Life is that thing that happens while you are living (unknown).

The rugby world cup was a stark reminder of how quickly time flies, it feels just yesterday I was sitting in Brighton watching Japan beat SA and here I am four years later watching the Japanese support South Africa. What it does reinforce in the investment mind is that paying as little interest on purchases and earning annual dividends is crucial to performance.

They say children leave the house but never the wallet, I have experienced this over the past couple of years, and the economic climate and political environment make it increasingly difficult for the youth to become self-sustainable, where am I going with this? I had the privilege of being the joint applicant on a mortgage (bond in SA) application; my daughter is in the process of purchasing a flat in London with the idea that in 30 years this will be a large part of her pension. I chose a 20 year term with 10 year fixed rate of 1.89%, yes you read it correctly 1.89% for first 10 years then floating for last 10.

With interest rates in the developing world this low, how is it that the powers that be cannot get the economies growing but, more importantly, how can South Africa ever get growth going with interest rates so high. Eksdom, corruption and the SMEs are a huge problem, but high interest rates are not helping anyone other than those who are moving money overseas at an ever-increasing rate.

I feel like a broken gramophone, Donald Trump continues to fight with everyone and anyone, yet US markets continue higher while everyone sits underweight waiting for the crash. Every article I read either refers to deflation, recession, trade wars, Brexit, slowing earnings, rates cuts to stimulate and the end of the world as we know it.

Low interest rates definitely help, why hold cash at 0 when you can buy a dividend stock paying 2%, companies can fund buy backs with cheap debt, PE ratios are expanding while earnings contract, growth shares (those who sell hope of being the next best thing) continue to outperform Value (those that are seen to be stable payers but won’t see growth without acquisition).

South African markets have their own structural anomalies, ETF ( global exchange traded funds) are now having more of an effect in market moves than underlying fundamentals, Clicks (a share we are short of) trades on a 35 PE and moves higher as funds allocate passive money to it, (Aspen and Steinhoff had the similar moves when they were in their go-go years), we are not saying clicks is a Ponzi scheme but it currently trades at a 3 times valuation of any other SA retailer which is not sustainable.

Moving into UK property shares has proved quite lucrative but at the same time we missed out on what we feel is the last leg of the resource bull market, Impala platinum which we held at R30 in the beginning of the year is now R104,60% of this move in the last 4 months, Anglo, Amplats, Kumba Iron Ore, Assore and Billiton have had similar outperformance and shows that when funds are underweight a sector topping up to full weight leads to big moves regardless of how irrational they seem.

The World Cup is over, Halloween is done, Guy Fawkes fireworks are popping outside and the first Christmas advert was flighted on UK TV this weekend. Thankyou Boks for showing us a team of underdogs can still overcome the favourites, ‘gees’ is not to be under rated. The Courtney team this quarter feel a bit like the England team did on Sunday, battered, bruised and not sure how the market did what it did. However, as I write the portfolios are up for the year even though we underperformed our benchmark. Protection of your capital is key and we constantly analyse where we failed to spot the gaps. We hope to report outperformance into the new year.

All the Best

Die Courtney Span.

Trump, Trade Wars, Tariffs, Tanker attacks all that’s missing are tidal waves and tsunamis.
Given all the T’s one cannot help but think the final T will be tears, yet still the USA powers
higher on cheap money and central bankers promising to do all it takes to provide liquidity.

The quarter has been characterized by illiquidity and volatility, JSE volumes have halved as
asset managers sit on their hands hoping to be the first to react when things normalize. The
SAFEX open interest which topped at 260 thousand contracts in 2017 now only has 75
thousand. The Rand had four moves over 6%, two of these moves happening in under five
days. (Currency traders are crying over this, but when I tell them a 10% move in a day for a top
100 JSE share is becoming the new norm they realize their lives are sheltered).

This quarter saw moves over 5% on a day in 21 of the top 40 shares listed on the JSE, this is
neither rational nor sustainable and the biggest issue is that the next day the stocks reversed on
no new news flows. Algorithms search for the volume and sell or buy until they find it, the
moves have very little to do with fundamentals and reality.

