The Weekly Focus. A Market and Economic Update 19 November 2018

Transcription

1 The Weekly Focus A Market and Economic Update 19 November 2018

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 4 Economic Update...6 Rates...9 STANLIB Money Market Fund... 9 STANLIB Enhanced Yield Fund... 9 STANLIB Income Fund... 9 STANLIB Extra Income Fund... 9 STANLIB Flexible Income Fund... 9 STANLIB Multi-Manager Absolute Income Fund... 9

3 Newsflash Locally, markets fell back last week, including our Property Index, in line with world markets continuing with their bottoming process. Market Comment Markets weakened last week as the bottoming process from the big October correction continued to play out. It looks like we may now have a bottom in place, with an apparent reverse head-andshoulders pattern on the S&P 500 Index. This is usually a bullish pattern, implying the next big move is up. Even the ALSI seems to be forming a bottoming pattern, albeit still perhaps a tad unfinished. Below we show a graph of the MSCI World Index, with its reverse head-and-shoulders pattern taking shape, even if a bit lob-sided. Source: I-Net Bridge Uncertainty is still high because of both Brexit and the big trade issue with China. The G20 meeting is next week on the 30 th of November, when hopefully Trump will meet the Chinese Premier to make progress on the trade issue. The trade issue seems to be dominating global equities and emerging market bonds and currencies, although last week EM currencies firmed, perhaps in hope of the upcoming meeting at the G20. There is a sense that both China and the US are in some pain from the trade war. Certainly many US market commentators and US corporates are blaming Trump on this issue. He can no longer claim he is causing a strong stock market. The MSCI World Index is -3.4% in dollars in 2018 (+9.1% in rand terms). Almost all the return is coming from the MSCI USA Index, which is +2.2% in dollars. The MSCI Europe Index is -12.5% in dollars in 2018, the MSCI Japan Index is -9.6% and the MSCI Emerging Markets Index is -14.8%...all struggling in dollar terms. The S&P 500 Index is +2.6% in 2018, led by Health Care s +11.3%, then Consumer Discretionary s +7.8% and IT s +6.7%. Financials are -4%, Industrials -4.9%, Energy -7% and Materials -8.7%. Locally, markets fell back last week, including our Property Index, in line with world markets continuing with their bottoming process. Even the chart of Naspers shows a reverse head-and-shoulders pattern forming.

4 To-date the SA Listed Property Index 2018 total return is back down at -22.5%, then the All Share Index total return is -10.2%, while the All Bond Index return improved to +5.6%, as bond yields declined (prices rose) and the rand strengthened. A key factor in the improvement in the rand and in our bonds has been the weakness in the US dollar over the past few days, albeit still very mild weakness. The dollar reached a new 2018 high last week versus the euro of $1.120 and has since weakened to $ The jury is still out on this one, where it will be in about 3 and 6 months hopefully weaker. But if the trade war continues, it could certainly strengthen further, to the detriment of most markets. Meanwhile the US 10-year bond yield has suddenly declined from 3.25% last month to 3.07% today (price up). On the charts it looks like a short-term double top on the yield (double bottom on the price). This could be partly due to a perceived softening in the US economy s growth rate and/or to the big decline in the oil price, which is positive for global consumers, for importing countries like India, China, South Africa and Japan and for lower inflation. The dollar oil price is down -21% from its high last month and is now virtually unchanged in That is a serious move! The rand oil price is down almost -26% since early October, back at levels of 6 months ago, so hopefully the Reserve Bank will not hike interest rates on Thursday (much lower rand oil price and better rand exchange rate - both good for lower inflation). The only negative for us about the tumble in the rand oil price is that Sasol has fallen -23% from its early September high. BHP Billiton gets hurt a bit too. It has been noteworthy, unfortunately, how badly many of our big rand hedges have done lately, apart from Sasol. British American Tobacco has been absolutely lambasted mostly because of the US FDA s desire to ban menthol in cigarettes in the US. Menthol cigarettes apparently contribute about 25% of the company s total global profits, which is huge. British American Tobacco is down a hefty -41% in rand terms in 2018, so that s about -56% in dollar terms, back at levels of 5.5 years ago. This tumble has hurt its stable mate Reinet as well. Investec Securities is recommending buying British American Tobacco now because it trades at under 10 times expected earnings and yields a juicy 7%-plus on dividends. They say the big tobacco companies in the US are ready to fight the FDA on this one, saying there is no scientific evidence about menthol and any fight could be dragged out over 3-5 years. They feel the dividend is safe. But for SA investors Richemont, Mediclinic and AB Inbev have also done very poorly in 2018, being three other big rand hedges that have failed miserably to give us a hedge against a weaker rand. Richemont is down -16.3% in 2018 in rand terms, back at levels of over 5 years ago, so about -32% in dollar terms, while Mediclinic is down -38% in rands and AB Inbev -26% in rands (or -42% in dollars). Another big rand hedge, Naspers, is -21% in rands in 2018, or -37% in dollars. So much for using the JSE rand hedges as an alternative to offshore investing! It used to work quite well, but has been a disaster in Only Anglo American (+17.3% in rands) and BHP Billiton (+14.7% in rands) have helped, apart from a few others like Anglo Platinum (+33.8% in 2018). Other Commentators US Market Analyst, Elaine Garzarelli The quants model declined to 79% (from 86%) due to the downgrade of the Bloomberg Financials Conditions Index and the Junk Bond to 10-year yield ratio. Junk bond yields rose to 7.1% last week, the highest level in over 2 years, so the junk bond to 10-year yield index was downgraded to neutral from bullish.

