. While Fleet Street Publications (Pty) Ltd makes every effort to ensure the accuracy of the contents of its publications, no warranty is made as to such accuracy, and no responsiblity will be borne by the publisher for the consequences of any actions based on information so published.

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2 October 2009

In August this year the Statistics SA Labour Force Survey poured the first icy stream of water over the President’s ambitions when it revealed the South African economy had shed 267 000 jobs in Q2 2009! To make matters worse, more than 23.6% of the country’s ‘official’ work-seeking citizens are out of a job. The ruling party will offer the usual ‘misunderstanding’ defence when the opposition takes it to task. But to the thousands of unemployed in the mining and manufacturing sectors these excuses and denials will be purely academic.

The real concern is the link between unemployment and recession. This fact is best illustrated in the United States where millions of jobs have disappeared since the economy hit the skids in December 2007. The latest numbers – for August 2009 – confirm that 14 of the country’s 52 States have jobless rates in excess of 10%. The world’s largest economy lost 216 000 jobs in August (and 276 000 in July) and the nationwide jobless rate is expected to peak above 10% in 2010, from the current 9.7%. It’s no wonder US Federal Reserve chairman Ben Bernanke warns of a slow recovery!

Why are we so obsessed with the employment numbers? Each job cut ripples through the domestic economy impacting consumer spending, inflating insolvencies and negatively influencing the GDP growth number. You cannot emerge from recession without

stemming job losses! So while you might take heart from recent positive moves in global macroeconomic indicators you’re going to have to watch local employment statistics with more than the usual trepidation.

The high unemployment ratio is not our only concern. Many analysts hold that sustainable economic growth hinges as much on the quantity of employment opportunities as the quality of each job. Full employment might be a grand design; but it matters little if all of those opportunities are in the informal sector.

Economists also point to the discrepancy between recent wage settlements and worker productivity. Companies plying their trade in South Africa are paying more to produce their goods and services. These companies are surviving inflation plus wage increases by gradually reducing their head counts. With the cost of labour escalating on two fronts new investment capital dries up, following the path of least resistance to destinations with less stringent labour regulations!

Given this information you should be asking questions about the 2009 equity rally. The rapid rise in the market capitalisation of the country’s major listed companies has nothing to do with economic fundamentals and everything to do with investors lusting after quick capital return. Have we learnt nothing from history? Rapid price rises create socalled market valuation ‘bubbles’. And market ‘bubbles’ quickly develop into a full blown collapse. In this week’s feature article MoneyWeek SA gets to grips with the value debate. We ask a number of market commentators and economists if the JSE All Share index can keep climbing through the final quarter of 2009. Is the current equity market rally sustainable – or do you have to brace for a rapid market correction… You’ll find the answer on page 16!

Gareth Stokes Editor, South Africa

In this issue 3 News

world of microfinance?

6 Markets Eastern Europe isn’t out of the

20 Entrepreneurs How one man made a million from worms and any old rubbish.

The German election result – good news for the stockmarket?

woods yet.

7 Sector

Biotech is an investor’s graveyard – here’s how to avoid the pitfalls.

8 Who’s tipping what

21 Personal finance Be a successful bidder at art and antique auctions.

22 Books How the Fed’s musketeers fought the crisis.

How to make money from this Alt X investment company.

28 Last word Bill Bonner on why

13 Briefing Is a bubble developing in the

depressions can be good for you.

news SA economy

South Africa: “The most unequal society in the world” South Africa’s “overtaken Brazil as the country with the widest gap between rich and poor”. That’s according to a study by Haroon Bhorat – a leading economics professor at UCT. With over 13m people in the country relying on grants to get them through the month, it’s clear that if this trend continues the situation’s going to get much worse.

When the trend shows that there’s a big gap between the “haves” and the “have nots”, the social stability boat begins to rock. And with our Gini Coefficient Index – which measures the level of income inequality – fast approaching 0.679, our level is bordering on “unacceptably high” levels.

Although shocking, the findings are hardly surprising. Recently, we reported that the 27% salary increase Eskom awarded its CEO Jacob Maroga now brings his salary close to R5m a year. And he’s not the only one raking in the “big bucks”.

South African mining mogul and CEO of BHP-Billiton, Marius Kloppers takes

home a whopping $2m basic salary each year. Including retirement benefits and share based payments, Fin24 estimates Kloopers brings in around $10.4m a year.

That works out to about R210 136 a day.

But at least, in Kloppers case, his company delivers the goods.

On the other side of the coin, Bhorat’s document shows there are over 1m households in the country with an income of less than R1 080 a month. It’s no wonder we’ve seen more than eight strikes across various industries in the last six months.

Now think back to those history lessons.

Social instability is the catalyst in just about every revolution. With the gap between the ultra-rich and the poor this wide, one thing’s for sure: The strikes aren’t behind us – and if industries don’t submit to worker demands, they’re likely to get violent.

Companies

$23bn talks hit a dead-end Talks between cellular giant MTN (JSE:MTN) and Indian operator Bharti Airtel are over.

It wasn’t unexpected. The deadline for a decision had already been moved twice and analysts believed the issues standing in the way of the proposed merger were simply to large to overcome. Lindsey MacDonald, an analyst at Scott & Sullivan research consultancy told the

Business Day that the group wasn’t “completely surprised that the deal had been abandoned”.

So what really caused talks to collapse?

Temperatures had risen steadily over the past few weeks as both SA and India scrambled to protect their national interests, reports the Business Day. It all stemmed from our government’s demand for a dual stock exchange listing.

Government, which owns a 21% stake in the cellular giant, was unwilling to sacrifice MTN’s strong “South African character” and felt that, as it stood, the deal threatened the group’s identity.

Sounds reasonable right? It would have been six months ago when talks first started. But government didn’t raise the issue back then. The problem with its demands is the fact that Indian stock market doesn’t currently allow dual listings.

Yesterday’s announcement received mixed reactions from the market. Speculation was rife that the deal would bring in around R60bn into the country. This would have strengthened both our current account and the currency. As such, the rand weakened as much as 2% on the news. Meanwhile, Coronation Fund Managers (JSE:CML) – one of MTN’s 15 biggest shareholders with a stake of R900m – welcomed the decision to abandon the deal. After the announcement, portfolio manager Neville Chester told the Business Day that the group believed the “proposals had been unattractive to shareholders from ‘all perspectives’”.

The bottom line Cruise’s (right) wardrobe of clothes.

Her parents Tom Cruise and Katie Holmes have commissioned the world’s top designers to custommake outfits for the toddler.

R3.3m That’s the 89% increase to the salary package for Sipho Thomo, chief executive of the state run arms manufacturer Armscor which received a R479m bailout just one year ago.

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2 October 2009

£2m What cricketer Kevin Pietersen is set to earn per year as the face of Brylcreem.

£900,000 What Harperley World War II POW Camp in Crook, County Durham, is for sale for on eBay.

$50,000

The amount former celebrity chef, Keith Floyd, still owes his wife after their divorce settlement cheque bounced.

£12m The estimated value of a 507-carat diamond that has been found at the Cullinan mine in South Africa.

R5.5bn

How much rate payers in the Western Cape owe municipalities across the province.

$1.2bn

The estimated annual income from the hugely popular internet-based roleplay game, World of Warcraft.

R45,000 The cost of Milton Mbhele’s wedding tent, which was large enough to fit all four of his brides.

©GETTY IMAGES

£2m The value of three-year-old Suri

news Nor can Britain count on consumption – 65% of the economy – to power the recovery, noted Capital Economics. The savings rate is still below its long-run average of 8%, having hit double digits in previous recessions. With debt at record levels, access to credit constrained and job insecurity mounting, households will continue fixing their finances. Looming tax rises also bode ill for the high street.

Consumer spending, now 3.6% down on a year ago, is likely “to remain subdued for some time”, said Asda’s Andy Clarke.

How has this affected the share price?

We’ll have to wait and see. Trade was suspended in the hours leading up to the announcement.

Britain

Gordon can’t force march limping economy Gordon Brown made his crucial speech to the Labour Party conference standing in front of the words ‘Securing Britain’s economic recovery’. But the latest batch of data shows what an uphill struggle that will be. In August, house prices edged down for the first time since April, according to the Land Registry, while mortgage approvals also slid.

And the extension of the vehicle scrappage scheme merely shows the government isn’t confident that the economy is ready to stand on its own two feet.

In any case, the scheme is “merely bringing forward sales” that would

It seems the Bank of England’s quantitative easing (QE) policy is not gaining traction, according to its preferred measure of money supply growth. Households repaid unsecured debt for the second month running in August, while the household saving rate has hit a six-year high of 5.6% of income. Meanwhile, the government announced a £100m extension to the car scrappage scheme.

Private non-financial companies

16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4%

87 89 91 93 95 97 99 01 03 05 07 09 Source: Capital Economics

have been made later. In France, the end of a scrappage scheme in the mid-1990s led to a 20% plunge in car sales, said Prosser. The scheme does nothing to change the fact that the UK economy, as the FT put it, isn’t set for a strong rebound, but is merely “limping towards recovery”.

The way we live now

©PHOTOLIBRARY

It’s not just on the “esoteric” money supply figure that QE “might be judged to be failing”, said David Prosser in The Independent. The hope was that the cash would bolster bank lending, yet the latest figures for consumers and businesses reveal “there is some way to go”.

Figures in pence

Households Britain’s household saving as % of income

For most of us Christmas is a time of cheer and goodwill. But a row over Christmas lights has descended into a pie fight in one town. When Holmfirm parish councillor Kath Smith spent £6,000 on Christmas lights for the town in 2006, she presumed the local business association would reimburse her. But they refused as she couldn’t produce receipts and had not agreed a budget with them. Three years later the fight had become so bitter that Smith stormed into the bakery belonging to the head of the association and hurled pies at workers. After taking the association to court Smith has now been awarded £3,300 to cover half the cost of the lights, plus £210 in costs.

MONEYWEEK’S strategic portfolio: Where to put your money now* Sector Gold Benchmark Bullion Date first tipped Nov 01 Performance to date +18%/year This week, gold slipped below the $1,000-an-ounce mark as the dollar rebounded to a twoweek high against the euro.

The long-term outlook is positive. Gold’s role as the oldest currency and ultimate store of value is back in the spotlight now that central banks are debasing currencies by printing money; the yellow metal has hit a five-month high in sterling terms.

Sector Japan Benchmark Nikkei Date first tipped May 03 Performance to date 3%/year The market has slid to a twomonth low amid fears that the strong yen will hit corporate profits by lowering export earnings. Meanwhile, the economy has returned to growth but the recovery, as elsewhere, will be patchy. Yet stocks still look appealing for long-term investors, as it is the cheapest major market on a price/book value ratio of just over one.

Sector Corp bonds Benchmark FTSE £ Corp Date first tipped Feb 09 Performance to date – Investment grade corporate bonds are no longer the “once-in-a-lifetime” bargains they were a few months ago, as M&G’s Richard Woolnaugh points out. A rapid recovery in risk appetite has driven prices up (so yields have fallen).

But they are still attractive for investors seeking income the Invesco Perpetual Corporate Bond fund yields around 5.4%.

Sector Defensives Benchmark Inv Perp High Inc Date first tipped Jul 09 Performance to date – This stockmarket rally has been spearheaded by cyclical stocks and decrepit banks, while investors hoping for a rapid economic recovery have largely neglected solid defensive companies, such as pharmaceutical stocks and oil giants BP and Shell, so these are still good value.

GlaxoSmithKline and BP are on expected yields of 4.9% and 6.2% respectively.

Weekly change to FTSE 100 stocks. Prices as of xx/xx/07

*Research shows that asset allocation is much more important than share selection. MoneyWeek doesn’t pick shares. But we have some definite ideas about which sectors are likely to go up.

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2 October 2009

the markets

Noel Coward once remarked that it was “extraordinary how 300 potent cheap music is”, 280 says The Economist. “He 260 could have said the same 240 about cheap money.”

With interest rates close 220 to zero in many 200 countries, individuals 180 and institutions are “stampeding” out of O N D 2008 cash into financial markets, as Crispin Odey of Odey Asset Management puts it, driving the MSCI World Index up by almost 70% over the past six months. Deutsche Bank estimates that over the past few months excess liquidity – money available to buy financial assets – has been rising at its fastest rate for two decades, says Edward Hadas on Breakingviews.com.

