Contents Newsflash Market Comment What is happening on the bond and property side? Other Commentators... 5

Transcription

1 27 January 2014

2 Contents Contents... 2 Newsflash... 3 Market Comment... 3 What is happening on the bond and property side?... 5 Other Commentators... 5 Economic Update... 7 Weekly Market Analysis... 9 Standard Bank Money Market Fund STANLIB Enhanced Yield Fund STANLIB Income Fund Liberty Investments Life Annuities... 11

3 Newsflash We may now be in the midst of a correction in world stock markets Market Comment People have been anticipating a correction for some time in world stock markets. It appears that we may now be in the midst of such a correction, triggered by the disappointing Chinese manufacturing indicator (HSBC s flash purchasing managers index, or PMI) that came out last week, indicating some contraction in factory output in China in December. This has hit the Hong Kong stock market hard, as it is down close to 9% in the last 6 trading days, trading where it first was seven years ago. The correction is clearly aggravated by the storm in emerging markets (including political problems in Turkey, Ukraine, the far east and strikes in SA), with sharp declines in many emerging market currencies, including our own, with the Argentinian devaluation of around 12% last week being the worst of the lot. Apparently they devalued because their foreign currency reserves had declined sharply. This brings back memories of late 2001, when the rand collapsed to 20 to the pound and to the dollar, just before Argentina removed its currency from a peg to the dollar. In my view, the Argentinian de-peg had a big influence on the fall of the rand then, because many American banks shorted our currency to hedge against guaranteed losses in Argentina. The rand was then one of the only liquid emerging market currencies that could be shorted. The Argentinian peso is down 13.6% so far in 2014, the Turkish lira is down 8% and the rand 8% (10.35 to 11.20), apart from losses in many other EM currencies. Source: I-Net Bridge Looking at the chart above of the rand to the dollar, one can see that the rand is now trading at a similar level to its worst point during the 2008 stock market crash, around 11.20, at least on the weekly chart. The recent break of trend at 10.50, indicated by the trend-line, may mean the rand could in time decline towards the weekly low in 2001 of However, the intra-weekly low for the rand in 2008/9 was in fact to the dollar, to the pound (18.50 currently) and to the euro (15.37 currently). In 2001, the intra-weekly low was to the dollar and 20 to the pound. So far the US stock market is down 2.7% from its recent record high, trading now at the same level as in mid- November, about 10 weeks ago. Usually one anticipates a correction in the US of around 4-7%. So there could be more to come, although one gathers that there is plenty of cash on the sidelines just itching to get into equities.

4 Judging by reports from Davos in Switzerland, attended by some 2,500 political and business leaders, including 80 billionaires, optimism on world growth and the share bull market was quite evident for 2014/5. The JSE is so far holding up quite well, clearly with the help of the weaker rand, which is acting as a shockabsorber through the big rand hedges; but also our mining index is helping a lot. It had a terrible 2013, not participating at all in the global bull market. In fact today the JSE Mining Index is trading 8% lower in weak rands than it was last January - but only just below its recent high. In dollar terms, the JSE Mining Index (J177) is at least stabilising (not falling further) and the biggest share, Billiton, is hanging in there, trading at the same level as in 2007, in a gentle upward trend since April last year. Anglo American, which fell 80% in dollar terms 15 months after the crash, has been rising a bit in dollars of late. It fell sharply until July last year, when it was down 75% from its 2007 high, but is rising a bit now (see chart below of Anglo American in dollar terms). Source: I-Net Bridge This is an interesting chart, of Anglo in dollar terms, because it shows that the share is trading now exactly where it was 10 years ago in early 2004, in the early stages of the big bull market from 2003 to So we in South Africa may actually be fortunate now that our Mining Index, which has been stuck in the mud for some time, even in rand terms, could (possibly) be about to make a positive impact, from a low base. Of course, the latest negative manufacturing PMI index from China is not good news, but hopefully it is more of a one-off, than the start of a trend. Certainly, mining shares have not sold off much since it came out. However, STANLIB as a house is not bullish on mining shares at this stage, because of the material increases in supply due this year and next year in iron ore production, amongst others. STANLIB is more-or-less neutral on mining shares, citing also the big increases in costs that are hurting bottom-line profit. Counter to this house view, Citibank in London has turned bullish on mining shares, reflecting what they see as better bottom-up fundamentals, particularly from the major miners, although they prefer Billiton and Glencore to Anglo. In particular, they see free cash flow building up strongly, leading to better dividend payouts in the next few years. They are to my knowledge the only major firm to turn bullish on mining shares, though they do caution that they are not bullish on metal prices because of the supply increases. On the JSE Financial & Industrial shares that have soared during this bull market, so far the correction there is 3.5% from the recent record high. As mentioned previously, the big rand hedges like SA Breweries, British American Tobacco and Richemont, are helping keep losses down so far. Financials are hurting more, down 4.2% and trading back at May 2013 levels. Recently Bank of America Merrill Lynch indicated that in their monthly questionnaire on fund managers in South Africa, 100% of managers think the JSE is expensive and 100% think that there are only sells (no buys). This is the first time both have been at 100%. So I guess the signs for a correction were strong a week or so ago.