5 The Bloomberg Financial Conditions Index measures the health of the financial system between banks, businesses and consumers. The Fed s rate hikes have caused the financial system to tighten and this index has been on a downward trend recently, so it is downgraded from bullish to neutral. The ECRI weekly leading index is ranked bearish since it is warning of an economic slowdown in the US. The Valuation Indicator is still ranked bullish. It suggests a fair value for the S&P 500 Index of 3,060, about +12% above the current level. The quants model remains bullish (below 30% is a bear market). Garza recommends buying on dips in beaten-down sectors such as Technology, Financials and Industrials. While shares have plenty to worry about, especially on trade issues, dollar strength and a slowdown for Apple, inflation is not a worry, which gives the Fed wiggle room. Bear markets are caused by the Fed engineering a recession to slow down inflation. There is currently no need for aggression by the Fed. Core CPI inflation rose +2.1% year-on-year in October, down from a +2.4% high in July, while headline CPI inflation rose by +2.5%. Lower oil prices will help too. BCA Research BCA is optimistic on the US stock market for the next 9-12 months and regards the current correction as a good buying opportunity for long-term capital. But they do still think that the global equity correction could have further to run and would turn more bullish if global equities dropped another -8% from current levels. They are concerned about a deterioration in a number of leading economic indicators, both in the US and abroad, which tends to be bearish for shares. The Fed is expected to raise interest rates for the 9 th time next month to around 2.5%. The US economy is losing some steam, slowing and this is a yellow flag that needs to be monitored closely. Only business capital spending plans are strengthening. Also, while banks are willing to lend, the demand for loans is declining across the board, except in the other consumer category, which is mostly student loans. There is also some demand for sub-prime residential loans. But consumer confidence remains high and consumer spending is strong. Job certainty is high and wage inflation is making a comeback. BCA has been right on the strong dollar in 2018 and unfortunately they are forecasting that the dollar index will gain another +3% by year-end. This will put further pressure on emerging markets. Paul Hansen Director: Retail Investing