Money created by quantitative easing (QE) is also finding its way into stocks and accelerating the rush away from cash and expensive government bonds.

“Markets are entering a bubble phase”, reckons Odey, which could last until the end of the year. “At some point” QE will end, but until it does “this bull market is government sponsored”.

Stocks certainly appear to be in a “sweet spot” for now, as The Economist says.

Economic and earnings forecasts are being revised upwards, yet central banks and governments are keeping their feet on the accelerator. The Fed said last week that rates would remain “exceptionally low for an extended period”.

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MSCI World Index

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The fact that governments and central banks are still having to prop up the economy suggests that a sustainable recovery is far away, says Stephan Ruhkamp on FAZ.net. But investors expect a quick rebound: global earnings are expected to jump by 29% next year, while America’s S&P 500 index is on a 2009 PE of 20, compared to a long-term average of 15. Last week’s slide in US durable goods orders and housing sales should be “a wake-up call” for anyone expecting a smooth transition to a strong economy, says Capital Economics.

Markets are extremely vulnerable to disappointment when they realise that the rebound won’t be V-shaped, but for now cheap money and the herd instinct of fund managers could well keep the party going. Jeremy Grantham of GMO thinks the S&P could hit 1,130 by the end of the year, implying a rise of almost 10% from here. But beware: as UBS points out, rallies driven largely by liquidity rather than fundamentals “have a habit of reversing violently without warning”.

What is the Baltic Dry Index saying?

The Baltic Dry Index (BDI) tracks the cost of shipping bulk commodities and is thus deemed a leading indicator for the world economy and markets. But while it led the global equities slide of September 2008 and the rebound of March 2009 by around three months, its 55% drop since June may not mean equities are due for a fall, says Breakingviews.com’s Constantine Courcoulas. The recent picture has been skewed by China’s stockpiling of commodities and conditions in the shipping industry.

©BLOOMBERG

Tide will turn on this rally

The key issue is stockpiling by China Part of the surge since March has been due to a Chinese spending binge on raw materials, which is now ending. A subindex tracking the cost of hiring capesizes, the largest of the bulk cargo ships that carry iron ore and coal, has plummeted, but three other sub-indices have climbed since June, says Capital Economics: the key issue is reduced stockpiling in China.

Rising shipping capacity is also playing a part: there will be a 14% increase in the capesize fleet this year. For now, says Courcoulas, the BDI “looks like a measure of the shipping industry’s grim dynamics” rather than a harbinger of another equities slide.

Statistic of the week

The big picture: the Dow’s lost decade

Foreign direct investment (FDI) – the purchase of assets such as companies and factories in other countries – is set to slide to $1.2trn this year, down 35% from 2007, says the UN Conference on Trade and Development. FDI is unlikely to regain 2007 levels until 2011.

But in emerging markets it has suffered less than flows to the industrialised world, due to the hunt for natural resources.

Flows to Africa, for instance, hit a new record last year.

It’s been a really bad ten years, Dow Jones Index says David Bianco of Bank of 14000 America Merrill Lynch. The 13000 Dow Jones index is Executives' cash 12000 approaching the 10,000 level 11000 again, having spent the last 10000 decade fluctuating around it; it 9000 first rose through the barrier in 8000 March 1999. But an investor 7000 who bought then would still be in the red in inflation-adjusted 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 terms, says Jack Healy in The New York Times: 10,000 ten years ago is the equivalent of 13,200 now. The index also seems unlikely to rise decisively above 10,000 any time soon as consumers are deleveraging and the banking system faces further losses on commercial property and credit cards.

2 October 2009

the markets

Eastern Europe – the sick man of the developing world 1% next year, a far cry from forecasts for Asia as well as Latin America.

Trouble in the Baltic states?

©REX FEATURES

Emerging markets have bounced back sharply as global risk appetite has recovered – and eastern Europe has been no exception. The MSCI regional index has almost doubled from its low earlier this year. The long-term outlook remains compelling. Eastern Europe has a long way to go to catch up with western European wealth levels, while in Russia there are still just 40 supermarkets per one million people, compared to 180 in the West, as Elena Shaftan of the Jupiter Emerging Europe fund points out. But for now, the region faces an uphill struggle.

Latvia: propped up by the IMF

How it got into trouble Eastern Europe was highly exposed to a eurozone downturn, and unlike Asia or Latin America, it borrowed heavily from abroad to fuel growth. Banking systems depended on wholesale funding and money from western European banks, which own many of their eastern European counterparts. Worse, a large chunk of loans are denominated in foreign currencies. So when local currencies tanked against western ones, defaults jumped as borrowers paying off debts in local currency saw their bills rocket. Regional banks are still “not out of the woods”, says Erik Berglof of the European Bank for Reconstruction and Development. The bank has just asked for a 50% capital increase from member states to ease the impact of the crisis.

% change

*5133.90 10133.23 1057.08 2122.42 3795.41 5675.16 22284.00 24911.00 11.06 12.06 7.56

Banks are worried that bad loans, sharply up all over the region, have yet to peak.

That fear looks justified, given that unemployment will keep climbing and currencies are likely to fall back again as global risk appetite wanes, says Capital Economics. So the damaged banking system is set to keep credit conditions tight, hampering growth. Interest rates on consumer loans may have fallen recently, but they are still higher than this time last year, although benchmark interest rates have been slashed. Throw in the likelihood of a fragile recovery in western Europe and fiscal policy-tightening across the region – often at the behest of the International Monetary Fund (IMF) – and it’s hard to see growth exceeding

**1.08 -2.29 0.60 -2.08 0.99 1.25 -2.10 -1.78 1.05 -0.94 1.91

*30 Sep ** since 23 Sep

Winners IFA (IFH) Afro-C (ACT) Marshall (MTE) O-line (OLI) Metorex (MTX) Rolfes (RLF) Compclear (CCL) CMH (CMH) Nepi (NEP) ElbGroup (ELR)

% change Price 49.00% 40.85% 34.43% 23.53% 22.22% 21.05% 16.98% 12.54% 11.58% 10.00%

149c 200c 1144c 105c 330c 115c 310c 790c 2900c 1100c

Weekly change to JSE stocks as 30 September 2009

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Further conflict with the IMF could result in Latvia’s currency peg with the euro being abandoned, which other Baltic states would be likely to follow. That would trigger “a renewed bout of financial market-selling” in the region and send defaults on foreign-currency loans soaring, says Capital Economics.

In short, eastern Europe is the developing world’s sick man. Given all the potential pitfalls ahead, it’s too soon to join the investors rushing back into the region.

Best and worst-performing shares

Vital numbers FTSE 100 Nikkei S&P500 Nasdaq CAC40 Dax Top 40 All Share Rand/Euro Rand/Pound Rand/US$

Credit will stay tight

Meanwhile, the Baltic states are a potential flashpoint. With their currencies pegged to the euro, they can only restore competitiveness through falls in wages and prices, a so-called ‘internal devaluation’. This has resulted in falling domestic demand and growth: in Estonia GDP is set to slide by 14% this year. This sort of devaluation is “painfully slow and very damaging to democratic solidarity”, says Ambrose Evans-Pritchard in The Daily Telegraph.

For example, in Latvia, which is being propped up by the IMF, the prime minister has had trouble pushing through austerity measures amid resistance from his coalition’s “powerful party chiefs”, says The Economist.

Losers Iquad (IQG) SuprGrp (SPG) IPSA (IPS) Village (VIL) TWP (TWP) Alliance (ALM) Platmin (PLN) Wits Gold (WGR) DiamondCP (DMC) Mustek (MST)

% change Price -23.40% -22.02% -17.78% -16.67% -14.47% -13.65% -12.80% -11.39% -9.09% -8.93%

180c 85c 185c 100c 650c 215c 920c 7000c 200c 255c

sector of the week

Biotech survivors to buy now sector. Two years ago, Britain had more than 110 listed biotechs.

Today, there are still around 90, but fewer than a dozen of these have a solid business with revenue streams or deal with larger firms.

by Richard Hemming The biotechnology sector has always been an area that promises the world, but has never quite delivered. Investors first piled into the sector in the 1990s when they saw billions of dollars being made by industry pioneers such as Genentech, Amgen, Biogen and Genzyme. These American firms were among the first to use gene manipulation to create a whole new genre of medicines.

©CORBIS

So should investors just forget about biotech? Let’s not be too hasty. One factor in the sector’s favour is increased government involvement. The Innovation Investment Fund, a £150m venture capital fund, is meant to invest alongside private partners and aims to invest £1bn over ten years.

The biotech pioneers proved you In September, long-time sector could use living cells rather than supporter Sir Christopher Evans’ chemicals to create potentially investment vehicle, Excalibur, more effective remedies that target Research spending has trebled, so where are all the new drugs? bought International Bio-sciences the cause of the disease at the Managers, a biotech advisory and fund develops scar-reduction technology. genetic level. It’s a shrewd move at a management firm.

Once seen as among the sector’s best business level too, because generic or prospects, in mid-September it said it was cheaply made copycat versions of such While these developments are positive for cutting a third of its workforce after treatments are harder to develop. the firms involved, they don’t make it any takeover talks ended. Meanwhile, shares easier for investors to avoid backing duds. in cell therapy group Intercytex were Yet enthusiasm for biotechs has waned But as the sector matures, a better suspended this month after it, too, failed considerably in this decade. For one business model is coming to the fore. to attract a bidder. And gastrointestinal thing, innovation is getting harder. Many These biotechs – or ‘speciality disorders specialist Alizyme and York drug firms lament that “all the easy cures pharmaceutical firms’ – don’t rely on the Pharma both went into administration have been found”. Regulators are also ‘blockbuster or bust’ model that has within weeks of each other this winter. approving fewer drugs, partly because of ruined so many of their smaller rivals. the threat of patient lawsuits. The US Part of the problem is that buying into Food and Drugs Administration passed Instead, they already have one or more biotech is too often like going to the 25 new drugs in 2008. That’s only a little successful products, meaning they can casino. Many biotechs have just one or more than they approved 25 years ago, sustainably fund their extensive two products in development. The hope during which time spending on research development pipelines without constantly is that one of these will be approved by and development has more than trebled. raising more funds from investors. There the regulators and become a blockbuster More recently, the credit crisis has seen will be further bloodshed in the sector, drug. But more often, the product crashes investors turning the funding taps off. but it is highly unlikely to be in these and burns, along with the share price. businesses. We look at a promising stock Such high-profile collapses have Recent disappointments include the Shire in the box below. hammered investors’ confidence in the Pharmaceuticals-backed Renovo, which

The best bet in the sector BTG (LSE: BGC) is a transformed firm.

This time last year the only thing that mattered was the success of its varicose veins treatment, Varisolve. Good safety results had cleared the way for final stage trials in America. But investors were underwhelmed. Late stage trials are the most costly and BTG hadn’t found the biotech Holy Grail – a big partner to fund it.

look forward to. It also has a large pipeline of research and development projects – 200 eight of which it’s developing on its own, Figures in pence 180 including Varisolve, and a further eight it has partnered out with big drug firms. BTG 160 now aims to use its £78m cash pile to fund 140 further growth, rather than having to pour it 120 all into research. Robin Davison at Edison 100 Investment Research values the group at O N D J F M A M J J A S 297p a share. A potential deal for Varisolve 2008 2009 But fast forward 12 months and Varisolve is is a key catalyst for the share price in the a far less important part of the picture: what matters more is short term, he says. But long-term, BTG’s real attraction is its BTG’s consistently growing earnings. In December, BTG bought transformation into a speciality pharma group making consistent another biotech, Protherics, and now has £100m of US sales to profits – a “novelty for such companies in Britain.”

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2 October 2009

BTG

who’s tipping what Gareth Stokes, MoneyWeek’s analyst, picks the best – and worst – tips from the press and brokers’ reports, and suggests a share for the brave.

Manage risk – diversify product – maximise profit!

Tip of the week: Policyholder persistency is key at Liberty Holdings, Finweek The latest round of financial sector results made for depressing reading.

Banks were weighed down by alarming increases in impairment charges while investment banks and insurers suffered heavy losses on their investment accounts. South African insurance giant Liberty Holdings is no different. In the six months to June 2009 Liberty Holdings had to tell shareholders of a staggering R1.2bn hedging loss.

