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Global inflation fell to its lowest level in a year, 3.0% in February from 3.2% in January, according to JP Morgan statistics.
The slowdown is no surprise given the material base effect created by previously soft commodity prices. Meanwhile, momentum in the three month annualised rate of increase in inflation, which removes month to month inflation volatility and thus gives a better idea of price trends, is also slow at just 2.3%.

While a higher oil price could slow a downward trajectory in global inflation, the near term trend in both developed and developing economies is to shift lower.

Investor: Yields are tight, fees are high, and performance is scarce.What’s an investor to do?

Advisor: With so many uncontrollable variables impacting on your returns, one of the things you do have control over is fees. So look for funds with dirt-cheap fees. Enter the index fund.

Investor: But passive is boring and most active managers can outperform the market in SA.

Advisor: Not anymore. The funds have become smarter. In fact, choosing which index to track is now your first active decision!

The long-term performance graph of the FTSE/JSE All Share Index (J203) depicts significant events that moved the market during the period 1960 to 2011. It’s interesting to see that prior to the new democracy in South Africa, our market was affected by the political climate in our country whereas post the 1994 Democratic Elections global events have been a more substantial contributor to the volatility in our markets.

I remember in 1997 having various debates with some of my colleagues on what an appropriate rating for SA banks would be. At that time some market participants held the view that our banks had “defensive” qualities and that they deserved a premium rating relative to other SA equities because of their superior earnings growth track record and prospects.

“Human nature desires quick results, there is peculiar zest in making money quickly….compared with predecessors, modern investors concentrate too much on annual, quarterly and even monthly valuations”, Keynes

2011 was a roller coaster year for equity investors with more than $6 trillion – 9% in US dollars – wiped off the value of stock markets globally. At the start of the year the world was in recovery mode but dark clouds appeared early on when the so-called Arab spring saw the toppling of the long-standing leaders of Tunisia, Egypt and Libya after major political upheaval. Similar events continue to unfold in countries like Syria.

The current upswing in domestic consumer spending is one of the strongest associated with a post-recession recovery since the 1970s. This is not surprising. A sharp increase in South Africa’s terms of trade has boosted purchasing power and been supportive of final demand.

Our clients are well aware of the importance and emphasis we place on valuation and why it is important not to risk overpaying for an investment in any company. This article attempts to put the risk of overpaying into perspective by using the Constant Growth Gordon Dividend Discount Model (DDM)* to assess the long-term growth (g) and Return on Equity (ROE) that is required by a company in order to justify the price or value that you pay (the value in this case is determined by the price-to-earnings multiple (PE ratio) that you’ve paid for the company). We will reference a few practical examples in this analysis by using an example of a stock that we own (Lewis) and one that we don’t own (Truworths).