6 Economic Update 1. SA retail sales worse than expected in September. Sales declined in the month, but still positive over the past year. Importantly, retail was positive in Q3, which will help GDP growth, but the rate of improvement remains unconvincing. 2. Increase in US employment has been steady and persistent since 2009, but the overall rate of growth is actually relatively modest when compared with previous economic upswings. 1. Stats SA released the retail sales data for September According to this latest survey, retail sales fell by a very disappointing -0.6%m/m in September 2018, after recording revised growth of +0.7%m/m in August. The latest month-on-month sales performance was much worse than market expectations for retail sales to remain unchanged (Bloomberg), although the consensus is based on an extremely narrow group of forecasts. Over the past year, retail sales rose by a modest 0.7%y/y versus a consensus forecast +1.9%y/y. On a trend basis, retail activity has achieved an annual average growth rate of 3.4% over the past 12 months, which is perhaps a little surprising given that the economy has been in a technical recession. Clearly, though, the consumer lost significant momentum in the first half of 2018, after a relatively buoyant Critically, in the past three months (July September 2018, Q3 2018) retail sales were positive, rising by 1.5%q/q, helped enormously by the large increase in July. This, together with a modest pick-up in manufacturing and a few other sectors in Q3 2018, should help SA emerge from recession. Nevertheless, the rate of improvement in the SA economy remains very unconvincing. Hopefully, a big petrol price reduction in December possibly around R1.50/l could provide some welcome relief. Offsetting this is the strong possibility that the Reserve Bank will decide to increase interest rates by 25bps this week. A breakdown of retail spending by category reveals that a number of components of consumer activity have lost momentum during 2018, most especially food and beverage stores as well as hardware stores. More positively, sales of furniture and appliances have remained surprising buoyant, partly driven by discounting, as has pharmaceutical and medical goods. On-line shopping has also recorded persistent and relatively strong growth. Looking ahead to the next 12 months, household disposable income is likely to remain under pressure. This is partly due to the current upward drift in inflation, weakness in the labour market and a moderation of salary increases within the private sector. Growth in household credit also remains modest, although there has been an upward drift in some categories of consumer credit in recent months. The net result is that although we anticipate the growth in retail spending to record positive growth for H as a whole, the sector is clearly still struggling to gain momentum. Ultimately, the long-term performance of the retail sector in SA is directly linked to the growth in employment and household income. For example, if South Africa can add around new jobs in a year (this equates to the roughly the number of new entrants into the labour market in a year), then consumer spending would be expected to growth at around 7% in real terms (assuming the jobs are added at the average salary level and that the marginal propensity to consume remains unchanged. Equally, a stagnant labour market implies stagnant retail spending.

7 2. The current US economic recovery started in June 2009 (according to the US National Bureau of Economic Research), which means the economic expansion has been underway for the past 113 months (including November 2018). As we have discussed on a number of occasions, this makes the current expansion phase the second longest economic recovery in the recorded history of the US economy. It is also entirely possible that the current growth cycle becomes the longest ever recorded, surpassing the March 1991 to March 2001 growth phase that latest a total of 120 months. During the past 112 months (data available to October 2018) the US has added a total of 18.7 million jobs at an average of jobs a month. This is after losing 8.7 million jobs during the global financial market crisis. In addition, the unemployment rate has fallen from a peak of 9.5% in 2009 to 3.7% currently, while the number of people unemployed has fallen from a high of 15.3 million in 2009 to the current low of just over 6.0 million. It is also remarkable that US employment has risen each month for the past 97 consecutive months. In isolation, the performance of the US labour market during the past nine years is extremely impressive. However, when compared with previous economic cycles, the growth in labour is somewhat less remarkable. For example, the US labour market participation rate has fallen significantly during the past nine years and is currently at its lowest level since the late 1970s. In addition, the decline in labour participation over the past nine years is easily the most severe and protracted the US economy has ever experienced. A decline in labour market participation tends to flatter the decline in the unemployment rate. In other words, if the labour market participation had remained at the level that prevailed at the time of the global financial market crisis then the unemployment rate would be significantly higher than the current 3.7%. In addition, the gain of 18.7 million jobs over the past nine years represents a 14.3% increase in total employment. However, the gain of 14.3% is well below the rate of growth in employment achieved during the Mar 91 to Mar 01 upswing, the Nov 82 to Jul 90 recovery, the Mar 75 to Jan 80 expansion and the Feb 61 to Dec 69 boom. All of this suggests three key scenarios for the US labour market are possible over the next 12 to 18 months. US employment continues to grow at a level that exceeds the population growth (adding jobs at an average of between and jobs a month). At the same time the labour market participation rate remains subdued, which means the unemployment rate falls further and there is significant evidence of a rise in wages (wage growth quickly starts to approach 4.0%y/y). This scenario would be extremely concerning for financial markets (especially emerging economies) since it would suggest that the Federal Reserve would need to raise interest rates at a much more aggressive pace. Out of interest the latest NFIB economic trends survey highlights that 88% of companies hiring or trying to hire additional workers reported few or no qualified applicants for the positions they were trying to fill. US employment continues to grow at a reasonable pace (adding jobs at an average of to ), and while wages continue to trend modestly higher there is also a modest increase in the labour market participation rates. This suggests that the Fed can continue to increase rates at a steady pace, but not aggressively move interest rates from stimulatory too restrictive. The financial markets would continue to focus on valuations and relative yield. The economic data (especially the forward looking economic data) starts to signal a looming slowdown in the US economy. Partly because the Trump fiscal stimulus package is becoming less effective, partly because of the Republican s losing outright control of the US congress, partly because of the impact of the higher Federal Funds Rate on the economy and partly because of the delayed negative impact of the global trade wars. The monthly jobs report starts to disappoint more regularly, and there is no sustained increased in US wage growth or the labour market participation rate. This could prompt a more aggressive move from equities into fixed income instruments and an overall more conservative approach to portfolio management.

