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Focus On The Long Term

By Guillaume Oberholzer, 9 April 2019

Q1 Y19

With reference to our previous letter, the price we paid for our Christmas lights was load shedding. It is possible that we have not finished paying and that load shedding can be reinstated. However, what most taxpayers do not know is that Eskom consumed R4.6bn of diesel to minimise load shedding, while the budget for the financial year was only R670m.

The South African Revenue Service (SARS) has a new commissioner in Edward Kieswetter. He was part of the executive team when Pravin Gordhan was commissioner of SARS and did his job well. We just hope Mark Kingon will also be part of the current team.

The JSE rose 7.97% for the 3 months. This is not necessarily only good news, as some stocks have risen a lot and others have dropped a lot. Kumba Iron Ore rose almost 60% while EOH dropped about 65%. British American Tobacco rose 30%, but lost about 50% of its value in the last 6 months of 2018.

The only visible trend is that stocks doing most of their business in South Africa has had low to zero profit growth and, consequently, their price is under pressure. Shoprite down 13%, Truworths down 18%, Mr Price down 20%, Massmart down 20%, etc.

Over the past 6 months the JSE is only 2.56% positive. However, we believe that now, more than ever, an investor should keep his eyes on the long term. From the above share performance we also see that good management of funds as well as asset allocation is important within a client's total portfolio.

What Makes Stock Prices So Volatile?

The two biggest factors driving share prices are economic growth and valuation.

Economic growth in South Africa and worldwide is currently under pressure with the short-term prospects not looking too rosy. In the current circumstances this causes profit growth for companies to be small to sometimes negative. Any economic news that becomes known locally and worldwide is being absorbed into the market within minutes. Usually there is an over-reaction in prices to the news and later prices normalise again.

Valuation is a subjective concept because there are so many variables and unknowns. Different valuation models are also used. In the end, someone (or a team of people) decides what he is willing to pay for a company's profit and potential profit growth.

With so many participants (asset managers, advisers, individuals, etc.) on the market on a daily basis, prices vary widely.

Volatility is also aided by programmed trading being done by computers, term contracts, leveraged purchases and man's pursuit of short-term results.

Economic growth, profit growth and valuation take time to recover and realise. Keep your eyes on the long term.

Q2 Y19

The election should be a watershed moment for South Africa. Should the ANC win with a strong majority, Cyril Ramaphosa should be given a mandate to follow his agenda. We believe that there will then be clear economic and political policies that should have a positive impact on the business environment.

Please contact one of our expert advisors for further information.

The above-mentioned is for information purposes only and is in no way advice. Boshoff Visser Konsult (Pty) Ltd. encourages readers to get in touch with an expert financial advisor before making any decisions.