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

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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

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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

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Fixed Income – Relative Valuation against Equity