Willem and I have always had the mantra that in the SA markets someone else always knows
and when seeing big moves its best not to second guess or be arrogant and believe you know
more, this means we have missed some opportunities but at the same time we have not risked
the portfolios having possible big write-downs. (Steinhoff, CIL, Aspen, Brait and Tongaat have
taught many a newbie that pride comes before a fall).

Looking forward we believe SA small caps are becoming incredibly cheap, unlisted shares are
now trading at higher multiples than the listed ones. The biggest issue however is after entering
a trade how does one exit and in the case of small caps we can only see MBO or corporate action
as the solution. We have allocated a small portion of the portfolios to these opportunities in the
belief that offers to minorities are the next step.

UK property shares have been decimated in the wake of Brexit and the Amazon effect killing the
high street, some of these are now 80% off their highs and we are upping our exposure to these
too. The yields are high for a hard currency asset and the discount to NAV they trade at. Even if
NAV is over stated it still makes them a low risk annuity income stream.

The winter solstice has come and gone; before we know it Christmas will be upon us. Let’s hope
the markets deliver the portfolios some early presents.

All the best.

Arthur & Team

Just when you thought things couldn’t get worse, they do.

I have learnt that life is an hourglass, sooner or later, everything hits rock bottom, all you have to do is be patient and wait for someone to turn everything back around —Anonymous.

This quote is very apt for how South African fund managers must be feeling, the continued flow of bad news, corporate governance issues, EFF, Black First Land First, potential constitutional changes, a consumer that is being squeezed on all sides and foreign funds that seem to have an endless amount of emerging market shares to sell have meant that more than patience has been needed to survive unscathed.

The All Share 40 is down 15% for the year and 18% from the highs made in mid-January. January feels a million miles away and down 15% actually sounds reasonable/acceptable. The algorithms have made the market illiquid and unreadable; one day a share can be down 5% and the next up 5% with no material news. Normally I would say volatility brings with it opportunity however in the current environment the movements away from the mean are so big that every move takes the form of a mini crash or bull market.

Attached below shows that of the top 40, 13 are positive for the year 27 negative but what is striking is the % losses.

How have we at CC survived through all this

1. We made a conscientious decision to trade smaller; the same profits can be made on smaller positions given the larger moves.
2. When instinct and research says buy, give it time because bear markets are vicious, not having a position is having a position and lastly adhere to the 100% rule, when you are unsure don’t trade as whatever trade you do when unsure, will be wrong 100% of the time.

As the festive season draws near and people start reflecting on life and the prospect of holidays we hope the rest of 2018 will treat you well and that we have a good run into the end of 2018. (PS, fingers crossed that no Steinhoff-type announcement jumps up and surprises everyone like last year).

Kind regards

The Courtney Capital Team

Dear Client

The second quarter was a positive one for the portfolios

Given that there are so many extraneous circumstances that have resulted in sharp moves on low liquidity we are pleased to report that we managed to stay away from any bad news stocks and tempered our enthusiasm for small caps which have been offering huge value but remain untradeable and thin. December 2017 was a lesson in not believing everything CEOs tell you — an expensive lesson, but one we will never forget.

The quarter was characterized by continued emerging markets sell off, rand weakening 16% against the dollar and 10% against the pound and the all share index is down close to 2% for the year. The amazing thing is that only 9 shares of the 40 are up and of these 7 are rand hedges so being in the correct sector again beat overall index performance.

The power of conviction

Donald Trump, Cyril and the ANC, Brexit and trade wars continue to make taking any fundamental macro view impossible hence the portfolios also only trading in very few counters over the quarter. We prefer to trade what we know rather than offering a generic buy a bit of everything and hope to perform similarly to the index, when asset managers are in doubt they tend to move to a quasi-index tracker as its easier to explain losses that way, here at Courtney we would prefer to be in cash than hold shares just because the equity model says so.

Looking ahead

The emerging market sell off accelerated in the beginning of this quarter with the Turkish Lira showing down 22%, China Index 25% and Brazil Real down 14% for the year. EEM sell-offs generally pre-empt a world sell off. USA rate rises (the S&P now yields less than the 10 year for the first time in 9 years) means we will continue to be very conservative on the portfolios and hope by the end of the next quarter be able to report more positive returns.

The Courtney Capital Team

July 2018