The Weekly Focus. A Market and Economic Update 16 July 2018

Transcription

1 The Weekly Focus A Market and Economic Update 16 July 2018

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 4 Economic Update...6 Rates STANLIB Money Market Fund STANLIB Enhanced Yield Fund STANLIB Income Fund STANLIB Extra Income Fund STANLIB Flexible Income Fund STANLIB Multi-Manager Absolute Income Fund... 10

3 Newsflash The rand is down -5.3% versus the pound and -4.4% versus the euro so far in 2018 and -7.3% versus the dollar. Market Comment While our local listed property shares and our stock market generally remain range-bound at lower levels, still struggling, the US stock market is looking good. On Friday the tech-laden Nasdaq Index in the US reached a new record high (+11.7% so far in 2018 in dollars), while the S&P 500 Index reached a 5-month high (+3.9% in 2018 excluding dividends). The smaller share Russell 2000 Index is only just below the record high it reached in June, +8.8% in 2018 in dollar terms. The MSCI World Index of mostly developed markets is +3% so far in 2018 in dollar terms (including dividends), or +10.5% in rands, with the rand down around -7.3% so far in 2018 versus the dollar. The rand is down -5.3% versus the pound and -4.4% versus the euro so far in The STANLIB Global Equity Feeder Fund is up around +10% so far in 2018 in rand terms, trading very close to its record high. The MSCI Emerging Markets Index is -5.5% so far in 2018 (including dividends), hurt by both a fall in currencies and in share prices. At this stage, the SA All Bond Index remains the best asset class in 2018 at +4.8%, then cash with +3.9%, followed by the ALSI with -4.2% (including dividends) and finally the very disappointing SA Listed Property Index with -20.4% (including dividends). After all the positive hype of Ramaphoria in December and January, markets locally have been hurt by more and more evidence of the massive economic damage caused by 9 years of debilitating rule under Zuma. Even arguably our best Finance Minister ever, Trevor Manuel, says it will take about 10 years for our economy to recover from all the state-capture, thieving and shockingly poor management of the country and most of its state-owned enterprises under Zuma. Nedcor s highly experienced Economist, Dennis Dykes, said recently at a conference that our economy had been set back by about 10 years under Zuma s rule. Most of our municipalities, with the exception of the Western Cape, seem to be cashstrapped and struggling and the mining sector is under considerable pressure. Another year under Zuma and SA could have been a virtual wasteland. Imagine Eskom if no positive changes were made. So it is not surprising that the JSE Mid-Cap Index (share 41 to 100 on the JSE) is trading down -12.7% so far in 2018, back at levels of 3.5 years ago, while the JSE Small-Cap Index (share 101 and smaller on the JSE) is down -7.5%, also back at levels of 3.5 years ago. And this despite the ongoing global economic recovery, from which we historically have benefited nicely. Our stock market looks cheap, but we ve never experienced such poor economic management and I m usually the big optimist! Investec Securities notes that the median PE ratio of ALSI shares is near the lowest level (cheapest) in the past 6 years, while 40% of the market trades at a dividend yield above 4%, almost as high as in They recommend buying Maybe if my typical bullishness is down-in-the-dumps, then this could be one of the greatest buying opportunities (thinking contrarian)!

