‘Find companies that are selling something to China, because…China’s growing well..’ – David Shapiro

10 August 2011&nbsp23:13

HILTON TARRANT: We welcome Chris Hart of Investment Solutions to the programme. Chris, a number of interventions by governments around the world the latest of these, the Federal Reserve in the US signalling that rates will effectively be fixed for the next two years to take us to mid-2013. Well hear from John Stopford of Investec as to the impact on the bond market in a couple of minutes. From where you are sitting, this latest signal from the Fed the prospect of QE3 on the horizon has this fixed anything at all?

CHRIS HART: No, I think it signals that we are going to have yield and growth a premium. That I think is important. The other big factor thats going to be important, especially with whats unfolded in the US, is solvency. Thats why Im not too pessimistic about South Africa. There will be problems. We give yield, we give growth, and weve got solvency on our side, and I think those are going to be critical investment characteristics that we are going to need.

Effectively what the Fed has signalled is that we are not going to pay interest for a long time, because the interest rates are [near]zero. That anchors it, because the US is of course the kingpin and the centre pin of the global financial system. And that means we are running the same risk as in 2003, 2004, when yield was at a premium. Thats where subprime originally started. You had this desperate search for yield and you could sell subprime into the market because it gave you a yield pickup in a very low-yield environment. And of course, the situation of yields being very low is going to dominate.

As to the solvency problem bonds are not an obvious place to put money any more, because the value just seems to be fairly poor, and it may well be that shares like for instance where they say Apple has got more money than the US government at the moment shares that offer growth and yield at a good multiple jurisdiction, and within the South African context, like British American Tobacco and South African Breweries and that kind of thing, which manufacture things that are recognised as strong cash flow, strong balance sheet, etc, may well be the case to actually beat.

But obviously another big factor is your precious metals, and your Swiss franc has become the safe haven. The dollar/euro hasnt moved too much, but both have actually weakened against the Swiss franc and gold in this thing. I think weve had in gold about a 10, 12-year bull market. I think whats going to happen now is that the pace of that bull market is going to pick up, and the Fed has basically indicated thatdollar cash is certainly not going to be able to compete with gold, especially if we see QE3. You cant debase gold.

And at the end of the day I think we are going to see different safe havens emerge through this particular time.

HILTON TARRANT: David, listening to what Chris said about those diversified blue chips, its a theme that I think is consistent. Chatting to Theo Vorster of Galileo Capital just earlier this afternoon, he said this is a yield market you need to focus on the shares that will be paying you dividends over the next three, four, five years.

DAVID SHAPIRO: To put what Chris says into context, if we look at the US 10-year treasury, its trading at about 2.25% at the moment. I think it was down as low as 2% yesterday. But lets say its kicked up a little, so its 2.25% I can find at least 150 companies in the US, in the S&P 500, that are paying higher dividends or giving you higher yields than 2.5%. So where do you want to be in 10 years time? OK, admittedly youve got to look at each one of those companies, but I agree 100% with Chris. Find companies that are selling something to China, because if you look at US trade numbers today, Chinas growing well. The trade numbers, record exports and record imports, etc, just show you that, funnily enough, theres another part of the world thats doing OK. We seem to be so centred on Europe and the US. I agree, British American Tobacco, Richemont which is luxury goods, which sounds odd but they are still buying SABMiller. I still like the iron-ore companies like Kumba because they have such massive margins, 70% margins. Even if the iron-ore price comes down, they are still going to be paying 6, 7, 8, 9%, as we are now, or 10% dividend yields. You can add Exxaro, which is coal.

HILTON TARRANT: Lets bring in Simon Brown now. Hes with JustOneLap. Simon, a day-trader short-term trader, how on earth would you begin to trade a market like this where one day a stocks up 8%, the next day its down 10%?

SIMON BROWN: Thanks, Hilton. This is challenging trading, and lets distinguish the intraday from the guy who might hold a position for maybe a couple of days, for maybe a couple of weeks. At the moment the short answer is that tradings are down. So when things are going up and looking green, you are looking for opportunities more than anything to actually enter new short positions. By that I mean short positions making money on the downside. And you dont just go crazy. You would look for classic patterns, weakness on the buying side or something, and you wait for that to start to capitulate, wait for it to start to weaken, and then take that position. The wild swings weve seen at the moment they are quite large and they are quite spooky. But if you are trading it you can do all right in it. You just need to catch the bit in the middle. You dont need to take the complete extremes from it.

HILTON TARRANT: The message is pretty clear find companies that are diversified, find those companies that will give you a decent dividend yield over the next couple of years. Find those companies that have a lot of cash on their balance sheets.

DAVID SHAPIRO: You can find them, Hilton. You dont need to be a genius, you dont need to be a nuclear scientist to look for them. Its very simple. Just do your own homework, find them. I like what Chris says there yield and growth are going to be at a premium, so dont set the bar at 15%. Set it much lower.

HILTON TARRANT: And ignore these drops of 5% or 10%.

DAVID SHAPIRO: This is scary stuff, and I think also a lot the background to this is that investors have lost confidence, theyve lost confidence in Obama Im using this in an American context and in Congress, and also in the Fed. So no-ones coming out with a proper plan. We are very long on whats wrong, but we are very short on solutions.

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