by Louis Jansen Van Vuuren

Blue Chip Shares

Warning for Greedy Bankers

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With signs of the economic slowdown perpetuating, Nedbank Private Wealth stockbroker Louis J van Vuuren gets real about the pressures on Blue Chips shares and the importance of a balanced equity portfolio during rocky times.

In recent times, headlines depicting bankers’ greed and accompanying scandals have been blazed across the globe; it is not a surprise that the following joke is doing the rounds: Banker to Banker, ‘I wish we invested in poverty; it’s up 60% since 2001’. 

The reply:  ‘We did’. On first glance it is humorous, but if you measure the impact that the trading manipulation, greed and disregard for corporate governance have on the wellbeing of the general population, then it becomes less funny.  What has happened to the well-being of people? Leading indicators and GDP figures world-wide have indicated a slowdown in world growth, a direct impact on our well-being.

What is well-being?  There is no standard definition of well-being, though in the Stiglitz Report  ,it was found that GDP is not a sufficient measure of well-being as the concept is multi-dimensional ‘and should include objectively measured variables such as income level and subjectively measured variables such as ‘are you satisfied with your life’’. 
Following the Stiglitz report, various measures of well-being came to the fore, including the UN Happiness Index, Your Better Life Index compiled by the Organisation for Economic Co-Operation  and Development  (OECD), and numerous quality of life measurements developed by specific countries (Britain, France, Canada, Australia). 
In South Africa, we also find a few measures of well-being or quality of life, though these measures mostly include only objective indicators, such as the Living Standard Measure. Those that do include subjective measures are equally weighted, for example the Gauteng City-Region Observatory (GCRO) Quality of Life measure implies that the quality of life priorities of the community are not considered.
To address the gap, a PhD student  in Economics at the University of Johannesburg constructed a quality of life index in which she made use of a statistical method namely Principal Components Analysis,  which can determine which dimensions of quality of life are most valued by a community and weight these dimensions accordingly.  Based on 2009 data for the Gauteng City-Region, the research identified five dimensions that play an important role in influencing well-being for this region.  
The five dimensions in order of importance are ‘housing and service delivery’, ‘social relationships’,’ material well-being’, ‘health and education’ and ‘governance and safety’.  Remarkable to find that the ‘material well-being’ dimension which is commonly used to judge well-being is only the third priority.  Still it was found that on average people were satisfied with their lives however they were nonetheless concerned about their financial position and the lack of employment.
Society’s well-being, and more specific your well-being correlated to the movement in Blue Chip share prices would be an interesting exercise. Apart from being a proxy to material well-being, the Blue Chip price movements influence society’s well-being, with a perceived increase in wealth when the market goes up and down, but with a multiplier effect, this leads to a growing or slowing economy. 
In current world affairs, the feel-good factors and positive news flow driving the markets both locally and offshore have all but dried up. Worldwide debt indulgences by governments and bankers’ greed contribute to the woes.
The European Union is faltering under the debt burden. Survival of the Union and specific reference to the Greek exit followed by other countries, depends on how Germany will choose to minimise the political and financial cost. Despite a weak Euro, German exports are already wavering due to lower demand from the Southern regions. A Spanish bail-out is on the cards with 10-year bond yields at unsustainable levels. 
During a speech in London‚ Mario Draghi, head of the European Central Bank, said the ECB was ready to do whatever it takes to preserve the common-currency union. I do not share that view. Read the Endgame: The End of the Debt Supercycle and How It Changes Everything by John Mauldin and Jonathan Tepper. 
The uprising of the populace to oppose the austerity measures needed is a sure sign of well-being under threat. It is no co-incidence that Timothy Geithner, United States Secretary of the Treasury is having meetings with Mario Draghi and the Germany Finance minister ahead of a Greece debt rollover on 20 August 2012.
American slowdown
The USA is showing signs of a slowdown. The American economy grew by an annual rate of 1.5% in the second quarter, losing its momentum from earlier this year. Growth was curbed as consumers limited new spending and as business investment slowed in the face of a global slowdown and a stronger Dollar.
 Consumers spend less if their well-being is under threat.  One such threat would be a political showdown by Congress prior to the elections with regards to debt levels. This can result in a fiscal tax cliff-hanger directly affecting consumer spend. Over time the USA will be changed by innovation, and energy independence. 
Not only is the North American energy independence a stated goal, but it is a big contributor to employment numbers and economic stimulus. In addition, a growing disparity between the public and private sector well-being will be the saviour of the USA economy with the private sector taking up the gauntlet to grow its economy.
China is evolving into a consumer driven economy rather than industrialisation, raising concerns for the demand of commodities. The People’s Bank of China had a series of reserve requirements reductions in 2011 and earlier this year.
 It has lowered its benchmark lending rate to 6,00%  from 6,56%. GDP second quarter figures were lower than expected at 7.6%. A glimmer of hope of a turnaround in the manufacturing sector activity underpins talk of a soft landing by the IMF. South Africa export 45.3% of its total mining exports to China. Commodities stocks make up 33% of the JSE All-share index.
Does the Johannesburg Stock Exchange All-share Index, a ‘proxy’ for Blue Chip shareholders’ well-being, offer value at present? At writing the All-Share was at 34850, briefly touching a record high of 35035. The historic P/E moved from 12.4x to 13.2x, post the Anglo American Plc results, versus the long term P/E of 14.45x. 
With GDP projected to grow at 2.5% p.a. an overall earnings decline looks unlikely; however, a decline in resource earnings as we have seen causes the P/E to rise.  Equities are not expensive; in addition a reversal to the mean is not an infallible indicator, especially if there is systematic change, example nationalisation. 
Anglo American Plc, makes up 5% of the All-share.  Around 40% of Anglo’s assets are in South Africa. Is Anglo American Plc cheap? Yes, but earnings are under pressure. On 27 July 2012 Anglo’s reported a 47% drop in earnings for 1H12. The 7.7x P/E moved to current 10.4x and will rise to 14x within the next 12 months. 
At the current price, long term value investors will add stock, but an earnings downturn implies a higher P/E, back to the mean. Anglo’s current low debt gearing, well below a historical average of 25%, suggests new capex projects, if any, should rather be geared at current low interest rates. The dividend policy should be reviewed.  An interim dividend of 0,32c (US) implies a 2.7% dividend yield.
 The caveat for buying the stock remains commodity demand and a sustainable dividend policy for the long term investor. Does money in an investor’s pocket not imply a general increase in material welfare? We would suggest so.
There is an obvious feel good factor when the economy is booming, the Alsi goes up, your net wealth increase and subsequently your well-being. These factors, housing and social relationships combined with material wealth all adds to general well-being. 
Given the greed and current world debt levels, it is not surprising that there is a growing trend to probe the limits of capitalisation and human insatiability; rather aim to pursue a balanced life and a balanced equity portfolio.
About the Author:
Louis Jansen Van Vuuren is a portfolio manager at Nedbank Private Wealth, holds a B.Comm honours degree from the University of Pretoria and has spent the past 18 years in the investment and stockbroking fields in both the UK and South Africa. 
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