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27px;padding-bottom: 54px;"> <!--[if (gte mso 9)|(IE)]> <table align="center" border="0" cellspacing="0" cellpadding="0" width="600" style="width:600px;"> <tr> <td align="center" valign="top" width="600" style="width:600px;"> <![endif]--> <table align="center" border="0" cellpadding="0" cellspacing="0" width="100%" class="templateContainer" style="border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;max-width: 600px !important;"> <tr> <td valign="top" class="bodyContainer" style="background:#transparent none no-repeat center/cover;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;background-color: #transparent;background-image: none;background-repeat: no-repeat;background-position: center;background-size: cover;border-top: 0;border-bottom: 0;padding-top: 0;padding-bottom: 0;"><table border="0" cellpadding="0" cellspacing="0" width="100%" class="mcnTextBlock" style="min-width: 100%;border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <tbody class="mcnTextBlockOuter"> <tr> <td valign="top" class="mcnTextBlockInner" style="padding-top: 9px;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <!--[if mso]> <table align="left" border="0" cellspacing="0" cellpadding="0" width="100%" style="width:100%;"> <tr> <![endif]--> <!--[if mso]> <td valign="top" width="600" style="width:600px;"> <![endif]--> <table align="left" border="0" cellpadding="0" cellspacing="0" style="max-width: 100%;min-width: 100%;border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;" width="100%" class="mcnTextContentContainer"> <tbody><tr> <td valign="top" class="mcnTextContent" style="padding-top: 0;padding-right: 18px;padding-bottom: 9px;padding-left: 18px;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;word-break: break-word;color: #5b5b5b;font-family: Helvetica;font-size: 14px;line-height: 150%;text-align: left;"> <div style="text-align: center;">EDITION 4 | JANUARY 2019</div> </td> </tr> </tbody></table> <!--[if mso]> </td> <![endif]--> <!--[if mso]> </tr> </table> <![endif]--> </td> </tr> </tbody> </table><table border="0" cellpadding="0" cellspacing="0" width="100%" class="mcnDividerBlock" style="min-width: 100%;border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;table-layout: fixed !important;"> <tbody class="mcnDividerBlockOuter"> <tr> <td class="mcnDividerBlockInner" style="min-width: 100%;padding: 6px 18px 18px;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <table class="mcnDividerContent" border="0" cellpadding="0" cellspacing="0" width="100%" style="min-width: 100%;border-top: 2px solid #EAEAEA;border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <tbody><tr> <td style="mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <span></span> </td> </tr> </tbody></table> <!-- <td class="mcnDividerBlockInner" style="padding: 18px;"> <hr class="mcnDividerContent" style="border-bottom-color:none; border-left-color:none; border-right-color:none; border-bottom-width:0; border-left-width:0; border-right-width:0; margin-top:0; margin-right:0; margin-bottom:0; margin-left:0;" /> --> </td> </tr> </tbody> </table><table border="0" cellpadding="0" cellspacing="0" width="100%" class="mcnImageBlock" style="min-width: 100%;border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <tbody class="mcnImageBlockOuter"> <tr> <td valign="top" style="padding: 0px;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;" class="mcnImageBlockInner"> <table align="left" width="100%" border="0" cellpadding="0" cellspacing="0" class="mcnImageContentContainer" style="min-width: 100%;border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <tbody><tr> <td class="mcnImageContent" valign="top" style="padding-right: 0px;padding-left: 0px;padding-top: 0;padding-bottom: 0;text-align: center;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <img align="center" alt="" src="https://gallery.mailchimp.com/cdd951e6a7a08b835a0f38a3f/images/352136e1-af66-4208-a8ff-2a84073de89c.jpg" width="600" style="max-width: 1200px;padding-bottom: 0;display: inline !important;vertical-align: bottom;border: 0;height: auto;outline: none;text-decoration: none;-ms-interpolation-mode: bicubic;" class="mcnImage"> </td> </tr> </tbody></table> </td> </tr> </tbody> </table><table border="0" cellpadding="0" cellspacing="0" width="100%" class="mcnTextBlock" style="min-width: 100%;border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <tbody class="mcnTextBlockOuter"> <tr> <td valign="top" class="mcnTextBlockInner" style="padding-top: 9px;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <!