Wayne McCurrie on Fixed Income and Cash Investing
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Transcript of Wayne McCurrie on Fixed Income and Cash Investing
Agenda
Fixed Income and Cash Investing
Introduction
Fixed Income Markets
Cash Investing
Broad Asset Allocations
Introduction
investments
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Fixed Income - Introduction
• An issuing authority (Government – Agency – Corporate – Municipality) issues a Bond
(aka Gilt) where they promise to pay a certain % interest rate (mostly fixed) every six
months for a certain number of years (duration) and the capital at the end of the period.
There are also Inflation Linked Bonds and the so called zero coupon bonds.
• The valuation is based on the ruling interest rates in the market, the duration of the
bond and the credit rating of the issuer
• Simplistically if 30 year interest rates are 10% and the issuer is issuing a 8% bond of
R1m over 30 years, the issuer will be able to “sell” the bond at R1m / 10 * 8 = R0.800m
• The purchased will “make” money if rates fall and “loose” money if rates rise. I.e. if you
bought at an 8% yield and rates go to 9%, your investment is worth less.
• The capital value at the end of a 30 year bond has very little value in the calculation
• This is the same for ALL duration bonds (only overdraft has no duration)
• You (normally) pay TAX on interest received
Fixed Income Markets
investments
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Fixed Income – South African Bonds
investments
Risk assets within Fixed Income give most of Aug gains back
Source: INET
6
investments
Risk assets still ahead for the year, strong base effects ahead
Source: INET
7
investments
Market uncertain as to how risks play out
Source: Bloomberg
8
investments
EM local currency debt vulnerable to global risk appetite
9
Source: INET
9
-60
-40
-20
0
20
40
60
80
Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
R B
n
Cumulative Foreign Bond flows per calendar year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
investments
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Fixed Income – Inflation Rate
investments
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Fixed Income – Real Return on Bonds
investments
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Inflation expected to breach the upper 6%
target by Q4 2011
Source: I-Net, Momentum Asset Management, (August 2011)
Headline CPI (%) year-on-year
0
1
2
3
4
5
6
7
8
9
10
Jan-0
9
Apr-
09
Jul-0
9
Oct-
09
Jan-1
0
Apr-
10
Jul-1
0
Oct-
10
Jan-1
1
Apr-
11
Jul-1
1
Oct-
11
Jan-1
2
Apr-
12
Jul-1
2
Oct-
12
Jan-1
3
Apr-
13
Jul-1
3
Oct-
13
Headline CPI (% yoy)
investments
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Food, fuel and administered prices remain
upside price risks
Source: StatsSA
Percentage change in CPI categories for 2011
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
Te
leco
mm
un
icatio
n (
eq
uip
)
Ho
tels
Re
cre
atio
nal e
qu
ipm
en
t
Fu
rnis
hin
gs
Ap
plia
nce
s
Ve
hic
les
Po
sta
l &
te
leco
m s
erv
ice
s
Fo
otw
ear
Pe
rso
nal c
are
Clo
thin
g
Me
dic
al p
rod
ucts
Main
ten
an
ce
& r
ep
air
s
Fin
an
cia
l se
rvic
es
Oth
er
(fu
ne
ral c
osts
)
Ow
ne
r's e
qu
ivale
nt re
nt
Re
cre
atio
nal s
erv
ice
s
Insu
ran
ce
To
bacco
No
n-a
lco
ho
lic b
eve
rag
es
Actu
al re
nta
ls f
or
ho
usin
g
Do
me
stic w
ork
er
wag
es
Alc
oh
olic
be
ve
rag
es
Re
sta
ura
nts
Me
dic
al s
erv
ice
s
Pu
blic
tra
nsp
ort
Fo
od
Te
rtia
ry e
du
catio
n
Pri
mary
an
d s
eco
nd
ary
ed
ucatio
n
Wate
r &
se
rvic
es
Sta
tio
ne
ry, b
oo
ks
Pri
vate
tra
nsp
ort
Ele
ctr
icity a
nd
fu
els
% y/y change in CPI categories for June 2011
27% of the basket is below the 3% lower target band
34% of the basket is within the target band
39% of the basket exceeds the 6% upper target band
investments
Traditional valuation metrics not very effective at present
Global
-’ve Output
gap /
Deflation
+’ve Output
gap /
Reflation
Current
G4 Inflation
Protected
Securities
0.50% 2.00% 0.00%
SA risk premium 2.00% 1.00% 2.43%
Inflation exp (1 yr
fwd) 4.00% 6.00% 5.50%
Supply premium /
discount 0.50% 0.00% 0.50%
Fair Value 7.00% 9.00% 8.43%
Source: Bloomberg, Momentum Asset Management
14
investments
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Cash – An investment opportunity?
• Cash (for an individual or a tax paying entity) is actually only a good investment when
everything else is falling
• Scenario
• Real yields (i.e. above inflation) will most likely average abut 3% over time
• Inflation (optimistically) will probably average 5% over time
• Therefore cash should give you 8% BEFORE TAX
• Therefore if you are an individual at marginal tax rate – you will earn (after tax) LESS
than the inflation rate.
• You will at best stand still over time
investments
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Fixed Income – USA Government Bonds
investments
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Fixed Income – USA Real Return
investments
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The US of AA+
US government debt as % of GDP
US government debt is near 100% of GDP.
Not AAA credit rating stuff.
investments
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Barack Obama – 08 August 2011
Source: Bloomberg
“Markets will rise and fall, but this is the United States of America. No matter what some agency say, we’ve always been and always will be
a AAA country.”
Asset Allocation
investments
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Source: Momentum Asset Management
Investment clock
investments
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Fixed Income – Relative Valuation against Equity