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The consensus views of analysts, economists and other soothsayers are often more important for the participants in share, foreign exchange and money markets than the actual events themselves. Deviations from the consensus views can especially cause fairly major swings in the markets. Investors have to learn to live with these consensus views and to use them to their own advantage, particularly when it comes to selecting which shares to invest in. But don’t allow them to play too an important role in your timing.
For example, take employment figures in the United States. Every month the economists estimate how many jobs were created or lost in the previous month. If – when the actual figure is announced – it turns out fewer jobs were created than the economists thought, then share prices fall sharply, often by more than 100 points on the Dow Jones, the greenback weakens and interest rates even fall. Often the market forgets about all that after a few days and something new comes along to prick investors’ interest, sometimes in the other direction.
In South Africa such consensus views on all sorts of different things are becoming increasingly important. Or perhaps it’s the opposite: perhaps the market is paying increasingly less attention to these opinions. A few months ago (or maybe it was even a year ago, or longer) journalists reported regularly two or three times a month that SA’s Bank rate – and therefore also the lending rates – were going to increase or decrease the following month. If the inflation rate was a few points higher than the consensus figure, it was quickly said interest rates were going to increase. But if the official figures released a few days later were again weaker than expected, everything was turned around and it was predicted interest rates were actually going to decrease.
However, Reserve Bank Governor Gill Marcus has now placated the market and indicated the Bank probably intends keeping the interest rate at its current level for quite some time. So it’s now no longer necessary for economists/journalists to link every new economics figure with possible interest cuts or increases.
Investment analysts conduct intensive research on the ups and downs of particularly the larger companies and then estimate their future profits and dividends. Those are the so-called consensus forecasts. Their research is very important for the ordinary DIY investor. After all, the analysts are specialists and they often visit companies, where management can also sometimes give some indication of how business is doing.
All of that is information not available to the man in the street. McGregor and I-Net Bridge in SA collect those analysts’ opinions and make them available to various organisations. I personally make extensive use of such analyses and consensus views. They’re conveniently available on PSG’s trading platform, which I use for my transactions. Every DIY investor must ensure he has full access to these consensus views.
To get a better understanding of how such consensus views work, let’s consider a few international resources. South African investors can only look on in envy at the enormous amount of information available on every share – and can also wonder why even the smartest institutional investors are sometimes still so stupid as to buy a bankrupt giant such as the Royal Bank of Scotland.
The table above left gives us the consensus sentiment or recommendation of the international analysts who follow the affairs of various old South African companies now listed on the LSE.
Take SABMiller as an example. Thomson/First Call collects the opinions of 28 analysts who specialise in (among others) SABMiller. It is, after all, one of the largest breweries in the world and many analysts follow it. Though the majority of analysts are still quite excited about SABMiller, investors will note five of the analysts are clearly not so excited any more, while two even feel the time has come to sell the share. An average score of 2,7 is given to SABMiller on a scale where 1,00 is a perfect buying opportunity and five signifies a compulsory sell. I must say the score of 2,7 makes me feel slightly uneasy, even more so because it’s been regularly weakening over the past three months. Yes, all that kind of information, even the tendencies of the analysts, is readily available. I found it on yahoo.com/finance.
On the other hand, the analysts say Anglo American looks good and its rating of 2,0 isn’t only the best of the lot but has also improved consistently over the past few months. The 26 analysts who gave BHP Billiton a rating of 2,2 are probably the same 26 who gave Anglo the rating of 2,0. Readers will know that over all the years I’ve definitely preferred Billiton to Anglo, but the latest trend in the consensus views do make you stop and think. At its current price, Anglo may perhaps not only be a good buy, but the alert investor could perhaps even switch a little bit from Billiton to Anglo.
Old Mutual currently also enjoys a good rating in London and the consensus recommendation and rating of 2,2 shouldn’t be overlooked. Many analysts in SA are also currently pinning a “buy” tag on Old Mutual. Investors who fancy a good dividend would be advised to look at this share. Remember also the shares of an insurer and asset manager are usually, if not always, a better investment than the products they sell. So say “thank you, but no thank you” when the Old Mutual salesman next calls on you, but do go out and buy its ordinary shares through your stockbroker rather than heeding his sales pitch.