4 So far in 2018 the JSE Resources sector is doing best with a total return of +8.9%, while the JSE Financial & Industrial sector is ailing at -7.5%, back at August levels. Even Naspers is still -6.2% in Sasol is +18.3% just off a 4-year high, excluding dividends. Interestingly, US market analyst Steve Sjuggerud, who has a very good track record, is of the view that we could be seeing the start of a great bull market in commodity prices. At its worst, the commodity index was down -80% before the start of the last bull market. Now it is down -60%, but has started an early uptrend. He thinks the dollar will weaken too, as inflation picks up. Steve likes it when a market is hated by investors, as commodities are now, when it is looking cheap and when an initial upturn has begun. All three factors are now in place. The last commodity bull market ended ten years ago in 2008 with the big crash. Otherwise, so far the numbers show that offshore investing continues to beat local investing, except for SA Cash/money markets, which still pay very decent rates of interest. Even the dollar return of the STANLIB Global Property Feeder Fund is a positive +2% so far in 2018, way better than the miserable return of our local listed property index (-20.4% in rands or -25.2% in dollar terms)! Ouch! Other Commentators US Market Analyst, Elaine Garzarelli Garza s quants model remains bullish, with a reading of 76.5% (out of a possible 100%). So she recommends being fully invested, with healthy US company earnings and a solid economy. S&P 500 dividends for the second quarter of 2018 were up +8.1% year-on-year, reflecting record company cash levels and high business confidence. Garza s quants model now looks at 2019 earnings (after 30 June). She is forecasting +11% earnings growth to 175 in 2019 for S&P 500 earnings. The quants model valuation is now based on 2019 earnings. Based on her forecast, fair value for the S&P 500 is now 3,150, which is about +13% above current levels. She notes that for the first time since the US Labor Department began collecting data in the year 2000, there are now more job vacancies than people counted as unemployed. Although wage growth has picked up, technology is putting downward pressure on prices. There are no signs of a recession developing in the US. BCA Research BCA thinks that global investors are too complacent about the risks of a trade war. Global equities would suffer mightily from a trade war. Deep cyclical sectors such as industrials, materials and energy would be hardest hit. Financial equities would also fare poorly. Regionally, European and Emerging Market equities would underperform. A trade war would benefit government bonds. A contained trade war would likely be somewhat dollar bearish. In contrast, a full-out trade war could send the greenback soaring. The US imposed tariffs of 25% on $34bn of Chinese goods just over a week ago. Tariffs on another $16bn of Chinese goods are set to start on July 20. China has stated that it will retaliate in kind. Then Trump announced another 10% tariff on another $200bn of Chinese goods by August 31.

5 Trump has already levied tariffs up to 25% on steel and aluminium on the EU, Canada, Mexico and other US allies on 1 June. The affected regions have retaliated with their own tariffs. There is little reason to think that trade tensions will ease in the coming months. But it is very difficult to assess what damage these tariffs can do to the global economy. Uncertainty in the face of a trade war could definitely cause companies to cancel new capital or investment spending. Overall, BCA is concerned and downgraded global risk assets like equities to neutral from overweight a couple of weeks ago. Paul Hansen Director: Retail Investing

6 Economic Update 1. SA manufacturing better than expected in May Strongest monthly growth rate since April Hopefully SA can avoid slipping back into a technical recession in Q SA is ranked last in the Misperception Index. In other words there is a real risk that we perceive the situation in SA to be far worse than it is. 3. PMI data releases from Sub-Saharan Africa showed a softening suggesting potentially weaker growth in the region. 4. Sub-Saharan Africa Currency Performed relatively well against the US Dollar in the first half of the year compared to major currencies in emerging markets, however they are expected to come under pressure as the year continues. 1. In May 2018, SA manufacturing production rose by a much more encouraging 1.5%m/m, after declining by a revised -0.5%m/m in April 2018 (monthly data is seasonally adjusted). The market was expecting production to rise by a modest 0.4%m/m. Over the past three months (March 2018 to May 2018) production was down -1.5%q/q, but this should turn positive for Q as a whole if the June production performance data also improves. Over the past year manufacturing has risen by a healthy 2.3%y/y, partly helped by base effects and has averaged an annual growth rate of 0.5% over past 12 months. Essentially, on a trend basis, SA manufacturing continues to stagnate, with output remaining far below the level of activity that prevailed prior to the onset of the global financial market crisis in In addition, and unsurprisingly, South African manufacturing has massively underperformed global manufacturing in the past ten years, especially manufacturing activity in emerging markets. The SA manufacturing sector is comprised of ten major sub-sectors. The largest being food and beverages (25% of overall manufacturing), followed by the chemical sector (24%), and iron and steel (19%). At the other end of scale, the clothing and textile sector comprises a mere 3% of total manufacturing, while the manufacture of electrical machinery is only 1.6%. Each of these ten major manufacturing sectors are comprised of a number of additional subsectors, which means that in total South Africa s manufacturing sector is divided into more than 40 distinct industries, each with its own performance characteristics. While the manufacturing sector (in total) has grown by 2.3% growth over the past year, there remains a very wide dispersion in performance at a sub-industry level that fluctuates substantially from month-to-month. This dispersion is currently highlighted by the massive growth gap between, for example, the production of refined fuel (+7.0%y/y), plastic products (+8.4%y/y), and food (+5.5%y/y) vs. publishing (-17.0%y/y), footwear (-5.6%y/y), and clothing (- 11.0%y/y). In 2015 as a whole, South Africa s manufacturing sector averaged growth of 0%, which was the worst annual performance since the 2009 recession, and signalled that the sector experienced stagnation or a low intensity recession. This trend continued in 2016 with growth of 0.7% and under-performed further in 2017, recording a decline of -0.5%y/y. Unfortunately, this weakness appears to have largely continued in the first half of 2018, despite the relatively buoyant global economic backdrop - although the May manufacturing report was clearly a little more encouraging. Hopefully, the latest improvement in output is enough for manufacturing activity to avoid a return to recession conditions, which would clearly have a positive impact on SA s overall GDP growth performance in Q We remain optimistic that SA can achieve positive GDP growth in Q2 2018, albeit only fractionally positive.

