Absa Investments Media-Market Outlook-July Presented by: Christopher G.Gilmour-Investment Analyst

And Now for Something Completely Different  In 30 years in the financial markets, I have never seen conditions like this before  In the 1970s and 80s, the “Weight of Funds” ensured a continued upwards movement in equity prices. Like shooting fish in a barrel  In the 1990s and the Noughties, the removal of Prescribed Asset Requirements c/w a return to the international fold pushed SA equities higher  But now we are in new and different territory, though investment fundamentals remain intact  Like the rest of the world, our equity market is not aligned with the underlying economic fundamentals

And Now for Something Completely Different  There is a “race to the bottom” as far as interest rates are concerned. In late 2009, conventional wisdom saw US interest rates rising and those in the rest of the world following suit. But the reverse has happened.  The Yield Gap in the developed world has normalised after 50 years. In SA we still have a Reverse Yield Gap-but for how much longer?  The PE on the JSE ALSI appears cheap-but the PE on the FINDI is expensive  US earnings growth is slowing but SA’s is still reasonable

US Corporate Earnings Season-Q A mixed picture but on balance slightly better than expected So far 124 S&P 500 companies have reported - 33 (26.61%) have missed EPS estimates, 86 have beaten estimates (69.35%) and 4 are inline - 53 (42.74%) have missed revenue estimates, 70 have beaten estimates (56.45%) and 1 has been inline - 81 (66.94%) have seen earnings grow from Q1, 40 (33.06%) have seen earnings decline - 79 (64.75%) have seen revenue grow from Q1, 43 (35.25%) have seen revenue decline.

S&P 500 Index

A Race to the Bottom (That nobody wants to win)

S&P 500 Earnings Growth (%) US earnings growth in secular decline

JSE Alsi Earnings Growth (%) Earnings growth improving from last quarter

JSE ALSI YTD Total Return (%) 4.9% growth YTD

The Reverse Yield Gap

US Yield Gap

S&P 500 PE Ratio vs JSE ALSI PE Ratio (x)

JSE ALSI PE Ratio (x)

JSE FINDI PE Ratio (x)

Retail Sales get an adrenaline boost?

JSE Property Unit Trust Index Total Return YTD YTD total return of 18.9%

Conclusion  In the absence of a profound improvement in the S&P 500, it seems likely that global equity markets may continue to languish for the foreseeable future.  US earnings growth is declining and the underlying economic fundamentals (either in the US or offshore) do not appear robust enough to improve this situation.  The ALSI appears superficially cheap but if the large diversified miners are removed from the equation, the market is, in fact, expensive.  Retail stocks get a boost from lower interest rates. If further rate reductions materialise, they could benefit further, notwithstanding that most are priced for perfection.  Property stocks get boost from foreign investors seeking yield

Summary ALSI P:E 12.4xGood value Fwd 12.7x INDI P:E 17.9xPricey Fwd 15.6x Earnings GrowthY1Y2 ALSI 2.6%10.7% Resources-15.9%7.8% Industrials16.4%12.0% Financials14.4%13.5% FORECAST RETURNS Y1 Equities 10.4%Neutral Bonds 8.5%Neutral Cash 5.5%Neutral

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