The short list of the ratings currently enjoyed by a few well-known US giants actually underlines the recommendation made by several local asset managers: that the time has come to buy the cheap US shares. It definitely sounds like good advice. But don’t, like many of them, act with too much Warren Buffett faith – or is it fever? Buffett’s company – Berkshire Hathaway – has quite a poor rating of 3,0, which is even lower than SABMiller’s 2,7.
The graph of Berkshire versus the US’s S&P 500 over the past two years shows clearly why the world’s leading analysts are currently rather offish about the company. Don’t hesitate to invest part of the R4m or more you’ve already taken out of SA in US shares. However, before you do so make sure your adviser or broker knows how and where to find the consensus views of the analysts who follow the share and work through them with him. If he understands them and you’re happy with the answers – such as the current rating of 2,1 for Walmart, the world’s biggest retailer that’s now also set up shop in SA – you can go ahead and follow the advice and buy some of the shares.
Meanwhile, it might also be a good idea to practise a little by yourself. The financial website of Google, whose shares also enjoy an excellent rating of 1,7, is really an experience for all of us who live in “darkest Africa”.
Readers will remember I’ve been quite excited about the prospects of Woolworths lately. Recently the authoritative JPMorgan’s SA subsidiary also pointed out the share as one of the possible winners over the next few years. For the convenience of readers we’re publishing the full analysts’ consensus view of Woolworths. The information was collected by McGregor and processed by PSG, from whose website I obtained the table.
The table shows that for the year to 30 June 2010 Woolworths recorded a profit of 157c/share, and a dividend of 105c/share was declared out of that. The company will make its actual results for the year available by end-August. I’d like to make a prediction they’ll be slightly better than the analysts’ consensus view. The profit will be closer to 200c/share and, thanks to a sound final dividend of 80c/share, the total for the year will be 130c/share.
As soon as the new financial figures are available, analysts will update their forecasts. And considering the pleasant rise in Woolies’ share price over the past few weeks, it looks as if this could be a good omen. But even without these updates, the table shows the investor who buys the share now at 3030c can expect to receive a total dividend of 181c in 2013, which is a cash return of 6% in only about two years’ time.
That’s one of the reasons for my recent recommendation that if you’re already 60 and planning to retire at 65, you should take a bit more risk and buy Woolworths rather than following the usual course of putting your money into a fixed deposit at the bank. My long-term prediction, despite Julius’s rantings, is that Woolworths will declare a dividend of at least 240c/share by 2016. That’s 8%/year on the current share price of around 3030c – which is something you could retire on.
The advice to every DIY investor is clear: obtain access to the consensus forecasts as published by McGregor, ensure you understand them and then apply them to build your portfolio.
ECONOMIC FORECASTS
The folly of forecasting
A CONSIDERABLE NUMBER of current decisions are based on what economists forecast. Whether it’s the SA Reserve Bank setting policy or a housewife grocery shopping, to a certain degree economic forecasts have become part of the decision-making process. That’s even more so for those with investments and still more relevant for those with investment degrees.
But let’s face it: economists get it wrong. In fact, they get it wrong a lot of the time. And when they do get it right they take their time doing so. Renowned late economist John Kenneth Galbraith spared no sympathy when he stated: “The only function of economic forecasting is to make astrology look respectable.”
Paris-based investment bank Société Générale has compiled an index (the Economic Surprise Index) in response to the problem of forecasting folly, as described in the first paragraphs. When the index yields a positive result it means the actual data being released is better than economists had expected. A negative result would mean economists had overestimated the actual data. The results are plotted in the graph attached.
The market normally reacts positively to better than expected data and negatively to data that undershoots expectations – thus either positive surprises or negative surprises. Intuitively, you’d expect the market to perform well when SocGen’s graph is above the x-axis (positive surprises) and you’d like to be out of the market when the line is below (negative surprises). That would have been true if the behaviour of both economists and the market didn’t change – but, as we’ve concluded, they do.