7 Lifting South African manufacturing activity on a sustained basis is not an easy task; and certainly more complex than simply arguing for a weaker Rand in order to make South African products more competitive internationally. Competitive manufacturing requires a combination of factors including supportive infrastructure, appropriate regulation, a stable and productive workforce, innovate and dynamic management, an appropriate balance between the use of technology and labour intensity, and access to financing. Unfortunately, in recent years South Africa has struggled to achieve the right combination of factors that would allow the manufacturing sector to flourish and grow in-line with global trends; with one of two exceptions at a sub-industry level. 2. The Misperception Index is based on a global survey that looks at the gap between people's perception and the reality in 38 countries. In particular, the study examines why people around the world are so wrong regarding basic facts about the situation in their own country. As would be expected, across all 38 countries, each population gets a lot wrong when asked about their own country. In particular, people are often most incorrect on factors that are widely discussed in the media, such as the murder rate and the number of people who die from terrorist attacks each year. According to previous studies on this topic, this misperception is partly because people over-estimate the things that worry them the most. The 2017 study also highlighted that people are often unduly pessimistic about how healthy they are, as well as overestimating how connected they are to technology. The stand-out conclusion from the 2017 survey is that South Africa received the worst score out of the 38 countries measured. In other words our perception about a range of domestic indicators (mostly social) is the least accurate relatively to the other countries surveyed, and certainly a lot less accurate than the perceptions in Sweden, Norway and Denmark, which had the most accurate scores. Furthermore, South Africa s misperception score is to the negative. In other words, the country believes things are far worse than they actually are. It is also fascinating to see that although South Africans are the least accurate about a range of facts in our own country, according to the survey we are fairly confident that our knowledge is correct. This does not mean that South Africa does not have significant challenges or concerns, but it does suggest that perhaps we are not as well informed as we perceive we are. 3. Sub-Saharan PMI data indicates that the second quarter is likely to have been a weaker one for some economies across the region. The higher oil prices have in all likelihood put pressure on current account balances especially on oil importing countries. Added to that, the net capital outflows in Emerging Markets are expected to continue putting pressure on currencies across the board. Employment conditions look to be improving across the board in line with the global trend. A figure above 50-index points denotes expansion whilst below 50-index points represents contraction. Ghana s PMI slowed quite sharply to 52.7 June from 55.8 in May however it still remains in expansionary territory. This represents 29 consecutive months of expansion although the latest figure suggests some softening. The data also indicates some inflationary pressures building on the supply side. The Ghanaian Cedi weakened along with other Emerging Market currencies and the pass-through effect may affect price increases negatively. Over and above that, the improvement in economic activity in itself could have resulted in demand-side price pressures. Lower exports of gold and cocoa narrowed the current account surplus and portfolio flows have slowed in line with Emerging Markets. This could continue to put the domestic currency under pressure. The second quarter for Ghana is likely to come in slightly weaker than the first.