5 What is happening on the bond and property side? The stock market and emerging market currency sell-off, combined with the weaker production number in the world s 2 nd biggest economy, namely China, as well as some softer economic numbers last week in the US, has very interestingly boosted US bond prices, despite the possibility of further tapering announcements later this week from the US Federal Reserve, chaired by Ben Bernanke for the last time, before he retires. The 10-year US government bond yield declined sharply from its recent high of 3.05% on 31 st December to 2.73% today. As the yield declines, the price rises, so US bonds are showing good returns so far in 2014, very much against the consensus view. This has boosted the bonds of most other developed markets too, e.g. the UK and Europe. Only emerging markets have suffered, because of some selling, perhaps on the back of the big slide in the currencies and possibly some fear of further tapering. Foreigners were big sellers of SA bonds last week (approximately R6bn). They are selling at a poor price in dollar or euro or pound terms, because the rand price of, say, the 12/13-year R186 SA government bond, is close to its previous low seen in August last year, when the yield reached 8.75%, now at 8.68%, plus the rand is down sharply. SA Listed Property is down around 2% in the last 6 trading days, but is still above the lows seen in June and August last year. Global listed property was down 1.6% in dollar terms last week, but is also still above the lows seen in June and August last year. In rand terms, it is up 7.7% so far in 2014, trading at an all-time record high. If anything, the better global economy and fall in bond yields of late is positive for global property s fundamentals. Other Commentators ELAINE GARZARELLI Garza makes the point that the ending of QE1 (quantitative easing one) and QE2, when both went immediately to zero and steep stock market corrections followed, is very different from this slow reduction (tapering) in QE3. Her proprietary stock market indicator is still bullish at a level of 70%, even though it declined last week from 77%. She continues to recommend an unhedged position in US equities. Corrections should be limited to 4-7% in the US stock market. The fundamentals for shares are positive and her system indicates US shares are conservatively around 8% undervalued. The US expansion appears to be self-sustaining, based on stronger readings of late for industrial production, retail sales, federal tax receipts and mortgage applications. The Conference Board reported that the index of US leading indicators rose 6.1% year-on-year in December; a sign the US economy is set to keep expanding over the next 6 months. Inflation is mild and unlikely to spike in the near future, with petrol prices back down to $3.29 per gallon. Free trade has put downward pressure on inflation and will continue to do so going forward. A further positive is that a government budget surplus is not out of the question. The global economy showed improvement with stronger readings for Eurozone vehicle sales, Japanese bank loans and Malaysian industrial production. Money supply in the US, Japan, Eurozone and China rose by 7% year-on-year. Such synchronised global expansion, no matter how slow, reduces the risk of a recession and increases the odds of higher S&P 500 earnings. The debt limit issue is still to be sorted, as it expires on 7 th February. Garza expects it to be raised or suspended.