--[if mso]> <table align="left" border="0" cellspacing="0" cellpadding="0" width="100%" style="width:100%;"> <tr> <![endif]--> <!--[if mso]> <td valign="top" width="600" style="width:600px;"> <![endif]--> <table align="left" border="0" cellpadding="0" cellspacing="0" style="max-width: 100%;min-width: 100%;border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;" width="100%" class="mcnTextContentContainer"> <tbody><tr> <td valign="top" class="mcnTextContent" style="padding-top: 0;padding-right: 18px;padding-bottom: 9px;padding-left: 18px;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;word-break: break-word;color: #5b5b5b;font-family: Helvetica;font-size: 14px;line-height: 150%;text-align: left;"> <strong>Focus on the Long Term</strong> <h4 class="null" style="display: block;margin: 0;padding: 0;color: #949494;font-family: Georgia;font-size: 20px;font-style: italic;font-weight: normal;line-height: 125%;letter-spacing: normal;text-align: left;">Benjamin Graham is best known for his classic textbook “The Intelligent Investor” in which he famously remarked that “In the short run, the market is a voting machine but in the long run it is a weighing machine.” In other words, sentiment drives investor behavior in the short run, whilst reason prevails in the long run.<br> </h4> He coined the phrase “Mr. Market” to personify a remarkably accommodating fellow who names the prices at which he will buy from you or sell to you. Graham’s most ardent disciple is none other than Warren Buffet, who said of Mr. Market that “…. the poor fellow has incurable emotional problems. At times he feels euphoric and can only see the favorable factors affecting the business” …. “At other times he is depressed and can see nothing but trouble ahead for both the business and the world.”<br> <br> <em>Correlation of Markets and the Economy</em><br> Logic dictates that the performance of financial markets should be correlated with the state of the underlying economy. Economic growth is the main driver of corporate earnings, which should have a major impact on the valuation of securities. An examination of stock market prices and GDP in developed market economies shows that these do indeed tend to move together over time. The long term relationship is borne out by the graph below.<br> <br> <strong>Dow Jones Industrial Average vs USA Growth in GDP</strong><br> <div style="text-align: center;"><img data-file-id="431753" height="235" src="https://gallery.mailchimp.com/cdd951e6a7a08b835a0f38a3f/images/b3487a99-d8f5-4108-b9cf-8b0b3f0684d0.jpg" style="border: 0px initial;width: 500px;height: 235px;margin: 0px;outline: none;text-decoration: none;-ms-interpolation-mode: bicubic;" width="500"></div> Source: CXO Advisory Group Economic Indicators April 2018<br> <br> However, the situation is very different in the short term. The simple reason is that markets continually rise and fall in anticipation of GDP forecasts and tend to run ahead, sometimes for the correct reasons and at other times quite irrationally. It is more true to say that there is a lead/lag relationship between markets and fundamentals and thus no short-term correlation is possible. Current GDP growth is therefore of no use in predicting next quarter investment returns.<br> <br> <strong>Asset Valuation in Principle</strong><br> How do you determine the correct value of a share or bond? In theory, the price that you pay should equate to present value of the after tax future income distributions over time. In the case of a company this income is the future dividend flow.<br> <br> Our intention is not to get bogged down in the mathematics of how securities (shares and bonds) are valued. Suffice it to say that you would need some earnings forecasts, an investment time horizon and an assumed discount rate at which to convert future cash flows to their present day equivalents.<br> <br> Your discount rate would be a function of both the current inflation rate and the relative riskiness of the investment. Higher risk assets need to produce higher returns than their lower risk counterparts. For example, shares are riskier than bonds, smaller entities are riskier than larger ones, emerging markets are riskier than developed markets and mining stocks are riskier than banks.