To make matters worse the life company was “caught way offside” by policyholder persistency. The rate of

policy lapses, withdrawals and paid up policies soared due to the severe financial stress experienced by individual life policyholders.

There was a “significant deterioration in the persistency environment during the past 18 months,” said Liberty chief executive, Bruce Hemphill. While presenting the group annual result Hemphill discussed the contraction in real disposable household income and the increase in unemployment since mid-year 2008. He also observed that a deteriorating economy “impacted Liberty Holdings’ customers and its business.”

New business volumes from the Individual Life business were acceptable. Aside from persistency concerns the group recorded good mortality and morbidity experience and a healthy R1.7bn net cash inflow. Costs across the Life Business were in line with

Gamble of the week: Zeder Investments Limited You can do worse than picking up a few shares in Alt-X listed Zeder Investments Limited (JSE: ZED). This investment holding company invests in unlisted companies that aren’t easily bought or sold by private investors. At 28 February 2009 the group lists Kaap Agri (34.3%), KWV (25.7%), MGK Business Investments (26.7%), Agricol (20%) and KLK Landbou (10%) among its top shareholdings. Zeder also has significant shareholdings in Suidwes Investments, Capespan Group and NWK through a 49.9% interest in Thembeka Agri Holdings.

Despite its defensive qualities, Zeder has run into some

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2 October 2009

expectation, tracking inflation higher.

How did the insurer fare in its latest half-year? To begin, total revenue declined from R12.8bn to R9.6bn. The bulk of this revenue was from individual long-term insurance with R9.857bn followed by corporate long-term insurance with R3.738bn, asset management R804m and health services R177m. Once adjustments and ‘once off’ losses were accounted for, Liberty Holdings reported a net attributable loss of R1.3bn, and a headline loss per share of 483.3c.

problems through the recent recession. The group’s latest trading update warns of a 16.1% to 23.4% decline in headline earnings per share for the six months to August 2009. Part of the earnings dilution is due to the increased number of Zeder shares in issue following a recent rights issue. The group also says its KWV operational business weighed in with much lower profit compared to the prior year.

Will the earnings slump deter investors? We don’t think a poor half-year result will impact the share price too severely.

Zeder’s focus on agricultural, food, beverages, food processing and related sectors should see it through. The group’s defensive qualities offer downside protection while the agriculture leaning means investors can look forward to “attractive long-term investment returns of a highly cyclical nature.”

who’s tipping what Why should investors consider the counter? Shaun Harris says buying the share now is the equivalent of backing red in Roulette after black has come up 11 times. “Liberty is a strong brand and will do better: the question is how and when?” writes Harris. He suggests it will be up to chief executive Bruce Hemphill to right the ship. Liberty identifies policyholder persistency and capital management as its major challenges through the second half. These challenges will be easier met as economic conditions ease slightly in coming months. Liberty’s property and healthcare divisions performed admirably in the latest half-year and provide a foundation for future growth too. At 6635c/share Liberty is perfect for investors looking to prop up their longterm portfolios.

Recommendation: BUY at 6635c Market capitalisation: R18.877bn

won’t rekindle shareholder enthusiasm. Group revenue from continuing operations contracted 8.4% to R7.8bn, in part due to the cancellation of low margin contracts with Supply Chain South Africa and weaker than expected sales at the group’s dealerships. Group revenue retreated 9.2% from R12.4bn to R11.3bn. It doesn’t sound too bad until you consider Super Group headline loss per share of 170.9c for the full year! “Nobody will have been surprised that the numbers were poor,” says Jamie Carr in the Financial Mail. But nobody was prepared for the net loss of R1.3bn either.

Despite managements best efforts through FY 2009 Super Group still faces major recapitalisation challenges.

“Shareholders were informed that restructuring agreements between Super Group and its funders – setting out the key terms of the equity recapitalisation

Turkey of the week: A “mighty Hercules” needed to clean up at Super Group, says the Financial Mail Super Group (JSE: SPG) is no stranger to this section of the Who’s Tipping What column. A long-term favourite among logistics sector analysts, the company has been in a downward spiral for what seems like an eternity. The shareholders who availed themselves of the recent rights offer have done so in blind faith rather than any hope of a quick turnaround. And with the share now languishing at 83c they’re probably none too happy.

Latest results, for the year to June 2009,

The best motivation for investing in Zeder can be found in group chairman Jannie Mouton’s letter to shareholders in the 2009 Annual Report. He reveals some of Zeder’s investment philosophy, admitting that the group has taken advantage of tough economic conditions to invest on “attractive terms!” Value gurus will appreciate the weighted average price-to-earnings ratio across the portfolio of just 5.6 times. The same measure puts the portfolio dividend yield at 4.3%! “Our underlying investments have continued to deliver pleasing results with headline earnings per share growth

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2 October 2009

and debt restructuring – had been signed.” At that date the company was sitting on close to R2bn in debt, incurring R430m in interest charges for the year. Recent decisions to sell noncore divisions and refocus on the company’s key competencies hardly dented the balance.

Super Group will have to improve its liquidity position if it hopes to return to profitability. And that’s going to be difficult under the “tough economic trading conditions expected to prevail in the year ahead…” Consumer spending will remain under pressure through FY 2010. Is a recovery in the offing?

Shareholders are pinning their hopes on two recent developments. The first is that an impressive recapitalisation plan is finally on the table. The second is that a prospective “strategic investor” is showing signs of interest. “Investors will be hoping they can now draw a line under the horror story,” says Carr. But we wouldn’t hold our breath! Avoid.

Recommendation: Avoid Market capitalisation: R485.509m

ranging from 10% to more than 100%,” said Mouton. He argued the fundamentals of the industry the group prefers to invest in. The strong defensive qualities are underpinned by global population growth, urbanisation, demand from the bio fuels industry and the fact “agriculture plays an important economic, social and rural development role,” said Mouton.

We’d be buyers of Zeder at 174c/share.

Recommendation: BUY at 174c Market capitalisation R1.760bn

best of the financial columnists Trade liberty for riches at your peril John Kampfner Time

Austerity is just what Britain needs Mark Scott BusinessWeek

Taxpayers must flex their muscles Maurice Saatchi The Times

Financial services are not all bad Editorial The Economist

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2 October 2009

I call it ‘the pact’, says John Kampfner; the willingness of intelligent, well-to-do people to trade certain liberties for prosperity or security.

The model is Singapore – the economic powerhouse where to speak out against the government is to invite a lawsuit, bankruptcy or even prison. But the pact’s appeal has grown far wider. The past two decades have laid to rest any notion that enrichment provides “an automatic impulse to greater liberty”. In places such as Russia, China and central Asia people have “found a way to disengage from politics while growing (mostly) more comfortable”. The phenomenon occurs even in Western nations that “proselytise about democratic values”.

Britons have “acquiesced in illiberalism to such an extent” that local councils eavesdrop on people suspected of disposing of their rubbish incorrectly. Pre-crash, we allowed freedom “to be recast as a vehicle to deliver consumption. But it is much more than that, and if we forget it we will all be the losers.”

A new mood of austerity is sweeping Britain and, in the short-term at least, it’s not doing the economy any favours, says Mark Scott. In recent months, savings rates have more than doubled, while spending on big-ticket items has declined at the fastest rate in decades despite Gordon Brown’s VAT cut. Personal debt – the world’s highest at 183% of disposable income, more than a third higher than Americans – has fallen for the first time since 1993. Why? Consumers are scared.

There are fears the recession will continue well into 2010. Also, historically low interest rates have persuaded people that now is the time to clear debts. Total personal borrowing in July – loans, credit cards and mortgages – fell $1bn. In the long run, the increased saving should help Britain’s economy and “put household finances on a more even keel”. In the near-term, however, “the adjustment to less debt will be severe”, says Jamie Dannhauser, economist at London’s Lombard Street Research. But “it’s exactly what Britain has to do”.

Thanks to the bank bail-outs, we are all capitalists now, says Maurice Saatchi. So perhaps we should embrace a new approach rather than rush for the door marked “exit strategy”. Since we, as taxpayers, have stumbled into ownership of “one of the great global cartels”, the state is now our fund manager and we the investors. And according to London minister Lord Myners, our investments are doing rather well: “‘We will sell our shares at a profit,’ he assured us. ‘The taxpayer will enjoy the benefits of the actions we took.’ Good. In that case I take as my role model the Qataris”, who provided Barclays with funds of £5bn and pocketed a £2bn profit six months later. “Capitalist discipline will have an excellent effect all round. If Stephen Hester of RBS gets his £9m bonus, I get my £9bn profit, which I take in the form of a tax redemption.” Instead of despising his greed, I suddenly wish him well. Let’s not forget: We, the taxpayers, have “all the power because we have all the money. All we have to do is use it.”

Financial innovation has a bad name at the moment, says The Economist, but it can be a force for good. Take mobile money, which allows cash to travel as quickly as a text message. Mobile phones have become “tools of economic empowerment for the world’s poorest people” and mobile money services could have a similarly dramatic effect. Across the developing world, people use their local corner shop to top up their calling credit. Mobile money services allow these shops to act rather like bank branches, taking cash and crediting it to mobile money accounts. By far the most successful example is M-Pesa, which was launched in 2007 by Safaricom of Kenya and now has nearly seven million users. According to a recent study, M-Pesa has increased the incomes of those using it by 5% to 30%. Extending mobile money to other poor countries would have a huge impact. “It is a faster, cheaper and safer way to transfer money than the alternatives” and “provides a stepping stone to formal financial services” for billions of people. This opportunity should be seized.

Money talk

“There’s always talk about money, but it’s never as much as you think.”

Harry Hill (pictured) on rumours he is to become the highest-paid comedian on television, quoted in The Mail On Sunday “How have we become known as the Marks & Spencer option when Jesus would just as likely be in the queue at Asda?”

Stephen Cottrell, the Bishop of Reading, on the Church of England being too middle class, quoted in The Sunday Times “Respect money, but don’t covet it – never let it be your god.”

George Davies, founder of Per Una and Next, quoted in The Sunday Times “I’m not trying to play God, I’m playing God’s accountant. We won’t be able to save it all, so let’s do the best we can.”

Naturalist Chris Packham on why resources should not be used to save pandas, quoted in the Sunday Express “It’s like not paying the Congestion Charge. It’s not a criminal offence…

I made an error.”

Baroness Scotland on employing an illegal immigrant, quoted in The Mail On Sunday

investment strategy

Why value is king in the Asian market dividend yield, and the price-tosales (p/s) ratio (the share price divided by a year’s turnover) beat anything else. And over the past two years, the top three were p/s, price-to-book (p/b) and the trailing price-to-earnings ratio (the share price divided by the latest 12month earnings figure). So while “our gut instinct may say buy growth when in Asia, listening to your head may yield better results”.

by Tim Bennett HSBC’s chief executive is heading East. “Asia is our biggest business and China our No.1 priority. To drive the business you have to be here,” said Michael Geoghegan last week, on his move from London to Hong Kong. But for investors who want to grab a slice of Asian equity growth, which of the two classic investing strategies works best?

Value (buying ‘cheap’ stocks) or momentum (chasing popular stocks higher)?

So what to buy?

As we near the end of the current cycle “momentum will once again become king of the castle”, notes Rosgen. But “that is still a long way off”. The most profitable game in town for now remains “value, value and more value”. So which Asian stocks should value investors buy?

Lessons from 2009 Asian stockmarkets fell off a cliff in 2008, bottomed in March this year, and have since leaped by around 50%. That volatility has led some investors on a wild-goose chase, says Citigroup’s Markus Rösgen. “We all want to own the best-performing market or sector every month”, but “few achieve it”. The good news is, there’s no need to chase the latest growth story – “since the lows, it’s been all about value”.

Value investors, who follow an approach pioneered by Ben Graham (see box), believe that you make money from shares in the long run by ignoring the herd and looking for cheap, robust stocks. This works, notes Rösgen, because “good fundamentals and the market’s discovery of these gives ‘good’ momentum, not the other way round”. In other words, when stocks are good value, the market eventually notices and drives them higher.

Is the smart money heading to Hong Kong?

“Value strategies have been the top performers recently” they start to look like bargains. But since the bottom, these “value actors have been in the driving seat”. Value strategies have also been the top performers over the past one and two years. So what are the most reliable value ratios?