8 Nigeria s PMI also moderated to 58.4 in June 2018 down from the all-time high of 59.1 reached in May. Business activity has been steadily improving since January Oil production levels have been significantly lower at Million Barrels Per Day (MBPD) in June from 1.8 MBPD achieved in the first quarter. However the weaker oil sector numbers are likely to have been offset by stronger non-oil sector GDP data especially since it represents 90% of the economy. What is encouraging is that foreign exchange reserve levels have stabilized at $47.7 Billion which gives comfort that the currency can be maintained at the NGN360/$ at least until after the elections. Kenya s PMI remained flat at 55 only slightly higher than the 55.4 recorded in the previous month. Kenya s first quarter GDP improved from the previous quarter. Last year s economic performance was weighed down by a drought followed by an election impasse. Weather conditions have improved this year which has been good for the agricultural sector and business activity is returning to normal with the political noise settling. Despite the interest rate cap regulation, Kenyan economic activity looks to be improving. A proposal has been tabled in this year s budget for an amendment on the cap which should further help stimulate economic activity should it be successful. Higher oil prices are likely to push inflationary pressures higher. Zambia s PMI slowed to 51.9 in June from 52.3 in May signaling four straight months of expansion. Despite business activity being in expansionary territory it increasingly appears that growth will struggle to surpass 2017 growth of 4.1%. What is concerning is the debt levels as well as arrears building up in government finances and the IMF deal is still delayed. The weaker currency is also likely to end with higher inflation and interest rates. 4. The recent trade tensions between the US and its trading partners have negatively impacted emerging markets currencies and markets. Amongst Sub-Saharan Africa (SSA) currencies the effect has been slightly more muted. The strongest performer year-to-date is the Zambian Kwacha which started off the second quarter on a bad note but has since clawed back the losses appreciating by 3.3%. Zambian paper was also affected negatively as credibility on the management of government finances by authorities has waned. Amongst the major SAA currencies, the Rand has weakened by the most this year depreciating by 8%, followed by the Ghanaian Cedi and Ugandan Shilling. However on a longer term basis the Rand is one of the better performing currencies over a 5 year period. The Kenyan Shilling still remains a structurally overvalued. It is one of the best performing currencies amongst Emerging and Frontier markets. The Kenyan Shilling appreciated by 3% this year and has only depreciated by 2.9% over 5 years. That is less than the fundamentals would suggest as inflation in Kenya has averaged 6.4% for the last 5 years and has a long term average of 9.9%.One could argue that the suasion tactics by the Central Bank of Kenya had an effect however it is difficult to ignore the support of reserves (which are at all-time highs), the diaspora remittance which reach record highs almost every month as well as the IMF standby facilities. The Naira has hardly moved this year but has depreciated by 17.5% per year over the last 5 years. The depreciation has had a negative impact on Nigeria s inflation dynamics with minimal improvements in its terms of trade. This highlights the dependence that the country has on oil as its dominant export and revenue earner. So oil production levels will be key in terms of how well they are able to accumulate reserves. Egypt has had the worst performing currency over 5 years at 21% per year however it has felt the benefits of a depreciating currency. Following the devaluation of the Egyptian Pound the country experienced capital inflows on both equity and bond markets and improvements in exports.

9 Global oil prices have increased whilst precious and industrial metals have decreased in general. This is likely to have negative terms of trade impact on oil-importing currencies while being supportive for the oil-exporters. This could lead to some deterioration in current account balances and has already shown in some currencies coming under pressure such as the Rand. We still expect a weakening bias on the Zambian Kwacha, Kenyan Shilling, and Ghanaian Cedi whilst the Nigerian Naira and Egyptian Pound are expected to remain at current levels into 2019 supported by high reserve levels. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