Drikus Combrinck, psg konsult, pretoria east
For example, take employment figures in the United States. Every month the economists estimate how many jobs were created or lost in the previous month. If – when the actual figure is announced – it turns out fewer jobs were created than the economists thought, then share prices fall sharply, often by more than 100 points on the Dow Jones, the greenback weakens and interest rates even fall. Often the market forgets about all that after a few days and something new comes along to prick investors’ interest, sometimes in the other direction.
In South Africa such consensus views on all sorts of different things are becoming increasingly important. Or perhaps it’s the opposite: perhaps the market is paying increasingly less attention to these opinions. A few months ago (or maybe it was even a year ago, or longer) journalists reported regularly two or three times a month that SA’s Bank rate – and therefore also the lending rates – were going to increase or decrease the following month. If the inflation rate was a few points higher than the consensus figure, it was quickly said interest rates were going to increase. But if the official figures released a few days later were again weaker than expected, everything was turned around and it was predicted interest rates were actually going to decrease.
However, Reserve Bank Governor Gill Marcus has now placated the market and indicated the Bank probably intends keeping the interest rate at its current level for quite some time. So it’s now no longer necessary for economists/journalists to link every new economics figure with possible interest cuts or increases.
Investment analysts conduct intensive research on the ups and downs of particularly the larger companies and then estimate their future profits and dividends. Those are the so-called consensus forecasts. Their research is very important for the ordinary DIY investor. After all, the analysts are specialists and they often visit companies, where management can also sometimes give some indication of how business is doing.
All of that is information not available to the man in the street. McGregor and I-Net Bridge in SA collect those analysts’ opinions and make them available to various organisations. I personally make extensive use of such analyses and consensus views. They’re conveniently available on PSG’s trading platform, which I use for my transactions. Every DIY investor must ensure he has full access to these consensus views.
To get a better understanding of how such consensus views work, let’s consider a few international resources. South African investors can only look on in envy at the enormous amount of information available on every share – and can also wonder why even the smartest institutional investors are sometimes still so stupid as to buy a bankrupt giant such as the Royal Bank of Scotland.
The table above left gives us the consensus sentiment or recommendation of the international analysts who follow the affairs of various old South African companies now listed on the LSE.
Take SABMiller as an example. Thomson/First Call collects the opinions of 28 analysts who specialise in (among others) SABMiller. It is, after all, one of the largest breweries in the world and many analysts follow it. Though the majority of analysts are still quite excited about SABMiller, investors will note five of the analysts are clearly not so excited any more, while two even feel the time has come to sell the share. An average score of 2,7 is given to SABMiller on a scale where 1,00 is a perfect buying opportunity and five signifies a compulsory sell. I must say the score of 2,7 makes me feel slightly uneasy, even more so because it’s been regularly weakening over the past three months. Yes, all that kind of information, even the tendencies of the analysts, is readily available. I found it on yahoo.com/finance.
On the other hand, the analysts say Anglo American looks good and its rating of 2,0 isn’t only the best of the lot but has also improved consistently over the past few months. The 26 analysts who gave BHP Billiton a rating of 2,2 are probably the same 26 who gave Anglo the rating of 2,0. Readers will know that over all the years I’ve definitely preferred Billiton to Anglo, but the latest trend in the consensus views do make you stop and think. At its current price, Anglo may perhaps not only be a good buy, but the alert investor could perhaps even switch a little bit from Billiton to Anglo.
Old Mutual currently also enjoys a good rating in London and the consensus recommendation and rating of 2,2 shouldn’t be overlooked. Many analysts in SA are also currently pinning a “buy” tag on Old Mutual. Investors who fancy a good dividend would be advised to look at this share. Remember also the shares of an insurer and asset manager are usually, if not always, a better investment than the products they sell. So say “thank you, but no thank you” when the Old Mutual salesman next calls on you, but do go out and buy its ordinary shares through your stockbroker rather than heeding his sales pitch.