The best ratios This didn’t work when the market was in freefall. That’s because when investors are panic-selling, it’s nigh on impossible to pick the lows, because prices just keep falling – even when, using value ratios,

Over the past year, ignoring the impact of country and sector, Citigroup says that picking shares using value ratios such as price-to-book (the share price divided by balance sheet net assets per share), the

Citigroup has a list of the cheapest 50 large caps screened for a low p/e, low p/s, and low p/b. The good news is that the best ones are all well-diversified blue chips that should be safe bets even in such tough times. Agricultural, industrial and energy products firm Noble Group (Singapore: NOBG) has the lowest p/s ratio at 0.18.

The four Asian stocks with the lowest p/es are listed in Korea – an expensive market to access from the UK. In fifth place is Hong Kong-listed oil, gas and chemicals giant Sinopec (HK: 0386) – on a p/e of 9. In the top quartile on a p/b basis is container ports-to-telecoms giant Hutchison Whampoa (HK: 0013) – p/b 0.86. One stock that makes the top two quintiles on all three counts is Jardine Strategic (Singapore: JSH) – p/s 0.58, p/e 10.7 and p/b 1.0. Its interests span commercial property, hotels and transport.

Don’t gamble, invest Ben Graham’s Intelligent Investor turns 60 this year. It’s a book that will “repay its purchaser a hundred times”, says The Motley Fool. Although value investing is now well established, when it was published in 1949 it held “revolutionary insights into evaluating companies”. Since then, “all fundamental investing writing has followed Graham”. Graham was the first to emphasise the importance of balance-sheet strength combined with relative cheapness. He largely dismissed growth investing; he understood it, and outlined its attractions, “but could not see it working”. His value-investing approach favoured a handful of ratios including a low p/e backed up with a healthy dividend yield and a p/b ratio, ideally below one. He also cautioned against being distracted by the whims of ‘Mr Market’, prone to lurching from optimism to pessimism. The best protection, suggested Graham, was to diversify between equities and bonds. All in all, says The Fool, the book will teach you “the difference between investing and speculation, the stockmarket and the racetrack, and value versus price”.

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personal view

Invest in these 3 value plays today to protect your wealth What I would invest in now

This week, Craig Massey, director of Sanlam Private Investments, tells MoneyWeek where he would put his money.

After a vicious ten month correction, global markets bottomed in early March 2009. The fall in the markets finally ceased as the rate of decline in economic indicators slowed and, in some cases, even turned positive. This was the evidence the market needed to convince it that the monetary and fiscal stimuli were making a difference in turning around financial markets.

Nowhere was this clearer than in the narrowing of credit spreads. This indicated that financial markets were working again, albeit at lower levels of activity. It also encouraged investors and we saw the US housing market – one of the biggest culprits in the collapse – bottom out.

Unlike previous recoveries, which were relatively quick, I believe this recovery is likely to take place over a prolonged period of time.

The reason: The average citizen and a large number of corporate entities are in the process of rebuilding their balance sheets and consolidating their financial positions. We can see this already in the large uptick in US savings rates. What this means is that there’ll be a slow recovery in consumer spending. Despite this, the recovery in emerging market economies will be more robust than in the developed markets.

The markets have rallied sharply off their lows and have been a little over enthusiastic in the gains they’ve made to date. However, the overriding trend is positive and I’d look at buying into the market on any good pullbacks.

We should see some of these over the next couple of months.

With this in mind, here are my top three equity picks. What you’ll notice is they’re all 100% rand-hedged. I believe the current rand strength isn’t sustainable and any weakness in the currency going forward will enhance these shares’ returns.

1. DBX MSCI World Index Tracker (JSE:DBXWD) I like this share because it protects you against rand weakness and provides essential diversification. Since this ETF is rand denominated, it means you don’t have any Reserve Bank restrictions and you’ll get to track the movements of the MSCI World Index. Developed markets are currently cheaper relative to emerging markets, which makes this ETF a good long-term value play.

2. Liberty International (JSE:LBT) Along with all global property counters, Liberty International experienced significant declines in its share price in 2008. But with the stabilisation in all financial markets and the move out of recession I believe this company has significant upside. Its portfolio is essentially property with the focus on quality decentralised shopping centres in the UK. The company’s trading at a healthy discount to its net asset value.

3. BHP-Billiton (JSE:BIL) BHP is one of the largest shares on the JSE according to market capitalisation. This diversified commodity share operates in around 25 countries, making it the perfect share to invest in for any recovery in the commodity cycle. It has a strong management team and is my preferred share if you’re looking for commodity exposure.

In fact, I believe every portfolio should contain it.

The shares Craig likes: 12mth low R7.26

Now R8.45

Liberty International R143.70

R41.87

R58.23

BHP-Billiton

R119.80

R204.15

DBX-World

12mth high R11.96 R217.99

*Prices as at 30 September 2009

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2 October 2009

investment briefing

Can microfinance help end poverty?

The inventor of microfinance – giving small, cheap loans to the poor – won a Nobel Prize. Now, the idea’s gone global. But is it just a new debt bubble in the making? Simon Wilson reports.

What is microfinance?

©GETTY IMAGES

lender. And Pierre Omidyar, the founder of eBay, is a big investor. In 2005 he gave It’s a way of lending tiny amounts – $100m to Tufts University to create a typically up to a few hundred dollars, but microfinance-only investment fund. often far less – to poor people in developing countries. In its modern form microfinance, also known as Sounds good – what’s not to like? microcredit, dates from the 1970s. The As the microfinance sector has expanded most celebrated institution is still the out of the not-for-profit sector into the Grameen Bank (‘Bank of the Villages’), commercial sector, some have argued that which began in Bangladesh in 1976. some lenders are now indistinguishable Muhammad Yunus, a young economics from the loan sharks they were supposed professor, realised that local craftswomen to replace. For example, Mexican were crippled by extortionate borrowing microfinance firm Compartamos Banco costs (of up to 10% a day) to fund the (‘Let’s Share’), which floated on the purchase of raw materials. He began by stockmarket in 2007, has been denounced lending just $27 each to a group of 42

by Yunus and others for charging interest families (most borrowers are still women) rates close to 100% a year. And for the to help them grow their businesses, past year or so critics have warned that and found that the poor were perfectly microcredit lenders risk fuelling a US capable of looking after the money and subprime-style bubble by lending recklessly paying it back with near-perfect reliability. to people who cannot afford it.

Is it all smiles for microfinance debtors?

Since then, Yunus has won the Nobel Peace Prize, and the movement has gone global, supported Is there any truth in that? by the UN and the World Bank.

The Wall Street Journal seems to think so. A recent report on Indian microfinance paints a disturbing picture. India recently overtook Latin America as the world’s most dynamic All good then? microfinance market, especially commercial microfinance; some No. Microfinance, say critics, is simply not an effective or 22 million Indians have microcredit borrowings. The article efficient way to lift large numbers of people out of poverty. describes how the poor people of Ramanagaram, a shanty town In reality, not all poor people are plucky would-be in the southwestern state of Karnataka, are being “carpetentrepreneurs with the ability or desire to start their own bombed” with offers of credit. Reportedly, many loans are made businesses. So giving them a loan is no long-term answer to with no proof of income by agents working on commission. poverty. US academic Aneel Karnani, for example, says And (contrary to the spirit of microfinance) loans are made not microfinance has been romanticised: “Countries that have to fund the growth of small businesses, but simply to pay for lifted people out of poverty”, such as China and Vietnam, consumer spending or to refinance existing loans more cheaply. have not done it through microfinance, he says, but through the development of larger enterprises which create jobs. The question is, could we not use the resources in a better way, for What’s the case for the defence? example, by creating garment factories rather than creating Vikram Akula, founder of India’s largest microfinance lender individual entrepreneurs by giving them each a loan to buy a SKS, made a furious but cogent response to the Journal piece – sewing machine? accusing it of making generalisations based on anecdotal evidence. Akula points out that Indian microfinance institutions still boast repayment rates of over 95%. He points to local So why are big banks getting interested? factors in terms of specific repayment problems in Karnataka, Partly because wealthy clients are increasingly interested in and rejects the idea that socially responsible investment, microfinance lenders encourage and partly because they simply their staff to let people borrow see the benefit of lending more than they can afford. It’s a money with low default risks Can smaller investors join in? convincing defence, but that and good rates of return. In the Citigroup, Standard Chartered, Crédit Agricole, Barclays and doesn’t mean the possibility of a past few years, the proven BNP Paribas all offer clients opportunities to get involved in microfinance bubble can be ability of microfinance to turn microfinance. Some use investors’ funds to provide credit to ruled out. The Economist quotes a profit has attracted privateindividual entrepreneurs, and some buy shares in academic Jonathan Morduch as equity funds and other foreign microfinance lenders themselves. For retail investors, a good predicting that there may well investors. Most notably, place to start researching opportunities is the MIX market be localised failures among Sequoia Capital, the venture (www.mixmarket.org), an online microfinance information microcredit firms as a result of capital firm that backed platform run by the World Bank. According to its website, the overheating. But “I don’t see Google, Apple and Cisco, took microcredit providers it covers have a total of 80 million any evidence at all for an $11m stake in SKS clients worldwide, with an average loan per borrower of $508. something like a global bubble”.

Microfinance, a large Indian 13

2 October 2009

opinion

Sterling is being debauched – and that could spell disaster for the British economy How low can the pound sink?

At the start of this decade, a pound bought €1.70. At the start of this week, it bought only €1.08.

Parity with the euro, Matthew Lynn unimaginable when the single currency was launched, looks inevitable within the next few months.

Global view

More surprising, however, is the tacit encouragement from the central bank.

In an interview last week, King described the fall in the value of the pound as “helpful”. So it was only to be expected that currency traders, who still fret about the cost of finding themselves on the wrong side of a fight with a central bank, took note and gave the pound another downwards shove. In all fairness, King was only expressing the mainstream view among policy makers and economists. A cheaper pound will revive manufacturing and kick-start a more general rebalancing of the British economy.

©GETTY IMAGES

The trouble is, this is nonsense – and Right now, Britain is happy with that. dangerous nonsense too. Comparisons The government looks on with benign are regularly made with the early 1990s, neglect. The governor of the Bank of when Britain’s ejection from the England, Mervyn King, even seems to European exchange-rate mechanism, and be talking the currency down. the big fall in the pound that followed, Devaluation is seen as part of the policy helped trigger the long upswing of the mix, along with printing money, that will eventually lead to recovery. And the markets have been more than happy Pound vs euro to oblige. Sterling is the new whipping boy of the trading 1.5 floors. Its weakness against the dollar has been masked, 1.4 to a degree, by the frailty of 1.3 the US currency. But it is its value against the euro, the 1.2 currency in which most of Britain’s trade is carried out, 1.1 that reveals how friendless 1.0 sterling has become. It has been falling steadily against Jan Jan Jan Jan Jan 2005 2006 2007 2008 2009 the single currency for most of this year. After recovering slightly from the all-time low 1990s. But the comparison is bonkers. of €1.02 at the height of the financial The pound then had been fixed at too crisis, it has resumed its decline. Parity high a rate against the German mark. now looks a certain bet.

The UK had a structurally reformed economy held back by an overvalued In many ways, that’s a rational response currency. That isn’t true now. There’s no to the dismal economic outlook the UK reason to suppose the pound was now faces. France and Germany were overvalued a year ago. As for the badly hit by the crisis, but their fundamentals of the economy, let’s not economies are starting to recover. Their even go there. This looks far more like an public-sector deficits, while serious, are old-fashioned sterling collapse, of the sort nothing like as bad as the UK’s. Their the UK witnessed repeatedly throughout economies weren’t anywhere near as the 1960s and the 1970s. And they never dependent on the bubbles in property and heralded any sort of revival – they were finance. And the European Central Bank part of the problem. has proved a far sturdier defender of monetary stability than the Bank of To imagine that a service-based economy England. Small wonder then that such as the UK can devalue its way out of investors are selling sterling.

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trouble is daft. Britain is barely a manufacturing economy – certainly not one that can compete on price with eastern European or Asian factories. It is an exporter of high-value, intellectual property: financial services, insurance, legal advice, media and science. What goods it does export are high-tech and design-intensive. They aren’t being sold on price – if they were, there wouldn’t be any orders at all. All you do when you devalue the currency is reduce the income of those sectors to the extent that they price their work in sterling. That makes the country poorer, not richer. To imagine that Britain is suddenly going to become a low-cost manufacturing centre implies a savage reduction in living standards – and that presumably isn’t what the advocates of devaluation want.