<br> <br> The investment manager would ideally select counters that are offered by Mr. Market at prices that are at a discount to their fundamental valuation and avoid those that are excessively priced. Over time, as the effect of the “weighing machine” is felt, the valuations should materialize and translate into solid performance.<br> <br> The most common valuation convention is to refer to a “price to earnings ratio” or P/E ratio. For example, if a share trades at 100 and the earnings are 10, the P/E ratio is 10 and the “earnings yield” is 10%. If half of the earnings are distributed as dividends, (a so called “dividend cover” of 2), then the dividend yield is 5%.<br> <br> <strong>Asset Valuation in Practice</strong><br> Security valuation is best illustrated by an example. Let us assume that the required real return for the shares of a listed company is 4% and our target company is able to grow its earnings at an additional 5% for the first 5 years before reverting to the market average. After crunching the numbers, we price the shares at a multiple of 16* current earnings. This is the “price to earnings ratio” or simply the “P/E ratio” of 16. <br> <br> In a similar manner, changing the excess earnings growth rate from 5% to 20% for the first 5 years would increase the P/E ratio to 29. Changing the excess earnings growth rate to 40% for the first 5 years, we would be happy with a P/E ratio of 57. As improbable as these numbers may seem, technology stocks have in recent years vindicated their stratospheric valuations by delivering commensurate performance.<br> <br> The concept of a P/E ratio can be misleading as earnings are historical by nature. Analysts therefore base their numbers on projected future earnings and use so-called “forward price earnings ratios”. By way of an example, if we assume that a company has a P/E ratio of 18 and earnings are set to increase by 20%, then the forward P/E is only 15, which is considerably less expensive.<br> <br> Logically one would expect high P/E ratios when markets rally and low P/E ratios after periods of sustained underperformance. It would generally follow that a low P/E ratio is a proxy for value and a high P/E ratio a sign that markets are overvalued. <br> <br> The current average P/E ratio for shares quoted on the JSE ALSI Index is 15, which is very much in line with the long term average. To place this in context, the highest level attained in Jan 17 was in excess of 30 and the lowest in Jan 09 was only 8. Although there are other measures of value, it seems on the face of it that on a price to earnings basis, the JSE is not expensive in relative terms.<br> <br> <strong>The Role of Sentiment</strong><br> The purpose of the rather technical discussion regarding the valuation of securities is to illustrate how sensitive these values are to changes in the assumptions made. These assumptions reflect the changing views of the investment community. Not surprisingly, the market reacts whenever key economic data is released (for example, housing, jobs or retail sales numbers), or when commodity prices and interest rates move unexpectedly. Variances between analyst forecasts of corporate earnings and trading updates or unexpected trading results can also cause havoc with share prices.<br> <br> In these times of unprecedented market turbulence, we are reminded of the perennial question that our fund managers need to confront, namely whether the consensus view of the market is based on the correct assumptions. The analogy of whether the “voting machine” or the “weighing machine” is in use is very apt in this context. The ability to differentiate oneself from the herd when it matters is the hallmark of the astute investment analyst.<br> <br> In our next Newsletter we shall examine the effect of geopolitics on market sentiment, consider financial markets in the correct context and revisit the importance of following a sound financial planning process. </td> </tr> </tbody></table> <!--[if mso]> </td> <![endif]--> <!