“’Life is 10% what happens to you and 90% how you react to it.”- Charles R. Swindoll

In this edition we review the performance of the local equity market for December 2015 and feature the Rupert family empire in our stock pick. As always, we welcome your feedback and look forward to assisting you with your equity portfolio.
The Legae Team

A December to remember-politics and the markets

The JSE All Share index ended the month down 1.77% bringing the annual return for equity investors to a sombre 1.85%. As we reflect on December 2015 and the year that has been, a wise investor will use the discipline of introspection and critical analysis to understand his tally of wins and losses. These lessons will better inform future investment decision making.

SA can be accused of numerous misgivings, but the one thing that can never be said is that it is a boring nation– the unceremonious removal of the Minister of Finance proves as such. As all South African’s got ready to wind down a eventful year in the blazing summer heat, SA’s political landscape undertook a seismic shift which sent the markets into free fall. Forget resource sector volatility, currency weakness and monetary policy normalisation– what transpired at the South African National Treasury turned the heat up to ‘unbearable’ for market participants followed by a wide spread sell-off.

South Africans woke up to the news that President Zuma had removed finance minister Nene and replaced him with David van Rooyen. What ensued was nothing more than a blood bath. Every market from equities, to bonds, commodities to currencies capitulated as we all tried to make sense of what had transpired. The sovereignty of fiscal policy was destroyed and pensioners lost billions in their retirement savings. Only to have the President announce 3 days later ex-Minister Gordhan reinstatement. It was the soothing balm of certainty needed to end the market turmoil.

The decision to change Finance minsters in SA at a time when the economy is in its most fragile is something that SA was sorely punished for. On the JSE it was the financial sector and banks in particular that suffered. None of the banks were spared and Standard Bank came out the worst casualty falling 12% for the month. SA was put on negative watch by ratings agencies and the Rand hit lows never before seen.

For the first time this year December saw financials the worst preforming sector, down over 6% (1month) followed by resources and then industrials. Rand hedges bar Steinhoff benefited from the rand weakness. If we look at Figure 2 alongside, its not surprising to see the miners as the worst performers led by Lonmin. On the upside it was industrials that faired best lead by investment holdings company Brait which unlocked unbelievable value for shareholders through its off-shore acquisitions of unlisted Virgin Active and New Look.

In other company news MTN has missed its payment deadline for the $3.9bn Nigerian fine.

Figure 1: AllShare Index performance and PE rating


Figure 2: AllShare best and worst performers for 2015



MTN maintains no payment will be made till legal proceedings have been concluded. YTD MTN has lost investors nearly 40% in value and there is no clear indication of what the future of its Nigerian operations holds. What is certain is that MTN has the “too big to fail” benefit, being the largest cell phone net-work provider in Nigeria. This makes it unlikely the government will shut down MTN Nigeria in its entirety. However what must be noted is that post the fine scandal– MTN now trades at a PE of 9x, making it the cheapest of the telco stocks.
The billions of rands of shareholder retirement savings and wealth eroded by political upheaval, makes a strong case for larger diversification both in currency and geography. Compa-nies with a currency advantage and conducting most of its business off-shore have become even more attractive. We are now sobered to the fact that political risk is a real threat to the stability of our markets. As such, this months stock pick fea-tures our favoured currency and geographical hedges primarily from SA’s most famous entrepreneurial family– The Rupert’s.

Sticking to what works-The Rupert Dynasty

Figure 3: REM (white), REI (green) and CFR (pink)


If one where to have invested in the trilogy of Rupert compa-nies, in 2015 alone that would have returned to you nearly 30%. That is 16 times greater than the return of the JSE. The attractiveness of these investments is three fold.

1. Rand hedge attractiveness
2. Access to unlisted and/or expensive companies through investment holding companies
3. The Rupert management track record

The star performer of 2015 was Reinet which returned over 26% YTD and is indicative of its core holding in British Ameri-can Tabaco which returned 31% YTD. Through Reinet , you are able to access BTI more cheaply.
Remgro offers the same indirect access to First Rand, RMB, Mediclinic, Distell and RCL as well as unlisted Unilever.
Richemont is a niche player and has a market dominance in the luxury goods segment. It is ranked second largest in terms of market capitalisation.

Investment holding vehicles are favoured in a high PE environ-ment which currently characterises the ALSI (36).

If one believes that the management that drive the investment decisions of the Rupert dynasty will continue to unlock value for shareholders holding one or all three of the 3 R’s is an at-tractive prospect.

Global market feature– Fed lift off and a underwhelming performance of developed markets

The great Federal Reserve lift-off has occurred without much a do. The US began normalising monetary policy for the first time since 2006 and the markets, given much forewarning took the policy action well. In 2016 we continue to expect a very slow and gradual policy normalisation as Jannet Yellen has given us ample forward guidance.

This year has been hard on most emerging market given de-pressed commodity prices and political instability. The only real winner here wear India. Global growth was tepid and we expect that to not be very much change next year.

Of the developed nations Germany’s DAX offered the best re-turn (9.6%YTD) mainly attributed to the stimulus measures of the ECB. The biggest loser was the FTSE 100 which corrected some 4.7%. The S&P 500 was basically flat for the year.

Conclusion-failing to plan is planning to fail in 2016

There is now a collective and resounding understanding that we live in times so uncertain that everything than can change will change( for better or worse). As an investor you must re-main unemotional about this if you are to protect the long term value of your portfolio.

Harking back to our opening quote we believe that focusing on your locus of control as an investor is the only prospect for future success. One cannot control the macroeconomic envi-ronment, not the currency, nor interest rates or business confi-dence. What is within your power to control is your ability to critically analyse the facts as they stand and make your investment decisions accordingly.

Remember in any given economic climate there are those who make money and those who lose money. The defence again future market volatility will be to invest in listed companies where their revenues are generated largely outside of SA.

We wish you a calm and cautious start to new year and we look forward to helping guide you with all your equity investment needs.