The government and bank should keep a closer eye on sterling. If there is a collapse of confidence in the UK, and if the IMF does have to bail the country out, it will be the currency markets that pull the trigger. Britain is critically dependent on foreign capital. It 20 is running a trade deficit of £6.5bn a month, close to 15 record levels. There is no sign of it closing despite the huge 10 fall in the pound’s value.

Worse, the UK is critically 5 dependent on foreigners to finance its yawning budget deficit. Savings are so low that there is no way the British can buy £200bn of government debt a year – even before the crisis, foreigners accounted for a third of all gilt sales. While the bank buys up gilts with freshly minted money, that might not matter. But when it stops, there won’t be many buyers for all that debt in a depreciating currency.

Debauching the pound isn’t a solution – it’s part of the problem. And if it gets out of hand, it could yet provoke a real crisis.

If confidence in sterling were to collapse suddenly, the bank would have to hike interest rates sharply to defend the currency, and the government would have to slash spending to restore faith in the markets. Either would turn a recession into a full-blown depression. Both together would be a catastrophe.

investing in property

What to make of the myriad property predictions?

MoneyWeek’s case for buy-to-let...

by Gary Booysen • • •

Tip #2: Follow the oldest of all property adages: Location, location, location.

This isn’t too say you need to pick the most expensive area, but consider the tenants you plan on letting your property out too. Are you targeting students close to the universities who will be far more accepting of less “polished” accommodation? Or will you be seeking out that young couple that’s still trying to get the deposit together for their first starter home? They’ll take care of your property, but will demand higher quality property management.

“Rental growth is fizzling out!”

“House prices ‘gradually improve’” “Buy a house while bargains last”.

These are three recent well substantiated opinions found on the pages of Fin24.

With all the differing issues, what’s an investor to do?

Fin24’s Joan Muller goes on to say that “Buy-to-let investors who were hoping to pass on doubledigit rental increases to tenants this year are in for a nasty surprise.”

Tip #3: Hire someone to do a home inspection until you have experience to do your own If this is your first buy-to-let property, get a professional to have a look over the place. They’ll pick up things that you missed. Is that small patch of damp really nothing to worry about or is it going to destroy your newest asset? They’ll be able to tell you...

She quotes Raal Nordin, CEO of Only Rentals as he expounds his theory of why it’s a bad time to invest in a buy-to-let property.

“The residential market is not an attractive place for investors to be, with poor prospects for both capital and income gains."

But according to well respected property strategist, John Loos at FNB Home Loans: “It's a relatively good time to buy. Although things are turning for the better, there is a high level of financial stress selling and that is where the opportunistic buyer can cash in.”

The latest Lightstone House Price Index released on Monday shows annual house price inflation is 0.2%. A remarkable improvement from the 3.1% deflation we saw in January. This further strengthens the buy-to-let investment case as strong future capital gains compliment your steady rental income.

Plus, on Tuesday, Tito Mboweni hinted at the need for a rate tightening towards the end of the year.

But what does this mean for us?

People will once again default on their mortgages and first time buyers will hold out for a larger deposit. This will force rental prices higher. In the

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2 October 2009

medium- to long-term, buy-to-let residential property looks like a fantastic investment opportunity.

Just as Bill Bonner of the Daily Reckoning predicted, inflation is on its way back up after the wild, expansionary monetary policy of the last year.

So now could well be the time to get back into residential property. And here are five tips to make sure you don’t miss the boat...

5 bonus buy-to-let investment tips to jump start your portfolio Tip #1: Buy houses in the “starter homes” price range: Starter homes generally show better rates of return. Not only will you have a larger capital gain as a percentage of the price you paid, but you’ll collect far higher rental on five R200 000 rand flats than one R1m house.

Tip #4: Don't over improve a rental house Overseas, gutting and converting a lovely Victorian Townhouse can be a lucrative project but, in South Africa, there’s an abundance of newly developed housing. Generally if people like the feel of an older house (thanks to the larger rooms, character, etc.) they will take it without the African Deco bathtub or granite countertop. More often than not, the cost of these “improvements”, come to far more than the increased rental or selling price.

Tip #5: Follow your lease to the letter. If you give tenants an inch, they’ll take a mile Get a lawyer to draft a professional agreement and then stand by it. You shouldn’t only draw on a lease agreement if you find yourself in trouble. It’s the guidelines for expected behaviour. Be firm, stick to your guns and you’ll find most tenants a pleasure to deal with.

MoneyWeek’s Roundtable

As the JSE keeps rising, we ask: “For how long can this share price surge continue?”

Bull market recovery or bear market bounce? We asked some of the country’s top market commentators whether the current rally can continue, and where they would put their money today.

Gareth Stokes: The JSE All Share index has surged 35% since early March 2009. How much longer can this equity rally last?

Alwyn van der Merwe: The very strong run we’ve seen since early March 2009 is unlikely to continue at this pace. The market has already re-rated to almost 14 times price-to-earnings. So the short-term view is we must expect a breather in the market. Whether that means that market prices are going to go down or whether the market is going to go sideways is tough to predict. Investors are waiting for an earnings recovery to underpin the next stage of the recovery. At this stage we expect an improvement through 2010 as lower domestic interest rates gain traction and global analysts adjust growth estimates higher.

a turning point and I would expect, at the very least, some kind of short-term pullback from current levels. In my view the market is already showing some signs of running out of steam. It’s going to take a while to get back to the May 2008 record.

Gareth: There are a number of contrarian analysts who claim the current share price recovery is nothing but a reversal in the bear trend. Can this really be the case?

Hart: I am probably regarded as a hard liner and I certainly think this could turn out to be a bear market bounce.

Gilmour: One of the interesting things that Jeff Gable [head of market research at Absa Capital] looked at yesterday is electricity generation. The three month on three month comparison has been sharply positive since June this year. He sees this statistic as an early indication that mines are ramping up production.

You get a similar – though less apparent – indication when looking at the Statistics SA manufacturing numbers.

Another number to watch is the retail sales number. We’ve had a bit of a turnaround last month, for July, but we need to see consistent monthly improvements before we read more into it. I’d also like there to be further improvements in the insolvency and liquidation numbers. Company liquidations are still growing at pace, but the number of insolvencies seems to have turned around.

“I’m quite confident that over the next 18 months the market will recover further from current levels”

Chris Gilmour: I drew a graph yesterday, going back to 1961, of the percentage change in the JSE All Share index versus the percentage change in earnings. I used this graph to try and get a better ‘picture’ of market turning points.

The latest upswing shows a very similar pattern to what we had in 2003. Back then we had a significant rally in the market, but earnings only followed a year later. With earnings expected to decline into 2010 I get a feeling this pattern is going to repeat. What we need to determine is whether share prices have climbed too quickly. I’m not entirely sure they have. We’re seeing some very positive numbers coming out of the US in terms of manufacturing. And there have been huge productivity gains there too, which translate into better profitability. I think all the ingredients for a continuation of this rally are in place.

Chris Hart: The markets are on the cusp of 16

2 October 2009

Gilmour: I would have to disagree. Until recently I thought we’d move sideways for a bit. But now I’m confident we should see a sustained improvement.

Alwyn: Views on this matter depend on definitions. If you hope to see the same run in the market we experienced between 2003 and 2008 you will probably be disappointed. Back then you had the best of both words – low ratings and ridiculously low earnings growth. This time round we started with low ratings – but earnings growth was very high. I’m quite confident that over the next 18 months the market will recover further from current levels – so it’s looking more like a pullback in the bull market trend rather than a bear market correction.

Gareth: What macroeconomic indicators should we be looking at to confirm the sustainability of the current market rally?

Alwyn: From a global perspective, you want to see companies start to replenish their low inventory levels. As they replenish these levels you start to see industrial production levels pick up. We are starting to see signs of this. The other thing to look for – and I must confess to being a bit concerned about this measure – is for consumption expenditure to come to the party again. Of course there are a few hurdles that might restrict consumers from coming to the party in a big way, such as debt levels and debt servicing ratios. And most importantly, both globally and locally, we would like to see a recovery in the job market. This is normally a lagging indicator. In other words once you see the economy recover, only then you will start to see an improvement in the job market. If each of these components is in place we can be pretty sure we’re looking at a sustainable recovery.

MoneyWeek’s Roundtable Our panel Alwyn van der Merwe Sanlam Private Investments

Christopher Gilmour Absa Capital

Chris Hart ©PHOTOLIBRARY

Investment Solutions

Who will win out in the battle of the bull and the bear?

Hart: The critical component is for final demand to pick up both locally and abroad. Without strong final demand the recovery process will stall. Factors like financial system stability are important – manufacturing and production numbers need to be going higher – but neither mean anything in the absence of demand.

Gareth: What is the outlook for so-called emerging economies? Some experts predict earnings growth in emerging markets will be a function of falling input costs (on the back of cheaper commodities) and a resurgent consumer.

Chris: I’d be a bit careful about such assumptions. Yes, commodity prices have declined significantly since all time highs – but they’ve been resurgent of late. The big one is oil, which has been bumping around in a narrow range for quite some time. It looks like it could come back strongly at any time. Other commodities like copper, nickel, lead and zinc have recovered strongly too. As for consumer spending – the problem in an economy like China is to encourage people to spend. They are notorious savers!

Alwyn: Gable also reminded us about how people used the word “decoupling” when the deep recession started. The “decoupling” concept proved to be a bit of a pipe dream, but it is true that emerging economies came out of the recession in a much better state, largely because the so17

2 October 2009

called fundamentals were in place. But the one thing that people spoke about was that to save emerging markets you would have to get the consumer in China to spend. There was an interesting report that I read yesterday clearly indicating that the retail sales in China are picking up quite nicely. The Chinese consumer is not as indebted as his Western peer and will certainly support growth in the emerging world. Debt levels in emerging governments aren’t nearly as bad as those in developed economies either. This means that from a fiscal perspective the big risk for the developed world is how to get out of fiscal debt. The emerging world certainly doesn’t have that particular problem. So on both counts – from a fiscal perspective and a consumer perspective – I think the recovery can be more sustained in the emerging market than the developed market.

Gilmour: We’re not seeing much consumer resilience in South Africa. Local consumers are still very nervous and for good reason. One of the major problems we’re experiencing here is unemployment.

Consumers are thus beset by two fears – that of being unable to service debt and that of unemployment. There is no indication as yet that the consumer has lost this fear.

Gareth: Estimates for JSE All Share earnings point to a decline of 11% this year, followed by an 18% improvement in

2010 and another 21% in 2011. Do these numbers tie in with your expectations – and what does this mean for market valuations?

Gilmour: That would be our ballpark. I’d go along with that. And that would very much tie in with the graph I mentioned earlier.

Hart: I think that’s correct. I don’t have an issue with a rebound next year – but I have a feeling the rebound might not be as strong as expected. We might only see 10% improvement in 2010. However I think our recovery will be aided by the fact we didn’t throw in the kitchen sink through the financial crisis.

Gareth: A great deal has been said about the strength of the rand and its knock-on impact on domestic inflation and growth.

Could you share your views on the rand, inflation and possibly interest rates?

Alwyn: The latest inflation number surprised on the downside, or was at least in line with expectations, so we don’t get a negative surprise. Reasons for this include food prices coming off a high base and the much stronger rand. If the rand behaves itself into next year we will go into the Reserve Bank’s 3% to 6% target inflation range in the first half. Under such conditions interest rates are likely to Continued overleaf

MoneyWeek’s Roundtable remain lower for longer. Whether we see another interest rate cut is anyone’s guess.

My view is given the fact that inflation is likely to move back into that inflation range we’re not going to see one. The one negative in the inflation picture is administered prices. These form a big part of the CPI basket and you’ve seen now that NERSA is warning that Eskom needs a 60% price increase for electricity over the next two years. Short-term we’re not too concerned about the rand. We’ve got a target for the rand of between 800c to 850c/dollar. Which means at the current level the rand is overvalued. But there are a couple of cyclical factors supporting the currency. At some point the strong rand will have an impact on growth. In the short-term again it’s going to mean exporter margins will come under pressure, but as the global recovery gains traction the exporters should see their business levels pick up, but at a lower rate of profitability.