6 BCA RESEARCH BCA looked at the possibility of timing the next bear market, noting that monetary indicators, a good sign of potential trouble, are not signaling that a bear market lies ahead in the near future. Valuations (PE ratios etc) have not been reliable in predicting a bear market in equities and are not giving any warning signals now. Valuation overshoots can persist for a long period. Currently the S&P 500 price-toearnings (PE) ratio, based on trailing operating earnings, is only slightly higher than the average of the past 50 years, at around 17/18. People often refer to the Shiller PE, using a 10-year average of earnings, as a good market barometer, but it has not been a good predictor of future returns. Currently economic indicators are not signaling any risk of recession. BCA expects US real GDP growth to be in a 3% to 3.5% range in 2014, better than most are predicting. On the technical side, the only real negative now is that financial advisors are especially optimistic; but this type of sentiment can last quite a long time. BCA concluded that there is no foolproof way to forecast equity bear markets. Monetary indicators give the most reliable signals, but do not always work. Currently monetary indicators are positive for the market, as is the economic cycle. Valuations and technicals are both neutral, whereas at the previous market peaks (in 2007 and 2000) all four were negative. Looking at margin debt (money borrowed by investors to buy shares), it is currently at an all-time high in absolute terms. However, as a share of broad US public equity market values (capitalisations), although it is elevated relative to history, at almost 1.6 standard deviations above the mean, this has continuously been above prior seven-decade highs for the past 7 years. So it also does not seem to be a harbinger of an imminent decline. So the odds appear strongly stacked against a bear market in the near future. However, writing last Friday, Chen Zhao said he is a bit worried about a correction, because margin debt as a percentage of the US GDP (size of the economy) is quite close to the peak levels seen when the stock market peaked in 2000 and in 2007, before the big bear markets that followed. Also the volatility index or VIX, often called the Fear Index, is at a very low level, indicating some complacency amongst investors. But as he says, none of these issues is sufficient to upset the global economy. As far as emerging market currencies go, Chen has this to say: They are too small to matter for global financial markets. Take that sports lovers! Signs of a stock market bubble are not prevalent, he notes, despite the 173% gain for the S&P 500 Index since March So far it has been 116 weeks since the market had its last 10% or more correction, but this is by no means an extreme relative to the past. Chen recommends staying overweight in the Japanese stock market. Just one snippet: Citibank indicates that US institutions are currently cash heavy, with on average 11.3% of funds under management sitting in cash, the highest proportion since July Paul Hansen Director: Retail Investing