The short list of the ratings currently enjoyed by a few well-known US giants actually underlines the recommendation made by several local asset managers: that the time has come to buy the cheap US shares. It definitely sounds like good advice. But don’t, like many of them, act with too much Warren Buffett faith – or is it fever? Buffett’s company – Berkshire Hathaway – has quite a poor rating of 3,0, which is even lower than SABMiller’s 2,7.
The graph of Berkshire versus the US’s S&P 500 over the past two years shows clearly why the world’s leading analysts are currently rather offish about the company. Don’t hesitate to invest part of the R4m or more you’ve already taken out of SA in US shares. However, before you do so make sure your adviser or broker knows how and where to find the consensus views of the analysts who follow the share and work through them with him. If he understands them and you’re happy with the answers – such as the current rating of 2,1 for Walmart, the world’s biggest retailer that’s now also set up shop in SA – you can go ahead and follow the advice and buy some of the shares.
Meanwhile, it might also be a good idea to practise a little by yourself. The financial website of Google, whose shares also enjoy an excellent rating of 1,7, is really an experience for all of us who live in “darkest Africa”.
Readers will remember I’ve been quite excited about the prospects of Woolworths lately. Recently the authoritative JPMorgan’s SA subsidiary also pointed out the share as one of the possible winners over the next few years. For the convenience of readers we’re publishing the full analysts’ consensus view of Woolworths. The information was collected by McGregor and processed by PSG, from whose website I obtained the table.
The table shows that for the year to 30 June 2010 Woolworths recorded a profit of 157c/share, and a dividend of 105c/share was declared out of that. The company will make its actual results for the year available by end-August. I’d like to make a prediction they’ll be slightly better than the analysts’ consensus view. The profit will be closer to 200c/share and, thanks to a sound final dividend of 80c/share, the total for the year will be 130c/share.
As soon as the new financial figures are available, analysts will update their forecasts. And considering the pleasant rise in Woolies’ share price over the past few weeks, it looks as if this could be a good omen. But even without these updates, the table shows the investor who buys the share now at 3030c can expect to receive a total dividend of 181c in 2013, which is a cash return of 6% in only about two years’ time.
That’s one of the reasons for my recent recommendation that if you’re already 60 and planning to retire at 65, you should take a bit more risk and buy Woolworths rather than following the usual course of putting your money into a fixed deposit at the bank. My long-term prediction, despite Julius’s rantings, is that Woolworths will declare a dividend of at least 240c/share by 2016. That’s 8%/year on the current share price of around 3030c – which is something you could retire on.
The advice to every DIY investor is clear: obtain access to the consensus forecasts as published by McGregor, ensure you understand them and then apply them to build your portfolio.
ECONOMIC FORECASTS
The folly of forecasting
A CONSIDERABLE NUMBER of current decisions are based on what economists forecast. Whether it’s the SA Reserve Bank setting policy or a housewife grocery shopping, to a certain degree economic forecasts have become part of the decision-making process. That’s even more so for those with investments and still more relevant for those with investment degrees.
But let’s face it: economists get it wrong. In fact, they get it wrong a lot of the time. And when they do get it right they take their time doing so. Renowned late economist John Kenneth Galbraith spared no sympathy when he stated: “The only function of economic forecasting is to make astrology look respectable.”
Paris-based investment bank Société Générale has compiled an index (the Economic Surprise Index) in response to the problem of forecasting folly, as described in the first paragraphs. When the index yields a positive result it means the actual data being released is better than economists had expected. A negative result would mean economists had overestimated the actual data. The results are plotted in the graph attached.
The market normally reacts positively to better than expected data and negatively to data that undershoots expectations – thus either positive surprises or negative surprises. Intuitively, you’d expect the market to perform well when SocGen’s graph is above the x-axis (positive surprises) and you’d like to be out of the market when the line is below (negative surprises). That would have been true if the behaviour of both economists and the market didn’t change – but, as we’ve concluded, they do.
Drikus Combrinck, psg konsult, pretoria east
