The JSE continued a solid run with resources very much still in the driving seat.

Bruce Whitfield:
Peter Brooke, who is head of macro strategy investments at Old Mutual Investment Group South Africa, is tonight's market commentator in our Cape Town studio. Peter, what a good day on the market and it is one that has actually been fairly solid over the last two weeks while I have been away and once again, the resources still very much in the driving seat. Good evening.

Peter Brooke:
Good evening, you will just have to stay away for more.

Bruce Whitfield:
I'll go away for a month for the sake of the market Peter for the sake of the market.

Peter Brooke:
Yes Bruce it was a good day today, the market was up 1.8 percent, very much in the large caps though which were up two percent and as you highlighted led by resources which were up three percent. And I think a lot of that was pent up from global trends, in the two days that we were away on Thursday Friday generally global markets were quite strong so we opened up sort of 1.6 straightaway and carried on up to two percent so we are slightly out of sync with the rest of the world, the US is down, I don't know when I left work it was down about 0.6 percent and most of the European markets were slightly off.

Bruce Whitfield:
And I just find it so interesting that this market is as robust as it is, I know it is resources driven primarily, but it is one that when the market pulled back to 27 000, 28 000, just two or three months ago we were concerned that we were forecasting the end of the world as we know it - yet global markets have recovered remarkably.

Peter Brooke:
Well our market has been a lot stronger than global markets so when we fell in January by the 21st, 22nd, it was an excellent buying opportunity but global markets only bottomed in March, or recovered, they may not have formed their bottom but certainly we have been so much stronger because of that resource story and if you look at property, small caps, financials, they are all down year to date.

Bruce Whitfield:
And I know you like to take the five-year view and that is what is so very interesting in this particular space that we are in at the moment because you were telling us at that time in the dark days of January when the lights went out and the market went tumbling down that you know one should take the five-year view, one shouldn't be too concerned, one should just look through the cycle. Are we through that cycle to your mind or is this what might be loosely termed as a bit of a sucker rally on the index basis at least?

Peter Brooke:
It is too early to say but I mean back then there was exceptional value and so it was an easier call than today where we have seen a recovery in markets, particularly a number of shares are no longer so cheap, I mean look at today's star performer, MTN, is now at R150 and I think, I don't know if it has been confirmed yet, but in terms of Bharti being in talks with MTN, but certainly that story has pushed it up but at R150 MTN is now on a historic PE of nearly 20 times so it is not as easy to make that call today and I would say that we are probably still in for a tough year and certainly the markets look ahead but the news flow in terms of macroeconomics and earnings expectations and earnings announcements over the next year is not going to be a pretty sight. I mean you mentioned you are going to be speaking to Standard Bank but property prices down 8.6 percent that starts to put pressure on the banks in terms of bad debts, are people going to stay in their houses, you are going to talk to John Gormersall in terms of PPC but that is going to put pressure on residential building demand.

Bruce Whitfield:
All of those factors absolutely and that is why one looks at the overall index and I know one shouldn't be suckered by the overall index, one looks at the consumer economy in South Africa, consumer stocks are still under a lot of pressure. We shouldn't be misled into thinking that the recovery we have seen since the middle of January has been across the market, it has been very much resources focused and the consumer economy is actually probably lagging quite sharply.

Peter Brooke:
That’s right. One of the stocks that put out a trading statement today is Famous Brands.

Bruce Whitfield:
And it was very good 20 to 30 percent profit growth.

Peter Brooke:
Exactly right but when we speak about it in a years time, I am pretty sure it is not going to be as good and you have got food price inflation coming through, discretionary spend under pressure, petrol price is going up, I think they are going to have an extremely tough year.

Bruce Whitfield:
And looking at that trading update, profits 20 to 30 percent higher than last year and the trouble there is also that the trading update doesn't give us much detail as to what the impact of food price inflation has been over the past 12 months and whether or not this 20 to 30 percent profit growth is as a result of efficiencies or simply more people buying burgers and pizzas.

Peter Brooke:
Well certainly, Tuesday night at our house we tend to go out because there is no power.

Bruce Whitfield:
Well hopefully that is a thing of the past as well. Peter Brooke, head of macro strategy investments at Old Mutual Investment Group South Africa.