8 At this stage the most likely outcome is scenario 2, but this is a clear risk that scenario 1 could become more evident in the short-term given the current high number of job openings and a degree of complacency about the emergence of inflation and how the Fed would be forced to react to a surge in inflation. Looking further out into late 2019 and early 2020, we would start to expect that scenario 3 could become more of a factor, especially if the Fed continues to increase rates and congress has become extremely divided and unhelpful in relation to the performance of the economy. Please follow our regular economic updates on Kevin Lings & Laura Jones (STANLIB Economics Team)

9 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 6.48% Effective: 6.68% 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 16 November 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: 7.71% 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 9 November 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: 8.15% STANLIB Extra Income Fund Effective Yield: 7.69% STANLIB Flexible Income Fund Effective Yield: 6.65% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 7.10% 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 future performance. 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 16 November 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.

10 Disclaimer 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 future performance. CIS are traded at ruling prices and can engage in borrowing and scrip lending. Portfolios are registered under the STANLIB Collective Investments Scheme (the Scheme). The manager of the Scheme is STANLIB Collective Investments (RF) (PTY) Ltd (the Manager). The Manager is authorised in terms of the Collective Investment Schemes Control Act, No. 45 of 2002 (CISCA) to administer Collective Investment Schemes (CIS) in Securities. Liberty is a full member of the Association for Savings and Investments of South Africa (ASISA). The Manager is a member of the Liberty Group of Companies. The manager has a right to close a portfolio to new investors in order to manage the portfolio more efficiently in accordance with its mandate. A schedule of fees and charges and maximum commissions is available on request from the Manager. The Manager does not provide any guarantee either with respect to the capital or the return of a CIS portfolio. 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. A money market portfolio is not a bank deposit account. 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. An annualised seven day rolling average effective yield is calculated for Money Market Portfolios. Excessive withdrawals from the portfolio may place the portfolio under liquidity pressures; and that in such circumstances a process of ring-fencing of withdrawal instructions and managed pay-outs over time may be followed. TER is the annualised per cent 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 except Fund of Funds which are valued at 24h00 daily. Investments and repurchases will receive the price of the same day if received prior to 15h00. The trustee of the Scheme is Standard Chartered Bank. The investments of this portfolio are managed, on behalf of the Manager, by STANLIB Asset Management (Pty) Ltd, an authorised financial services provider (FSP) under, FSP No. 719, under the Financial Advisory and Intermediary Services Act (FAIS), Act No. 37 of As neither STANLIB Asset 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 Asset 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 Asset Management (Pty) Limited is an authorised Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (Licence No. 26/10/719). Compliance No.: Z31B77 17 Melrose Boulevard, Melrose Arch, 2196 P O Box 202, Melrose Arch, 2076 T: (SA Only) T: +27 (0)

11 E: Website: STANLIB Asset Management (Pty) Ltd Reg. No. 1969/002753/07 Authorised FSP in terms of the FAIS Act, 2002 (Licence No. 26/10/719) STANLIB Collective Investments (RF) (Pty) Limited Reg. No. 1969/003468/07