Source: Bloomberg, January 2012.
Our friends at MitonOptimal are multi-managers and, as such,
they do not pick individual equities, but rather focus on sector selection and
let the asset managers make their top stock picks for them. Furthermore, given
the mercurial nature of markets at the moment it is hard to pin one’s hopes on
any one stock, as it is their view that we are currently in a trading market
and, therefore, a buy and hold strategy is not the correct approach right now.
A sector that they believe has the potential to produce good
returns in this current environment is the gold sector, where there is currently
a major disconnect between the individual share prices and the gold price.
In discussions with asset managers such as Daniel Sacks of
Investec Global Gold and Ian Woodley of Old Mutual Gold Funds, it is clear that
the managers are pretty bullish on the sectors, particularly given that ratings
are incredibly low and gold companies are cash flush. Both managers have the
ability to buy the gold commodity ETF in their funds, but have chosen lately to
reduce their physical ETF and instead buy the gold miners, as they believe the
better opportunity now lies with the shares. To labour this point, it is
estimated that the sector as a whole is pricing in a gold price value of $1500,
a significant discount to the current gold price of $1740 - this article was
written in early February.
Ian Woodley’s view is that, despite the more recent change to
a ‘better’ environment for risk assets, there has been no concomitant retreat in
gold share prices. The anticipation of more quantitative easing, higher
developed market inflation and lower interest rates for longer may be a reason
why gold stocks can continue to be attractive even when risk appetites are
increasing. Ian reports that gold demand from China and central banks remains
strong and can underpin a gold price in a range between $1650 and $1800 per
ounce.
Analysts are predicting that earnings of gold miners will be
ridiculously good in the near term. JP Morgan Analysts, Steve Shepherd and Allan
Cooke, said the average gold price received in the September quarter was a
record SAR391,250/kg, thanks to the gold price rising by 13% and the Rand
depreciating by 5.5%. On the negative side, however, labour disputes and wage
increases of over 9% will not have helped. Thanks to slightly improved
production levels and substantially higher gold prices, the likes of AngloGold’s
earnings should increase by 50% and Harmony’s are expected to double.
The other important catalyst we believe that will propel the
shares higher is the anticipation that the South African gold miners are now
going to pay out some of these high cash earnings in the form of special
dividends, or share buy backs. In 2011 Newmont (the world’s second largest gold
producer) announced a dividend policy that is linked to the gold price. This
firmly nails their colours to the mast and will force the company to pay
increased dividends in the future. Post this strategy, the share has massively
outperformed the S&P 500 and Gold Mining company management in South Africa are
said to be eyeing this dividend policy quite carefully. In a world of low yield,
higher dividends might just be the recipe to drive the sector higher.
Local and global investors are facing two issues at the
moment:
* In a world where cash returns remain unattractive,
investors are forced to assume additional risk to generate inflation plus
returns. Historically SA investors had comfort, as cash yields generated real
returns on average of 3% p.a. - at least since 1993. However, these days real
interest rates are now in negative territory.
* In the developed world, dividend yields from the global top
100 stocks currently exceed those of bond yields. Recent information from the
Old Mutual Investment Group shows the historical differences between the
dividend yields of these companies and a flat average of the US, UK, Japan and
Australian sovereign bond yields. It demonstrates that current dividend yields
of these large companies are more attractive relative to bond yields.
Given both scenarios make it clear that domestic and global
investors need to assume additional risk to gain real returns on their savings,
a golden opportunity may be gold equity.
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The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the
above article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of reading the
above article. For more information please contact Graham Macdonald on
[email protected] |
