Absa Investments MediaMarket OutlookOct 11 2012 Presented by

Absa Investments Media-Market Outlook-Oct 11 2012 Presented by: Christopher G. Gilmour-Investment Analyst

And Now for Something Completely Different § In the 1970 s and 80 s, the “Weight of Funds” ensured a continued upwards movement in equity prices. Like shooting fish in a barrel § In the 1990 s 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

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

US Corporate Earnings Season-Q 2/Q 3 2012 In Q 2, the percentage of companies beating revenue forecasts was the lowest since 2009. For every company that gave a positive outlook, nearly 5 companies gave negative outlooks, Thomson Reuters data showed. Q 3 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

S&P 500 Index Going nowhere slowly-like 1966 -1982

A Race to the Bottom (That nobody wants to win) US, Spain, France, Japan, Switzerland 1890 -2012

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

JSE Alsi Earnings Growth (%) Major disconnect

JSE FINDI Earnings Growth (%) Solid upwards trajectory

The Reverse Yield Gap narrowing progressively and significantly Over time

US Yield Gap RYG YG RYG=Reverse Yield Gap YG=Yield Gap

JSE ALSI PE Ratio (x) Expensive Cheap

JSE FINDI PE Ratio (x) Expensive Cheap

Retail Sales growth flagging?

Boomer retirement leads to lower US PE ratios

. . and that trend continues for some time

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.

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