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

2. And Now for Something Completely Different
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
Longer term, demographic factors suggest lower PE ratios

3. 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 is neutral-but the PE on the FINDI is expensive
US earnings growth is slowing but SA’s is still reasonable

4. US Corporate Earnings Season-Q2/Q3 2012
In Q2, the percentage of companies beating revenue forecasts was the lowest since For every company that gave a positive outlook, nearly 5 companies gave negative outlooks, Thomson Reuters data showed.
Q3 earnings estimates are down sharply, and now show a y/y decline of 1.8%, which would be the first quarter of negative growth in three years.
These results raise red flags for coming quarters. Early in expansions, earnings tend to strengthen as cost-cutting efforts boost profits - but revenues tend to catch up as demand increases later in the cycle. That hasn't happened in an expansion nearing its third anniversary
“Historically, we have only seen numbers like this during times of recession,”-Christine Short, S&P Capital IQ

5. S&P 500 Index
Going nowhere slowly-like

6. A Race to the Bottom (That nobody wants to win)
US, Spain, France, Japan, Switzerland

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

8. JSE Alsi Earnings Growth (%)
Major disconnect

9. JSE FINDI Earnings Growth (%)
Solid upwards trajectory

10. The Reverse Yield Gap Gap narrowing progressively and significantly
Over time

11. US Yield Gap
RYG YG
RYG=Reverse Yield Gap
YG=Yield Gap

12. JSE ALSI PE Ratio (x)
Expensive
Cheap

13. JSE FINDI PE Ratio (x)
Expensive
Cheap

14. Retail Sales growth flagging?

15. Boomer retirement leads to lower US PE ratios

16. ....and that trend continues for some time

17. 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. Reflects “muddling-through” approach.
US earnings growth is declining and the underlying economic fundamentals (both in the US and offshore) do not appear robust enough to improve this situation.
The ALSI is in neutral territory valuation-wise 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. However, a sustainably weaker rand could be negative for retail stocks.
An aging population may result in lower US PE ratios for next twenty years or so.

18. THANK YOU