--[if mso]> </tr> </table> <![endif]--> </td> </tr> </tbody> </table><table border="0" cellpadding="0" cellspacing="0" width="100%" class="mcnImageBlock" style="min-width: 100%;border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <tbody class="mcnImageBlockOuter"> <tr> <td valign="top" style="padding: 0px;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;" class="mcnImageBlockInner"> <table align="left" width="100%" border="0" cellpadding="0" cellspacing="0" class="mcnImageContentContainer" style="min-width: 100%;border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <tbody><tr> <td class="mcnImageContent" valign="top" style="padding-right: 0px;padding-left: 0px;padding-top: 0;padding-bottom: 0;text-align: center;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <img align="center" alt="" src="https://gallery.mailchimp.com/cdd951e6a7a08b835a0f38a3f/images/ada16f31-8646-4409-97b2-18853b2dd66a.jpg" width="600" style="max-width: 1200px;padding-bottom: 0;display: inline !important;vertical-align: bottom;border: 0;height: auto;outline: none;text-decoration: none;-ms-interpolation-mode: bicubic;" class="mcnImage"> </td> </tr> </tbody></table> </td> </tr> </tbody> </table><table border="0" cellpadding="0" cellspacing="0" width="100%" class="mcnTextBlock" style="min-width: 100%;border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <tbody class="mcnTextBlockOuter"> <tr> <td valign="top" class="mcnTextBlockInner" style="padding-top: 9px;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;"> <!--[if mso]> <table align="left" border="0" cellspacing="0" cellpadding="0" width="100%" style="width:100%;"> <tr> <![endif]--> <!--[if mso]> <td valign="top" width="600" style="width:600px;"> <![endif]--> <table align="left" border="0" cellpadding="0" cellspacing="0" style="max-width: 100%;min-width: 100%;border-collapse: collapse;mso-table-lspace: 0pt;mso-table-rspace: 0pt;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;" width="100%" class="mcnTextContentContainer"> <tbody><tr> <td valign="top" class="mcnTextContent" style="padding-top: 0;padding-right: 18px;padding-bottom: 9px;padding-left: 18px;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;word-break: break-word;color: #5b5b5b;font-family: Helvetica;font-size: 14px;line-height: 150%;text-align: left;"> <h4 class="null" style="display: block;margin: 0;padding: 0;color: #949494;font-family: Georgia;font-size: 20px;font-style: italic;font-weight: normal;line-height: 125%;letter-spacing: normal;text-align: left;">The Income Tax Act provides taxpayers with an opportunity to maximise their savings by contributing to Retirement Funds and/or Tax Free Investment Plans. </h4> <br> <strong>Retirement Annuities</strong><br> Contributions to retirement funds are tax deductible up to the following maximums. <br> The lessor of: <ul style="list-style-type:circle;"> <li style="mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;">R350 000<br> OR</li> <li style="mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;">27.5% of the greater of the taxpayer’s remuneration or taxable income</li> </ul> Please remember that tax deductible contribution limits apply in respect of contributions across all retirement funds, whether made by the taxpayer or the taxpayer’s employer on their behalf.<br> <br> <strong>Tax Free Investment Plans</strong><br> All natural persons can invest up to R33 000 per annum in a TFI, limited to a maximum of R500 000 during their lifetime. The tax payer does not get a tax deduction for the amount invested in that tax year, but the investment returns will be generated tax-free. The investment will also pay out tax free.<br> <br> Should you wish to utilize this opportunity or discuss further please don’t hesitate to contact us as soon as possible to ensure that you meet the deadlines for the 2019 tax year. <div> </div> </td> </tr> </tbody></table> <!--[if mso]> </td> <![endif]--> <!--[if mso]> </tr> </table> <![endif]--> </td> </tr> </tbody> </table></td> </tr> </table> <!--[if (gte mso 9)|(IE)]> </td> </tr> </table> <![endif]--> </td> </tr> <tr> <td align="center" valign="top" id="templateFooter" data-template-container="" style="background:#333333 none no-repeat center/cover;mso-line-height-rule: exactly;-ms-text-size-adjust: 100%;-webkit-text-size-adjust: 100%;background-color: #333333;background-image: none;background-repeat: no-repeat;background-position: center;background-size: cover;border-top: 0;border-bottom: 0;padding-top: 45px;padding-bottom: 63px;"> <!--[if (gte mso 9)|(IE)]> <table align="center" border="0" cellspacing="0" cellpadding="0" 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