7 Economic Update Locally last week, the SA leading economic indicator (LEI) for November 2013 was released by the Reserve Bank, and recorded another disappointing decline of 0.2%m/m. This follows a modest increase of 0.2%m/m in October and a decline of 0.1%m/m in September. The leading indicator has now declined in 6 of the last 9 months. On an annual basis, the leading indicator fell by 0.1%y/y in November 2013, down from growth of 0.6%y/y in October The current trend in the leading indicator suggests that the SA economy will remain under pressure during the first half of This is largely due to domestic circumstances. In contrast, the global economic environment continues to improve, which will hopefully provide some positive offset for the SA economy as the year unfolds. The weakness in November 2013 was fairly narrow with only 4 of the 11 components of the time series declining. The major negative contributions in November came from a decline in the number of residential building plans passed, as well as a deceleration in the six-month smoothed growth rate in the real M1 money supply. The largest positive contributions came from an increase in the export commodity price index, followed by acceleration in the twelve-month percentage change in the composite leading business cycle indicator of South Africa s major trading partner countries. Hopefully, a steady improvement in the global economy (which should lift SA exports, especially given the weaker Rand) coupled with an improvement in infrastructural development have the potential to start to lift SA s growth prospects. It is important that South Africa moves past the labour market disruptions and policy uncertainties that are currently affecting a number of key economic sectors, and finds a way to lift business and consumer confidence generally. In December 2013, SA headline CPI inflation rose by 0.3%m/m, with the annual rate of inflation rising to 5.4%y/y from 5.3%y/y in November The modest monthly rise in inflation was largely due to an increase in the petrol price as well as rental inflation. Surprisingly, food inflation declined during the month. For 2013 as a whole, SA CPI inflation averaged 5.8%, up slightly from an average of 5.7% in 2012 and a more subdued 5.0%y/y in 2011 and 4.3% in For 2014 SA inflation is forecast to average 5.9%, rising above 6% by year-end. The forecast is highly dependent on the outlook for food inflation coupled with the impact of the weaker exchange rate. Over the past year, the Rand has weakened by around 19% against the US Dollar and is down 27% over the past two years, and yet there is still no sign of the weaker Rand leading to higher domestic inflation (at the end of 2011 SA consumer inflation was 6.1%y/y). This appears to be largely due to the slowdown in the domestic economy and the inability for companies to pass-on cost increases. Nevertheless, the protracted currency weakness is, ultimately, likely to lead to somewhat higher inflation during Interestingly, the inflation rate for hotels is now up at 8.5%y/y, suggesting that the rise in domestic and foreign tourism is allowing the accommodation industry to pass-on cost increases and therefore the industry is able to benefit from the weaker Rand. The inflation rate for pensioners is also well inside the target range at 5.5%y/y. The latest inflation data confirms that there is still very little upward pressure on SA consumer inflation. Nevertheless, the risks to the inflation forecast remain to the upside, and the outlook is largely dependent on the pass-through from currency weakness and the path of food inflation. The Reserve Bank is obviously also concerned about the impact of the weaker exchange rate on inflation, but given the weakening domestic economy they are expected to keep interest rates on-hold during 2014 unless there is clear evidence that inflationary pressures have broadened and that the inflation rate could remain meaningfully above the inflation target on a sustained basis. Globally, the IMF released their January 2014 World Economic Outlook. Overall, the IMF has revised up their World GDP growth forecast fractionally for 2014, but they left their 2015 estimate unchanged. For 2014 world growth is now forecast at 3.7%, up 0.1 percentage points from the October 2013 estimate, while growth in 2014 is forecast unchanged at 3.9%. These forecasts are done on a PPP basis. The long-term average for world growth is around 3.4%. Using market exchange rates - world growth is forecast at 3.1% in 2014 and 3.4% in 2015 (the main difference is due to the GDP weight of China). The IMF made the following key points about world growth: Global activity strengthened during the second half of 2013, and economic activity is expected to improve further in 2014 and 2015; growth in the United States is expected to be 2.8% in 2014, up from 1.9% in 2013; the euro area is turning the corner from recession to recovery. Growth is projected to strengthen to 1% in 2014 and 1.4% in 2015, but the recovery will be uneven; the United Kingdom has been buoyed by easier credit conditions and increased confidence; in Japan, growth is now expected to slow more gradually compared with October Temporary fiscal stimulus should partly offset the drag from the consumption tax increase in early 2014; growth in China rebounded strongly in the second half of 2013, due largely to acceleration in investment; growth in India picked up after a favorable monsoon season and higher export growth and is expected to firm further on stronger structural policies supporting investment; Growth in emerging market and developing economies is expected to increase to 5.1% in 2014 and to 5.4% in 2015.