Bruce Whitfield:
Peter Brooke, head of micro strategy investments at the Old Mutual Group South Africa, is our market commentator this evening in our Cape Town studio and just looking at that accident at South Deep last week you have got to ask yourself the question as to what the gold mining industry is actually worth and whether it is worth the risks that are happening in the gold mining industry as well, the sector insisting of course it does everything it can to ensure safety, the gold price running, and the fact that probably several hundred thousand South Africans are dependent on the sector for their survival does mean that despite the risks gold mining is going to continue in perpetuity but should you be investing in gold shares though when you look at what is going on in the gold mining sector where the power cuts have had an impact over the last couple of months, the latest round of quarterly results coming out over the next two weeks or so – Peter Brooke, are you a big fan of gold shares? There is very little grey when it comes to gold shares isn't there, people either love them or hate them.

Peter Brooke:
It is not a very easy question to answer at all is it. I think when I look at gold shares you've got to look at your options because you have got other shares to invest in but also we can very easily look at new gold or the gold ETFs so even if you are a fan of gold you don't necessarily have to be a fan of gold shares and that was very much the position we were in last year where there was a period where we had no gold shares in our portfolio but we had physical gold and the reason to own physical gold was rand depreciation, dollar depreciation, inflation fears, rising gold price.

Bruce Whitfield:
And that decision would have stood you in good stead because the gold price has ramped up considerably.

Peter Brooke:
It has but now it gets more tricky because the gold price is a lot higher and relative to the gold shares, the gold shares are very cheap relative to the gold price, and that is really where you can encapsulate it very simply when you look at these quarterly results which are all going to be released in the next week so we should be sitting on a goldmine. I mean it should be a fantastic period because the rand weakened by about 12 percent, the gold price increased by 17 percent, this is quarter on quarter so it's stunning so overall a 30 percent increase in your selling price but…

Bruce Whitfield:
I was waiting for that.

Peter Brooke:
We don't get the volumes and the South Deep example in terms of the very big push in terms of safety coming through from government which started really about a year ago has meant a lot more emphasis on that, a lot more downtime in terms of lost days but we have also had the Christmas break which sort of rolled through to less stocks into the quarter and we had the whole electricity crisis and you know you look at say AngloGold it is going to be about 13 percent down in terms of production, now AngloGold got roughly 40 percent of its gold in South Africa and 60 percent elsewhere and so you are looking at say a 20 percent decline in the South African gold production. So even though the selling prices up 30 production is down 20 and then you have got higher costs so it is not as easy. What we do expect is that these results are going to be a lot stronger than the previous quarter in terms of profits and they should incrementally get better so it is starting to get quite interesting in terms of the actual gold shares. For one of the funds I run I have picked up a little bit around the time of when the power shut down, I just thought that was about as bad as it could get in terms of the underlying gold shares but it might well be too early and I think you've got to take a longer-term view around the gold price. What I believe in terms of the gold price is it’s reasonably high compared to its hundred year history but compared to a lot of other commodities it is low. So if you compare it to oil etc it is quite low so I think it looks kind of interesting and as an inflation hedge having some gold or gold shares in your portfolio does make sense compared to a year ago when we had none.

Bruce Whitfield:
You were talking about it this time last year you were buying physical gold through the ETF process. Do you retain a significant proportion of that gold that you bought? Are you continuing to add to your gold investment within the portfolios?

Peter Brooke:
No is the short answer.

Bruce Whitfield:
Have you sold the gold then?

Peter Brooke:
The one fund I can feel comfortable talking about is the flexible fund I run because it is fairly public information because every quarter the holdings go out and there I had about three percent in physical gold and I have sold all of that in January roughly and switched a fair amount of that into gold shares.

Bruce Whitfield:
Why and I guess one looks at the logic of holding the gold ETF and it's been a very popular investment and it has seen massive inflows in the last eight months or so. Why that specific decision to switch at that point? Simply because the gold shares were so battered the valuations were sufficiently compelling.

Peter Brooke:
Yes, I thought there was enough bad news in the share price but it could well be too early, I mean the reality is you have got a bad news quarter coming in terms of production but despite that, the results will be a lot better than the previous quarter. I mean, just take a share like Harmony which made a loss last quarter of 43 cents, it is probably going to make around between 25 and 30 cents profit this quarter.

Bruce Whitfield:
Are you pleased you made that decision? If you could make it over again would you have taken the same decision?

Peter Brooke:
I don't know, we will find out in two to three years time, you don't have to invest on like a one-week cycle.

Bruce Whitfield:
Peter Brooke, we are trying to get you to give us a couple of short-term forecasts from time to time but he sticks to his knitting, does Peter Brooke, head of macro strategy investments at Omigsa.