Uncle Sam wants you
Time to buy cheap American shares
ONE OF THE MOST popular recommendations currently doing the rounds in South Africa’s investment community is to buy United States shares, especially Microsoft. There’s a lot of logic in this argument, which is based on the following assumptions: Share prices in the BRICS countries (SA is now the “S”) increased considerably over the past two years while share prices in the old world – of which the US and Japan are now the leading members – haven’t even returned to the level of 10 years ago.
Nevertheless, many of the big guns in the US in fact earn a large portion of their income in the BRICS countries, so they should also share in the rapid economic growth of the new world.
However, the most important argument is that the valuation of US shares is much more attractive than even those on the JSE. In the investment world, “valuation” means the earnings multiple at which a share is trading. Take Microsoft as an example. Analysts forecast this giant organisation will earn US$255c/share (US cents) in its current financial year. The share is currently trading at $2620c. That gives a multiple of just more than 10 (2620c/255c). To put it in even simpler terms, its share price is equal to 10 times the expected profit for the following year. That’s cheap or – switching back to investment jargon – it’s a very attractive valuation.
Ten years ago Microsoft was trading at an earnings multiple of more than 40, the analysts point out. In fact, in December 1999 – when the share reached a record price (adjusted to allow for subdivisions) of $58 – the then earnings multiple was closer to 100. At that time the Nasdaq index was way above 5000. The current level at 2800 is just over 50% of the previous peak. Microsoft’s current share price hasn’t even reached 50% of its previous peak but even so it’s sustained a steady growth in profit over the 10 years.
Microsoft’s valuation ratio of 10 can be compared with the between 15,5 and 14 (historical and future profit) at which the JSE All Share Index is currently trading.
Internationally, investment analysts also think Microsoft is currently a good buy and give the share a rating of 1,9. In their scale 1 equals a perfect buying opportunity and 5 equals a perfect selling opportunity.
The three international giants listed on our own doorstep, the JSE – BHP Billiton, British American Tobacco and SABMiller – are currently rated between 2 and 2,2 by the analysts. That’s slightly weaker than for Microsoft.
Okay, Microsoft is a good buy, so what next? Marzél Stadler, of PSG Konsult in Pretoria East – where, incidentally, the Microsoft fever is running high – has drawn up a handy short guide for investors who’d like to buy Microsoft now. For a start, remember every South African is currently entitled to take R4m/year out of the country. You can take that out legally if your affairs are in order with the SA Revenue Service. You need a certificate from Sars before you can do so.
The next step is to open an account with a broker offshore and to transfer your money there.
PSG makes things a bit easier for its clients. It has also established an international broking division – called PSG Konsult Brokers (UK) – and its bank account is with Barclays plc. All you have to do after satisfying Sars is to open your own bank account with Barclays. After that, PSG will help you to place your money with