Gilmour: There’s an element of hysteria around the current level of the rand. The rand – yes the rand is strong – no doubt about it. On almost any measure you choose to use – whether it be purchasing price parity or not – and regardless of where you choose your starting point, the rand is probably quite close to fair value. The question you need to consider is whether a pseudo-emerging economy like South Africa deserves a currency at parity. It probably does. The rand strength is a direct result of international investors developing a higher risk appetite. We have one of the biggest infrastructure spends anywhere in the world and a lot of international investors are buying our industrial stocks because of that. If that continues then we have further support for the rand. Then there’s the much talked about Bharti MTN deal. There’s a promise of billions of dollars in capital inflows if the deal goes ahead. But on Wednesday it was called off again.

©PHOTOLIBRARY

Continued from previous page

Craneware will benefit from trends in American healthcare collapse of commodity prices.

Unfortunately we might be in a situation where interest rates are already too low.

However, I believe that Gill Marcus could be a dark horse in this regard. I’m not sure what her innermost beliefs are – but if her sympathies lie with the consumer we could see one or two further interest rate cuts.

Gareth: Will this interest rate trough

You might consider preference shares. And there was an argument for bonds, but with interest rates flattening out that asset class is not looking particularly attractive either.

Gareth: We guess that means investors are still best served in equities. What sectors do you like at the moment? Can you suggest some shares that should outperform the market in the next 18 to 24-months?

Alwyn: Choosing sectors is tough. Last year it was very clear that commodities and commodity shares were hopelessly overvalued, but this year the choice is not as clear cut. From a valuation perspective it’s also difficult to differentiate between the three broad sectors, Industrials, Financials and Resources. You have to look at the market in more depth than before. But I would certainly say it’s become a stock pickers market

“Does a pseudo-emerging economy like South Africa deserve a currency at parity?”

Hart: I don’t think the rand is sustainable at these levels. And we still have to see the economy adjust to its recent strength.

Inflation is a bit lower than expected – and that has a lot to do with the rand strength (already mentioned) and the 18

2 October 2009

remain in place for an extended period of time?

Gilmour: I doubt it. I think around the middle of next year you could entertain the possibility of another interest rate hike.

It all depends on the extent and speed of the economic turnaround.

Gareth: Most fund managers we’ve talked to expect real returns of around 8% from equities for 2009. Given the rather horrific return expectation for cash, where should the conservative investor invest?

Gilmour: Other than equities there’s really nowhere to go. Your choices – property, bonds or cash – are not that compelling.

Gilmour: I agree – our stock selection meetings have become livelier these days.

Alwyn: With the recovery in China you should still have exposure to resources. We run private client portfolios so we stick with the ‘broad’ commodity plays. BHP Billiton (JSE: BIL) is one share we currently favour. And we like to pick up Anglo American (JSE: ANG) when it drops to lower price levels. Regardless of management’s recent dividend decision the

MoneyWeek’s Roundtable company has great assets! Within the financial sector we prefer Standard Bank (JSE: SBK). This is the top sector pick as far as we’re concerned. From a valuation perspective – provided the global economy pans out as we expect it to – we also like Investec (JSE: INP). In the industrial space British American Tobacco (JSE: BTI) still features strongly. The counter has performed poorly this year due to markets focussing on recovery stocks. You simply cannot ignore its 5% sterling dividend yield at a time when the rand is so strong.

We also like some exposure to cyclical shares. Our favourite in this category is Steinhoff International (JSE: SHF) which offers growth prospects and outstanding value.

Chris: We also like the big diversified miners such as BHP Billiton. And – believe it or not – we still like Sasol (JSE: SOL).

This is a good play on the current high rand/dollar exchange rate and the recent price stability of oil. We believe the share is attractively valued at the moment.

Massmart (JSE: MSM) is another of our favourites. We’ve included that counter in our portfolio despite the negative sentiment doing the rounds. A lot depends on what happens in the next six months – a great Christmas will send Massmart share into orbit – but regardless of the short-term we expect the counter will outperform through 2010.

Gareth: Chris, Last time we spoke you were extremely bullish on gold. Is that still the case?

Hart: At $1 000 per ounce, gold is at the threshold of another big run rather than at the end. To take advantage of the gold price I’ll stick with Harmony Gold (JSE:

HAR). I remain of the view that resources will outperform through any sustained economic recovery. Since copper is one of the base metals that will lead the recovery worldwide I would consider Palamin (JSE: PAM).

Our Roundtable tips Stock Anglo American BHP Billiton British America Tobacco Harmony Gold Investec PLC Massmart Palamin Sasol Limited Standard Bank Steinhoff International

Code AGL BIL

Price 23975c 20310c

BTI HAR INP MSM PAM SOL SBK

23474c 7843c 5338c 8650c 9850c 28700c 9675c

SHF

1653c

Prices at 29-September-2009

The MoneyWeek map

China’s global shopping spree China is on a shopping spree – and it’s starting to ruffle feathers.

This week it was reported that China’s state oil company, CNOOC, is in talks with the Nigerian government to take control of six billion barrels of crude in the area. Western oil majors who have been working in the region for years are none too happy.

Canada West Tar sands group Athabasca Oil Sands ($1.9bn)

America Three distressed asset funds ($2bn)

Nigeria Addax Petroleum ($7.2bn) Nigeria 20 oil blocks (undisclosed)

Angola Marathon Oil ($1.3bn)

Key ■ Invested ■ Has made offer for ■ Blocked bids

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Canada East Teck Mining ($1.5bn)

But China is buying up far more than just oil – it’s snapping up assets around the world. Deals in Australia, Libya and Angola have been vetoed by local governments, but plenty of others, such as Canada, have been grateful to accept China’s cash.

We look at some of China’s most recent deals in the map below.

Kazakhstan Libya Gas group KazMunaiGas Hong Kong Verenex Energy Exploration ($939m) Commodities trader ($462m) Noble Group ($850m)

2 October 2009

Indonesia Energy firm PT Bumi Resources ($1.9bn)

Australia West Rare earth miner Lynas Corp ($218m)

Australia East Chemicals groups Nufarm ($2.4bn)

entrepreneurs

How I turned rubbish into profits away. That’s when the media really saved us.” A local radio station carried a story on the fertiliser business, which led to an investor stepping in with $2,000. “It doesn’t sound like much, but it really saved us,” Szaky explains.

by Jody Clarke Tom Szaky, 27, may scour rubbish dumps for a living. But he’s no ‘dirty old’ ragand-bone man. His New Jersey-based company, $12.7m-a-year TerraCycle, turns everyday waste such as rolled-up newspapers and old computers into everything from pencil cases to plant pots. Not bad for a college drop-out who came close to bankruptcy within months of launching.

Born in Budapest, Szaky’s family fled Hungary in 1986 when “Chernobyl created some instability and allowed us to leave”. His parents, both doctors, settled in Canada, where the young refugee took his first steps in business, first on a lemonade stand and then, at 14, designing his own websites. But it wasn’t until 2002, as a student at Princeton University, that he hit on his ‘rubbish’ idea. “Some of my friends back in Montréal were growing marijuana and having a really hard time of it.”

That was, at least, until they started using worm food – the detritus left over by worms – as fertiliser. “That turned the proverbial lightbulb on in my head.

And it wouldn’t go out.”

More interested in the worms than the marijuana, Szaky dropped out of college, maxed out his credit card and pumped $22,000 into buying and operating a machine that housed millions of worms.

Working from a friend’s garage, he fed

With no money for packaging, Szaky used recycled containers such as coke bottles, which he wrapped with colourful labels and sold into stores such as Home Depot and Wal-Mart. By 2005, he was completing sales of $0.5m a year, growing to $1.5m in 2006, as more investors stepped in with cash. “That’s when companies began approaching us, asking for help with their own waste.”

MY FIRST MILLION Tom Szaky, TerraCycle waste from the Princeton cafeterias into the machine, along conveyor belts that pumped out a tonne of fertiliser a day.

“That was my summer. Shoving rotten garbage into the machine.”

His parents weren’t too happy. They “couldn’t understand why I’d thrown away everything on something as silly as worm poop”. By September 2002, they had almost been vindicated. No one wanted the organic fertiliser. “I was just about ready to sell everything and walk

TerraCycle started off turning used yogurt cartons into plant containers, moving on in January 2008 to holdalls made from Capri Sun drinks pouches. It’s a win-win situation for all involved.

Companies such as Kraft Foods, which funds the collection of its waste, can show the public that they care about the environment, while TerraCycle has a constant stream of cheap raw material to make its products.

The business is heading for sales of $30m next year. Is Szaky worried at all that there might be a green backlash during the downturn? “I’m no environmentalist.

I don’t have a hybrid car and I don’t buy organic food. This is entirely about price.

And because we have cheap raw materials, we can provide that.”

The MoneyWeek audit: Pamela Anderson • What’s modelling earned her?

Pamela Anderson became a model in 1989, age 21, after being spotted in the crowd at a football match. She became a Playboy covergirl within a year, and within five years was being paid £100,0000 for a centrefold in the magazine. Her calendars have also been profitable, with her 1997 offering earning her a reported £2m. In 1996 a sex tape of Anderson and then-husband Tommy Lee was illegally distributed by an internet porn company. In 2002, Anderson won £1m in damages.

• What did she earn on Baywatch?

Anderson had various bit parts on television before winning the

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role of CJ Parker on Baywatch in 1992. The popularity of her character saw Anderson earn £30,000 per episode. In 1996, she earned a further £30,000 when her baby son appeared in an episode of the show.

• What is she worth now?

These days Anderson mainly makes her money from personal appearances and Playboy shoots. In 2006, at the age of 39, Anderson was paid £50,000 for an hour’s performance with strip troupe The Pussycat Dolls (not to be confused with the band of the same name). Last year she earned £245,000 for appearing on the Australian version of Big Brother for just two days – and she didn’t even sleep in the house. But despite her vast earnings Anderson is in trouble with her builders after not paying them for six months. She is reportedly broke after spending £5m renovating a home and the builders are now set to sue for the £690,000 they are owed. She also owes £157,000 to the taxman but has just £2,300 in her bank account, according to reports.

personal finance

Going once… going twice… sold!

How to be a successful bidder at art and antique auctions

by Karin Iten

price. So if the initial bid was R1,000, you’ll need to raise your bid to R1,100 to be in the running. If the auctioneer can’t get a bid for the initial price don’t panic, in this case the auctioneer will drop the asking price by about a third to drum up interest.

There’s nothing like the thrill of an auction. On the day, hundreds of lots will be up for auction. And that’s means being successful all comes down to your ability to think fast and react even faster. It’s an aggressive and utterly nerve-wracking experience – especially if you’re a first time bidder.

But there are ways to make the experience a lot easier…

4 things to do before the bidding starts: 1. View the catalogue – Auction houses generally release their auction catalogue about a month before the auction. So, if you’re interested in attending – and possibly bidding on a piece – get your hands on a copy. These days, most catalogues are available online. So once you’ve downloaded your copy, run through it and mark all the lots you’re interested in.

2. Attend the preview – Since most lots sell in about 30 seconds, it’s important to attend the preview and give yourself plenty of time to properly assess the item. Check the item for damage and signs of restoration. Handle it as much as possible and look at it from every angle. Any irregularity can seriously hamper the feasibility of buying the piece as an investment. And remember, most auction houses don’t have an exchange or return policy.

Once you buy it, it’s yours. So make sure you like it. If you have any questions about any of the items you’re interested in, the preview is the perfect time to approach a house specialist. They’ll be too busy to give you an in-depth answer on the day of the auction.

3. Set a maximum price – With all the hype of auction day, it’s easy to get carried away by the thrill of the chase. That’s why you need to set a maximum bid before the day. So go online and do some research. Check

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how much items of similar quality and from similar periods have fetched in the past and determine how high you’re willing to go. A site like www.artprice.com will be able to help you with your research.

4. Pre-register – Don’t forget to preregister for the auction with the accounts department. To do so, you’ll need to give them your name, address and, in some cases, your bank account details. They, in turn, will give you your paddle or bidder number. By pre-registering you’ll not only be able to walk straight into the auction on auction day (a useful thing if you’re running late), but you’ll also get a lower bidder number. If there’s a tying bid on the day, the auction house will use the lowest bidder number to break the tie.