10 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 6.36% Effective: 6.94% STANLIB is required to quote an effective rate which is based upon a seven-day rolling average yield for Money Market Portfolios. The above quoted yield is calculated using an annualised seven-day rolling average as at 13 July This seven- day rolling average yield may marginally differ from the actual daily distribution and should not be used for interest calculation purposes. We however, are most happy to supply you with the daily distribution rate on request, one day in arrears. The price of each participatory interest (unit) is aimed at a constant value. The total return to the investor is primarily made up of interest received but, may also include any gain or loss made on any particular instrument. In most cases this will merely have the effect of increasing or decreasing the daily yield, but in an extreme case it can have the effect of reducing the capital value of the portfolio. STANLIB Enhanced Yield Fund Effective Yield: 7.80% STANLIB is required to quote a current yield for Income Portfolios. This is an effective yield. The above quoted yield will vary from day to day and is a current yield as at 13 July The net (after fees) yield on the portfolio will be published daily in the major newspapers together with the all-in NAV price (includes the accrual for dividends and interest). This yield is a snapshot yield that reflects the weighted average running yield of all the underlying holdings of the portfolio. Monthly distributions will consist of dividends and interest. Interest will also be exempt from tax to the extent that investors are able to make use of the applicable interest exemption as currently allowed by the Income Tax Act. The portfolio s underlying investments will determine the split between dividends and interest. STANLIB Income Fund Effective Yield: 8.33% STANLIB Extra Income Fund Effective Yield: 8.42% STANLIB Flexible Income Fund Effective Yield: 6.05% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 7.40% Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. A schedule of fees and charges and maximum commissions is available on request from the company/scheme. CIS can engage in borrowing and scrip lending. Commission and incentives may be paid and if so, would be included in the overall costs. The above quoted yield will vary from day to day and is a current yield as at 13 July For the STANLIB Extra Income Fund, Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. The historical yield over the last 12 months is reported for the STANLIB Multi-Manager Absolute Income Fund.

11 Disclaimer The price of each unit of a domestic money market portfolio is aimed at a constant value. The total return to the investor is primarily made up of interest received but, may also include any gain or loss made on any particular instrument. In most cases this will merely have the effect of increasing or decreasing the daily yield, but in an extreme case it can have the effect of reducing the capital value of the portfolio. Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. An investment in the participations of a CIS in securities is not the same as a deposit with a banking institution. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from STANLIB Collective Investments (RF) (Pty) Ltd (the Manager). Commission and incentives may be paid and if so, would be included in the overall costs. A fund of funds is a portfolio that invests in portfolios of collective investment schemes, which levy their own charges, which could result in a higher fee structure for these portfolios. Forward pricing is used. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. TER is the annualised percent of the average Net Asset Value of the portfolio incurred as charges, levies and fees. A higher TER ratio does not necessarily imply a poor return, nor does a low TER imply a good return. The current TER cannot be regarded as an indication of future TERs. Portfolios are valued on a daily basis at 15h00. Investments and repurchases will receive the price of the same day if received prior to 15h00. Liberty is a full member of the Association for Savings and Investments of South Africa. The Manager is a member of the Liberty Group of Companies. As neither STANLIB Wealth Management (Pty) Limited nor its representatives did a full needs analysis in respect of a particular investor, the investor understands that there may be limitations on the appropriateness of any information in this document with regard to the investor s unique objectives, financial situation and particular needs. The information and content of this document are intended to be for information purposes only and STANLIB does not guarantee the suitability or potential value of any information contained herein. STANLIB Wealth Management (Pty) Limited does not expressly or by implication propose that the products or services offered in this document are appropriate to the particular investment objectives or needs of any existing or prospective client. Potential investors are advised to seek independent advice from an authorized financial adviser in this regard. STANLIB Wealth Management (Pty) Limited is an authorised Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (Licence No. 26/10/590). Compliance No.: HX Melrose Boulevard, Melrose Arch, 2196 P O Box 202, Melrose Arch, 2076 T: (SA Only) T: +27 (0) E: contact@stanlib.com Website: STANLIB Wealth Management (Pty) Limited Reg. No. 1996/005412/07 Authorised FSP in terms of the FAIS Act, 2002 (Licence No. 26/10/590) STANLIB Collective Investments (RF) (Pty) Limited Reg. No. 1969/003468/07