Investment Opportunities: Balancing Act Presented by: Dawie Roodt 6 March 2008

“…The global economy grew by 5 per cent from 2003 to It was a period of robust expansion but also of widening international imbalances. Now there are storm clouds ahead...” - Minister Trevor Manuel, 2008 budget presentation

In This Presentation: 1.South African Economic Trends 2.Investment and the Business cycle 3.Balancing risk and return 4.Balanced portfolio

South African Economic Trends

Economic Trends Threats  More volatile Rand  Inflation pressure  Electricity crisis (effect on GDP?)  Low savings  Politics  Sub-USA crisis Opportunities  Commodity cycle  Export stocks  Infrastructure development  Manufacturing

M3 (end of year)23.1%23.7%19.8% PSCE (adj. end of year)27.6%22.2%16.6% CPIX (average)4.6%6.5%8.1% Prime (end of year)12.5%14.5% Current Account: Nom-R111.0bn-R138.2bn-R145.1bn Current Account: GDP-6.4%-7.0%-6.5% R/$ (end of year) GDP (full year)5.4%5.1%3.5% Economic Overview Financials - Banks Financials Retailers Positive for equity Negative for bonds Neutral equities Positive bonds (short term) Negative bonds (long term) Positive for rand hedges Negative for importers Negative for bonds Positive rand hedges Positive exporters Negative importers Negative bonds Negative equities Positive bonds

South Africa: GDP

GDP at Market Prices Source: StatsSA and own calculations

Monetary Policy

Pressure on the Rand… Inflation bracket Source: SARB and own calculations 9/11 Aftermath - Bull run -Stability - Emerging Market Appetite -US troubles - Emerging Market Risk rising - Global Inflation - Politics - Eskom

Inflation Inflation bracket Source: StatsSA and own calculations CPIX Ave: 5.9%

Interest rates Toothless SARB Source: SARB and own calculations

Debt Levels

Private Sector Credit Extension Source: SARB and own calculations

Household debt to disposable income Source: SARB and own calculations 44.5% 50.2% 56.9% 59.4%

Savings to disposable income of households Source: SARB and own calculations 9.2% 5.4% 2.6% 0.5%

Balance of Payments

Source: SARS and own calculations

Fiscal Policy

Background Gold Deficit Surplus

Investments and the Economic Cycle

Consumption Expenditure Source: South African Reserve Bank Positive for retailers and consumer goods

Gross Fixed Capital Formation Source: South African Reserve Bank Infrastructure boom

Total Exports and Imports Source: South African Reserve Bank Trade Account Deficit

Balancing Risk and Return

Resources Pro’s –Value of sales –Boom in commodity prices –Global demand for resources –Weaker rand inflates income Cons –Production problems (labour, electricity, deep gold mines, input costs) –Sustainability of high precious metal prices? –High P/E-ratio

Mining and Quarrying GDP at Market Prices Source: StatsSA and own calculations

Mining Value of Sales Inflation bracket Source: StatsSA Bull Run

Contribution of mineral groups to total value of mineral sales, 2006 Mining divisionPercentage contribution PGMs34.5% Gold18.7% Coal18.7% Iron Ore4.9% Nickel4.5% Copper2.7% Chromium1.1% Manganese Ore1.0% Other13.9% Total100.0%

Resources: Price and PE Inflation bracket Source: I-net

Industrials Pro’s – Infrastructure development – Manufacturing drive (auto industry, etc) – Weaker rand support exports Cons – Electricity supply – Slower growth?

Manufacturing GDP at Market Prices Source: StatsSA and own calculations

Manufacturing Value of Sales Inflation bracket Source: StatsSA

Contribution to total value of manufactured product sales, 2006 Manufacturing divisionPercentage contribution Basic iron and steel, metal products and machinery 22.2% Petroleum, chemical products, rubber and plastic 20.5% Food and beverages17.2% Motor vehicles, parts, accessories and other transport equipment 15.4% Wood and wood products, paper, publishing and printing 8.6% Other16.1% Total100.0% Source: StatsSA

Industrials: Price and PE Inflation bracket Source: I-net

Financials Pro’s –Interest rate cycle (Domestic and global) –Global competitive institutions –Value for money (P/E basis) Cons –Sub-USA crisis –Pessimism towards sector –Uncertainty

Finance, Real Estate and Business Services, GDP at Market Prices Source: StatsSA and own calculations

Financials: Price and PE Inflation bracket Source: I-net

Construction Pro’s –Infrastructure boom (2010) –Interest rate cycle (Domestic and global) Cons –Supply constraints –Electricity

Construction GDP at Market Prices Source: StatsSA and own calculations

Construction and Material: Price and PE Inflation bracket Source: I-net

Asset Allocation

Investment Options

Balanced Portfolio Asset ClassPortfolio WeightingAnalysis EquitiesNeutral (Sector specific) - Resources: strong but overvalued -Industrials: Electricity? -Financials: Uncertainty continues, undervalued - Construction: New projects? BondsUnder- Weaker rand - Inflation - Supply (Fiscal Surplus) CashNeutral - Interest rates