What to do on the day of the auction: When a lot you’re interested in is called, the auctioneer will ask for an initial bid – usually at the predetermined opening bid price you’ll find in the catalogue. If you’re a novice, don’t open the bid. You don’t want “phantom” buyers to chase the price up because they can tell you’re overeager.

Once the opening bid’s been placed, bidding will move in standard increments – usually 10% of the initial

To raise your bid by the allotted 10%, simply lift your paddle and make eye contact with the auctioneer or one of his assistants. If, on the other hand, you want to raise the bid by an increment different from the standard raise – say up the price by R500 – then you’ll raise your paddle and call out your bid.

As the bidding winds down, the auctioneer will ask for a final bid. Once sold, the auctioneer will close the bidding and acknowledge the sale by calling out the bidder’s number and adding a description so you know if you’ve won the piece or not.

You then need to go to accounts department after the auction and settle your bill. Give them your bidder number and check that all the lots on the bill are yours and no items are missing. Remember, once you’ve successfully bid for an item, it’s yours.

And you’ll have to pay for it. So make sure you have enough money in the bank to pay for it.

Upcoming art and antique auction calendar: Sotheby’s decorative and fine arts auction Venue: Cape Town Date: 20th and 21st of October Sotheby’s stamp and coin auction: Venue: Johannesburg Date: 4th of November Sotheby’s decorative & fine arts auction (also featuring books, jewellery, furniture and ceramics) Venue: Johannesburg Date: 17th and 18th of November

best books

by Andrew Van Sickle It’s fair to say that the financial crisis of 2007-2008 caught the Federal Reserve almost entirely off guard. “Every time officials at the Treasury or the Fed thought they had finally gotten ahead of the Great Panic, they turned out to be insufficiently pessimistic,” says David Wessel, economics editor of The Wall Street Journal. Wessel’s book, which opens with the collapse of Lehman Brothers, is an account of “overwhelmed” and “exhausted” policy makers desperately improvising in order to stave off a total collapse of the system as the crisis of 20072008 unfolded. It focuses on the “four musketeers”: a small group of key Fed officials, including chairman Ben Bernanke, as well as other major players, such as then-Treasury Secretary Hank Paulson. Despite a slow start, claims Wessel, Bernanke was “creative and bold”, vowing to do “whatever it takes” to prevent another Depression. The musketeers “got the big things right”, he adds.

There are plenty of “salacious and superficial” accounts of the credit crisis, says Donald Luskin on Smartmoney.com. “But if you really want to understand what happened” at the centre of the “firefighting response to the global conflagration”, this is the book to read. It’s “the best chronicle so far” of officials’ role in the financial crisis, agrees The Economist. Wessel has close access to those involved and “an eye for enlivening details”, as well as a gift for making finance “accessible to the layman without boring the specialist”.

Ideas that made modern India Nandan Nilekani is India’s Bill Gates, says Thomas Friedman of The New York Times. In this book, the cofounder of Infosys, one of India’s biggest IT outsourcing groups, explores India’s development through its ideas, “the ideas that have held India back, the ideas that are allowing it to forge ahead, and the ideas that it still needs to embrace”, says Kenan Malik in The Daily Telegraph. The book is particularly good on discussing ideas that were once bitterly resisted but have now carried the day, says The Economist. “It is easy to forget that many Indians once viewed computers as ‘man-eating machines’,” for example.

The level of detail means the reader can sometimes lose track of the overall argument, and “there are shorter, gentler introductions to India… But this is the second book everyone should read about this compelling country.”

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Still, Wessel isn’t “wholly impartial”, says The Economist.

The depiction of a blundering Paulson is “overdone”.

Wessel may well be “too enamoured” of his musketeers, says Edward Luce in the FT. They may have dealt with the immediate crisis, but they played vital roles in causing it.

©BLOOMBERG

How the Fed’s ‘musketeers’ fought the crisis

Ben Bernanke: “creative and bold”?

Bernanke in particular happily backed his predecessor Alan Greenspan’s decision to keep US interest rates too low for too long, inflating the housing bubble. Only one Fed member, Ned Gramlich, tried (in vain) to convince Greenspan to use the Fed’s powers of regulation over the subprime mortgage industry.

And while deflation may have been prevented for now, the risk is that the flood of liquidity unleashed will lead to “a Great Inflation”. Until it’s clear how this crisis ends, “the jury should delay its verdict”.

In Fed We Trust: Ben Bernanke’s War on the Great Panic by David Wessel (Crown Business).

What caused the Great Depression An account of the errors that led to the Great Depression, former World Bank economist Liaquat Ahamed sets out to show how the world’s four most powerful central bankers in the 1920s and 1930s tried to repair an international financial system battered by World War I. But by seeking to return the world to the gold standard, they only made things worse, contends Ahamed, as they placed themselves in an economic straightjacket.

“Harrumphing about the ‘gold standard’, Mr. Ahamed reminds me of the fellow who condemned ‘painting’ because he had no use for Andy Warhol,” says James Grant in The Wall Street Journal. Even so, “unlike most works on the origins of the Great Depression, (it) is highly readable”, says Niall Ferguson in the FT. “That it should appear, as history threatens to repeat itself, compounds its appeal.”

A moral manifesto for the crisis “A detailed analysis of the ethical and moral issues” raised by the economic crisis, Good Value is written by a banker with God on his side, says Ruth Gledhill in The Times. Stephen Green, chairman of HSBC and an ordained Anglican priest, believes the crisis should make us consider “how is what I am doing contributing to human welfare”? It’s “a fairly earnest manifesto”, says the BBC’s Evan Davis. But it’s also an “intimate, refreshing and at times searing read”, says Chris Blackhurst of London Evening Standard. You have to “pinch yourself to remember that this really is the man sitting on the 42nd floor of the HSBC Tower at Canary Wharf speaking”.

Each of these books is up for the FT/Goldman Sachs Business Book of the Year awards. Frank Partnoy’s The Match King, and Animal Spirits by Robert Shiller and George Akerlof are also shortlisted.

Spending it Where to stay

Two Thai spas: Raw-food detox versus gastro-heaven Six Senses Destination Spa What’s so special?

Mom Tri is a renowned Thai architect who owns the exceptional Boathouse restaurant on the island.

A few years ago he decided to turn his own home into a luxury hotel with one of Thailand’s most stylish spas.

How they rate it

The hotel’s three swimming pools are fantastic, says Sasha Bates in The Sunday Telegraph, with the best being “the curvy saltwater pool cut into the headland with its myriad hidden corners for almost-private lounging”. The suites are traditionally Thai-styled with a dark colour scheme “that perfectly suits the forest hideaway feel”.

The menu “Unsurprisingly, given its pedigree, the food is outstanding, French-influenced and inventive,” says Bates. “Sea bass with a cashew nut crust and tamarind coulis was a fantastic example of what can happen when East meets West in the hands of a master.” The hotel restaurant has spectacular views of the coast and, if you fancy a change, the Boathouse – which is considered one of the best restaurants in Thailand – is located on the beach right below the hotel.

The cost Suites cost from R2,660 a night and the spa offers treatments priced from 1,200 baht (R265). To learn more visit Villaroyalephuket.com.

What’s so special?

Situated on Naka Yai, a private island just north of Phuket, Thailand, this spa bans laptops, mobile phones and BlackBerrys from all public areas and aims to revitalise its wealthy guests with a bespoke treatment programme including a raw food diet.

How they rate it

The island is “Robinson Crusoe heaven, with its jungly interior and coastline dotted with beaches, coconut groves and mangroves”, says Ian McCurrach in The Independent. The large villas have an outdoor bathroom, private pool, private hot tub, a shower that is also a steam room, and a personal butler service. For a finishing touch, each villa garden includes organic herbs which can be used in the hot tubs.

The menu Guests choose between a rawfood menu consisting of dishes such as avocado, fennel and orange salad, and the pescetarian menu. The raw food is “surprisingly tasty” given that it consists of vegetables cooked to a maximum temperature of 42˚C. The cost A Hill Pool Villa costs from R9,800 a night including full board, two 60-minute spa treatments per person per day and a choice of fitness classes. Find out more at Sixsenses.com.

What the travel writers are saying

My dream holiday

Want to be treated like royalty? Aoife O’Riordain in The Independent suggests these three hotels with royal connections.

Richard Wilson, the actor, likes to “collect nice hotels”, he tells The Telegraph.

His favourite is the The Grand Hyatt in Beijing.

It has “one of the most fabulous swimming pools in the world, stretching the entire length of the hotel and done out as a grotto”. He likes Le Bristol in Paris, located at the heart of the city, close to the Champs-Elysees. Unusually for central Paris, it has a small pool and even a garden.

In India, there’s the Umaid Bhawan Palace, which has been occupied by the Maharaja of Jodhpur and his family since 1943. With 347 rooms, it “makes most royal abodes look rather pokey”. Prices from R3,900 a night. Try tajhotels.com.

The Villa Milocer in Montenegro is the former residence of Marija Karadordevic, the Queen of Yugoslavia. It overlooks “a ravishing 2km stretch of Montenegro’s coastline”.

There are only four suites in the main building with two more in an adjacent building.

Doubles from €495 (R5,400), room only. Visit amanresorts.com.

For a touch of majesty in London, try Claridge’s. On 17 July 1945, Winston Churchill declared suite 212 to be Yugoslavian soil so that Crown Prince Alexander could be born in his home country. After World War II, so many exiled royals stayed at Claridge’s that “when a diplomat called and asked to speak to the King, the response was: ‘Certainly, but which one?’” Doubles from £289. See www.claridges.co.uk.

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©BBC

Mom Tri’s Villa Royale

toys

A cruising penthouse Feretti’s Altura 840 is not so much a boat as a “cruising penthouse”, says Alan Harper in Motorboat and Yachting. It is“beautifully constructed” and has first-class design, with the white leather and varnished teak adding to the cool penthouse ambience. The three twin cabins are similarly well appointed, and the designer glass balustrades and huge windows give a light and airy feel throughout.

The Altura also handles nimbly and drives well for such a big boat (84ft), giving “sparkling performance, powering through waves with barely a tremor”, and delivering a top speed of 30.1 knots.

In the cockpit, the Naviops system monitors everything from the weather to the bilge pumps.

Price: €4.13m excluding tax (about R49m).

Contact: www.venturaeurope.com.

The split level apartment “wouldn’t disgrace a Mies tower on Lake Shore Drive”, says Harper.

Wine of the week: the most beautiful view in the Cape!

Wine: Waterkloof Sauvignon Blanc R165 at exclusive wine retailers I can’t wait for the Waterkloof estate based in Somerset West, to open its restaurant. Mark my words, it’ll be the most amazing place in the Cape. The French chef is standing by and they hope to open in November.

by Marilyn Cooper They’ve completed the tasting room. And have built it around the gravity cellar, right on top of the mountain, which has the most stunning views. Two of the walls are completely glass and you can see the Vergelegen Schapenberg vineyards, Sir Lowry’s Pass, Gordon’s Bay and The Strand stretching right over the whole of False Bay. Spectacular!

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2 October 2009

So, why the picture of a horse?

Well, this farm also sticks to organic and biodynamic vineyard practices. This means they don’t use tractors between the vines, but use a horse drawn plough – hence natural fertiliser! But the wines are the most expressive of terroir I’ve ever tasted. The Sauvignon Blanc just blows me away – both in taste and price!

Marilyn Cooper is a Cape Wine Master and Managing Director of the Cape Wine Academy.

blowing it

Harman has it wrong on lap dancing city, dwarfing the cobbled streets and crushing out the patisseries and gloomy little bars I used to love.”

Harriet Harman, Labour’s equalities minister, has “declared war” on lap-dancing clubs. The UK Treasury must clamp down on these dens of iniquity, she thinks.

In the old days, the Europarliament was a pokey office on the Rue Belliard. There may have been a bar, but no one ever went there. Now the place is heaving, as “are all the innumerable places of refreshment, pullulating with animated young thrusters of both sexes, their Christian Dior spectacles glittering with lust for – lust for what? Power, that’s what.”

“Why should you be able to get tax relief for a night out at a lap-dancing club where effectively you are discriminating against women employees in doing so?”

©PHOTOLIBRARY

But what tax relief? Harman has clearly never run a small business, says Heather McGregor in The Observer.

“There is no tax relief on entertaining clients.” McGregor, who does run a small business, quotes HMRC Notice 700/65: VAT incurred “on the provision of business entertainment is blocked from recovery under a special legal provision”.

The Notice helpfully defines business entertainment as “provided to persons who are not employees of your business” and “provided free”. Taking clients to a lap-dancing club certainly meets those criteria. So what’s Harriet fussing about?

The ruin of Brussels It’s a while since I’ve been in Brussels, and my memory of it is of an anonymous place with the odd pleasant square and a few nice restaurants. London’s mayor, Boris Johnson, has similar memories.

When he first went there 20 years ago,

Harriet Harman has declared war on lap-dancing clubs he told The Daily Telegraph, the Gare du Midi was “a wonderfully dingy place with feral cats and trod-on chips and Turkish taxi drivers snoozing in their battered Mercs”.

How different it all is now. Returning the other day, Johnson found a “vast, space-age Eurostar terminal” louring over the ancient quartier, and while the British developers in the Fifties may have given Brussels a pasting, it was nothing to the destruction now taking place in the name of Europe.

“As you get to the sites of the burgeoning European institutions, it is as though gigantic alien motherships of glass and steel have crash-landed on the

For while Westminster feels the pinch, with MPs shell-shocked by the expenses scandal retiring in droves, MEPs in Brussels are riding higher than ever: “Attended by every possible comfort, they have minimal interaction with their constituents, and in general the great Euro-gravy train rolls on at tres grande vitesse.”

Is this all a gigantic waste of money?

Of course, but it also, as Johnson says, reflects the modern reality. It is in spaceage Brussels, not dessicated London, that our laws are made now, by sleek, selfconfident, overpaid, overfed MEPs who make British MPs seem penny-pinching models of economy by comparison.

Tabloid money… let’s hope City cowboys choke on their pink champagne ■ Baroness Scotland, the British attorney-general, is fined £5,000 (R66,000) for breaking her own law on illegal immigrants, says The Sun – “peanuts to a woman with three homes. She says she ‘inadvertently’ hired a Tongan housekeeper who had overstayed her visa. But, as one of our top law officers, Lady Scotland knows better than anyone that the law insists employers must verify claims of residency. She just couldn’t be bothered. Communities minister John Denham warns that uncontrolled immigration could lead to ‘street riots’.

If he’s right, why is Baroness Scotland still in her job?”

■ John Humphrys describes his salary for chairing Mastermind as “money for old rope”, says Ann Widdecombe in the Daily Express. “Most of us would say the same about Bruce Forsyth’s £500,000 (R6m) for hosting Strictly Come Dancing, Anne Robinson’s pay for The Weakest Link and some

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of the ludicrous earnings by newsreaders.” Yet when Carol Vorderman was axed from Countdown for refusing to take a cut in her £800,000 (R9.4m) salary, she was replaced by an unknown and the programme survived. “I admire Humphrys, Forsyth and Robinson, but it is a nonsense to suppose that nobody else could do their jobs.”

■ The collapse of Lehman Brothers triggered the world financial crisis, says Fiona McIntosh in the Sunday Mirror.

“So how did Lehman’s bankers, most of whom have since landed well-paid jobs, mark the anniversary of Black Monday?

By swilling pink champagne in a London bar.” Whoever says the decade of greed and arrogance is over is wrong. Not an ounce of remorse has been shown by the cowboys who ran our economy into the ground. “They are only interested in toasting their personal greed. Let’s hope they choke on it.”

shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news

PUNTS Company

Media

Reason

RMB Holdings (RMBH) Banking

Financial Mail

Stephen Cranston of the Financial Mail thinks RMB is still trading at a modest discount. He says it “used to be to little more than a FirstRand pyramid”. But, it’s come a long way from there. It now owns a quarter of Discovery and controls profitable direct insurer Outsurance. Its PE value has increased substantially in recent weeks but at a value of 12.44 this share is definitely still cheap. Buy. 2732c

Billiton (BIL) Mining

Imara SP Reid

The analysts at Imara SP Reid reckon that despite revenue dipping by 15.5% this is a strong medium- to long-term play.

They believe there might be a small pullback in BHP Billiton’s share price. This is thanks to the overestimation of the demand for restocking in China. Imara does favour Billiton, however, as global recovery poses “challenges on the supply front.” Buy.

20415c

Larry Claasen of the Financial Mail believes “least-cost router Telemasters has done well in a down economy.” It managed to turn a profit and increase revenue 32%. It has a strong cash position but its margins are under attack. In response to this, it cut its latest dividend. This leaves the share perfectly positioned to either take advantage of the recovery or brave a further downturn. Buy.

210c

Telemasters (TLM) AltX

Financial Mail

Current price

GB Gold (GBG) Mining

Imara SP Reid

“What rand strength? We are producing in the USA!” is the title of the latest report issued by Imara SP Reid. Great Basin Gold has been sheltered from the strong rand thanks to its operations in Nevada. This isn’t the only good news coming out of the Australian Miner. It’s about to add a very lucrative asset to its balance sheet. The South African Burnstone project will be one of the industries lowest cost gold producers. It’s due to come online in June 2010. Management reports it will be able to produce gold at around $400/oz and with the gold price hovering around $1,000 this one’s a no brainer. Buy. 1090c

Liberty (MTN) Liberty Holdings

Finweek

Shaun Harris in Finweek says: “After disastrous interim results – which included a R1.2bn hedging loss (though around 50% is a paper loss and might be clawed back) – Liberty Group can only do better.” The fact is, current CEO Bruce Hemphill is in the dog

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2 October 2009

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shares at a glance MoneyWeek’s comprehensive guide to the week’s shares in the news

Company

Media

Reason

Current price

house after failing to hold the reserves to cover the high number of clients who have simply stopped paying. Fortunately, his bad capital management has been offset by one determined shareholder: Standard Bank. It seems hell bent on making its investment in Liberty work and with enough pressure Harris believes they will. Buy. 12215c Vodacom (VOD) Telecommunications

Summit TV Rudi van der Merwe, Stanlib Financial Markets

Rudi van Der Merwe of Stanlib believes Vodacom is looking attractive. This share is a bargain at any level below R56. He doesn’t “think there is going to be a great deal of headline growth and new subscriber growth” but that isn’t why he likes it. “They are going to be able to widen margins by cutting costs and it will be a good annuity revenue generator and an attractive dividend play.” Buy.

5615c

DOGS Company

Media

Super Group (SPG) Transportation Services

Zurich SA (ZSA) Property & Insurance

Financial Mail

Financial Mail

Reason

Current price

The Financial Mail’s Larry Claasen says Super Group “used to be a good company, it was going places.” I believe the emphasis in the last sentence is on the “was”. Its revenue was down 8% and it’s struggling to keep its head above water. The advice dished out by Claasen is: “Stay away until it’s clear what’s left of it.” Avoid.

85c

Stephen Cranston in the Financial Mail believes its time to bail while the share price is still high. It’s currently sitting at 17800c but good luck getting out of this rather illiquid share. It’s just reported an underwriting loss of R24.5m and “its motor book losses remain unacceptably high.” On top of this bad news, the share has cancelled its dividend. Avoid.

17800c

Reason

Current price

WATCHLIST Company

Media

Hardware Warehouse (HWW) AltX

Afdawn (ADW) AltX

Financial Mail

Imara SP Reid

Hardware Warehouse does the majority of its business in the Eastern Cape. It’s pulled 17% growth out of the bag. Sasha Planting says that it “has a diversified its customer base and invested in management and new systems.” Will this pay off?

We’ll see! Hold.

60c

The liquidators are after Allegro’s associate, Corporate Money Managers. They placed it under curatorship a while ago. It was at about this time that Afdawn’s management decided to step in “to form a clearer understanding of the underlying transactions acquired by CMM”. But, while Afdawn was embroiled in discussions Allegro was also put under curatorship!

Management has not been forthcoming with details and this has affected the share price negatively. Hold.

107c

**Closing prices as at 30 September 2009

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2 October 2009

last word

Good things come from bad times Thank the gods for a depression!

The God of Abraham may rule the Vatican. But another group of gods rules the City.

They are like the Greek gods – playful and mischievous, with a keen sense of humor and a connoisseur’s taste for irony and paradox.

They look down from heaven not like a benevolent shepherd watching his flock, but like a cackling gawker betting on mud-wrestlers.

Bill Bonner

Here on the back page, this is not the first time we’ve paid homage to these lesser deities. Nor is it the first time we’ve mentioned their perverse method: those whom these gods would destroy are first cursed with good luck. Today, we look at the bright side: later, they’re blessed by misfortune.

According to a pair of researchers from the University of Michigan, a depression does more for longevity than diet or exercise.

Life expectancy during the worst years of the Great Depression increased from 57.1 years in 1929 to 63.3 years in 1933, says the report by Jose A. Tapia Granados and Ana Diez Roux. It didn’t matter whether you were a man or a woman, black or white, the results were the same. And it didn’t matter if you were in the US during the Great Depression or in Spain, Japan or Sweden during their economic downturns.

In their study of America’s depression, the team concluded that “population health did not decline and indeed generally improved during the four years of the Great Depression, 1930-1933, with mortality decreasing for almost all ages, and life expectancy increasing by several years in males, females, whites, and nonwhites”. By contrast, life expectancy fell during the boom years. For most age groups, “mortality tended to peak during years of strong economic expansion (such as 1923, 1926, 1929 and 1936-1937)”, they wrote in the Proceedings of the National Academy of Sciences.

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2 October 2009

Conventional wisdom is that recessions are times of stress. People do not eat as well. They skip medical check-ups. They should drop dead earlier. Instead, they live longer. Perhaps it is because the economy slows down, allowing people to live at a more comfortable pace. Or perhaps, in hard times, people have less money to spend on liquor and tobacco.

Maybe the unemployed get more sleep.

We don’t know. But if you want to live an extra six years, nothing works like a slump. When it comes to economic health, nothing works as well as a depression.

On Monday, World Bank president, Robert B. Zoellick, explained to

At least they were healthy Washington how the dollar made Americans wealthy: “The United States is incredibly fortunate that the dollar enjoys this special status.” It made it possible for Americans to buy things abroad with dollars and then, rather than come back to the US as a claim against US assets, the dollars stayed in foreign central bank vaults. It was as if the US, and the US alone, could issue IOUs and never have to pay up. An “exorbitant privilege”, Valery Giscard d’Estaing called it.

Since the end of World War II, the world had no real alternative. It had to use the dollar in its international transactions, just as it once used gold. This had a marvellous effect on world trade and roughly the same effect on America as a winning lottery ticket. Like a lottery winner, she was ruined by it.

With no effective limit on the number of IOUs they could issue, Americans issued

far too many. From a low of around 2% of disposable income in 1945, US debt service rose to nearly 15% of disposable income in 2007. In terms of total debt/GDP, the ratio was only about 150% in 1945, but that was with public debt from the war years at 120% of GDP. By 1950, the war debt had been cut down to about 70% of GDP, with private debt still at about 35%. At the height of the bubble years – 2005 to 2007 – total US debt hit 360% of GDP, only 60% of it owed by the federal government.

Then, the bottom fell out of asset prices in 2007-2009. With so much collateral disappearing, America’s leading financial institutions were in trouble. Suddenly, it looked like the whole system might fall apart. In March of this year, Americans found that their stocks had fallen back to real values not seen since 1968. Their houses were sinking fast too. By May 2009, one out of every four American homeowners was ‘underwater’ – with a mortgage greater than the value of his house. Incomes and profits were falling, along with the net worth of the typical American household.

Everything was falling – except debt. How the gods must have roared when they saw the looks on their faces! In the biggest, longest boom of all time – even with a monopoly on the world’s reserve currency – Americans had lost money.

But while Americans were once cursed by good luck, they are now blessed by misfortune. Granados and Roux merely scrape the surface. “The US would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency,” said Zoelick. “Looking forward, there will increasingly be other options to the dollar.”

Thank the rascal gods. Americans are saving again, rebuilding their balance sheets – and, eventually, their economy.

And now they can look forward to living longer than ever too.

To read Bill’s thoughts, sign up to Money Morning’s free email at www.moneymorning.co.za.