8 Encouragingly, the IMF s growth forecast for sub-saharan Africa has, once again, been revised up and is now projected at an impressive 6.1% in 2014 and 5.8% in The growth projection for South Africa is little changed, with the IMF revising growth for 2014 down fractionally by 0.1 percentage point to 2.8%, while their estimate for 2015 remains unchanged at 3.3%. These forecasts are largely in-line with private sector estimates, with the risk to the downside in Key risks include: deflation concerns; continued downside risks to financial stability; in emerging market economies, increased financial market and capital flow volatility remain a concern, given that the Fed will start tapering in early It is critical that the major central banks avoid a premature withdrawal of monetary policy accommodation, including the United States, as output gaps are still large while inflation is low and fiscal consolidation continues. Stronger growth is needed to complete balance sheet repair after the crisis and to lower related legacy risks. In the euro area, the European Central Bank (ECB) will need to consider additional policy measures. In emerging market and developing economies, recent developments highlight the need to manage the risks of potential capital flow reversals. Economies with domestic weaknesses and partly related external current account deficits (such as South Africa) appear particularly exposed. Exchange rates should be allowed to depreciate in response to deteriorating external funding conditions. In China, the recent rebound highlights that investment remains the key driver in growth dynamics. More progress is required on rebalancing domestic demand from investment to consumption to effectively contain the risks to growth and financial stability from overinvestment. In the emerging markets, Nigeria s Central Bank Monetary Policy Committee decided to leave interest rates unchanged at its first meeting of the year on 21 January The decision was largely expected by the market. The benchmark rate is 12%, and has remained unchanged for fourteen consecutive MPC meetings. The cash reserve ratio was raised from 50% to 75%, but the liquidity ratio was held at 30%. Consumer inflation remained stable at 8%y/y in December 2013, which is within the 2014 target of 6% to 9%, which is slightly above the November reading of 7.9%y/y. The Governor of the Central Bank of Nigeria remains relatively hawkish, arguing that the Bank is not necessarily at the end of the tightening cycle. Governor Sanusi Lamido Sanusi stated that the Central Bank was concerned about the Excess Crude Account as fiscal buffers were continuously being depleted. He urged authorities to reduce fiscal leakages as deficits are being financed by foreign portfolio inflows, which have started to decrease mainly because of QE tapering. Governor Sanusi s term comes to an end in June 2014, and the continuation of the tight monetary policy will depend on his successor. There is currently no clear indication as to who will take over his responsibilities. The Brazilian Central Bank hiked interest rates for the seventh consecutive time to 10.50% at its meeting on 15 January The 50 basis point rate hike was higher than market expectations of 25 basis points and was in an effort to reduce inflation. This is from the record low rate of 7.25% and continues the tightening cycle which began in April Inflation was seen at 0.92% m/m in December which was the highest monthly rate in just over a decade. On a yearly basis inflation came in at 5.91% y/y in December 2013, which was higher than the target rate of 4.5% and the 5.77% recorded in November. This is from a downward trend that began in July 2013 when the inflation rate was recorded at 6.27% down from 6.7% in June. The president of the central bank, Alexandre Tombini, stated that a weaker currency, the rising cost of labour and transport are placing upward pressure on prices. Brazil, along with South Africa, India, Turkey and Indonesia, have been referred to as the Fragile Five as these countries have high current and fiscal account deficits relative to GDP and are most vulnerable to currency shocks. The policy responses of these five have somewhat been different though, with some such as Brazil and India choosing a tighter policy stance while South Africa and Turkey kept the loose monetary policy stance. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

9 Weekly Market Analysis Currencies/ Indices/ Commodities Friday s Close 24/01/14 Weekly Move (%) YTD (%) Indices *MSCI World US Dollar *MSCI World Rand *MSCI Emerging Market US Dollar *MSCI Emerging Market Rand All Share Index US Dollar All Share Index Rand All Bond Index Listed Property J Currencies US Dollar/Rand Euro/Rand Sterling/Rand Euro/US Dollar Commodities Oil Brent Crude Spot Price ($/bl) Gold Price $/oz Platinum Price S/oz Source: I-Net Bridge * MSCI - Morgan Stanley Capital International

10 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. Standard Bank Money Market Fund Nominal: Effective: 5.07% per annum 5.19% per annum 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 24 January 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: 5.71% 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 24 January 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 (currently tax exempt) and taxable interest. Interest will also be exempt from tax to the extent that investor s 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: 6.51% 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 24 January 2014.

11 STANLIB Extra Income Fund Effective Yield: 5.96% 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. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. The above quoted yield will vary from day to day and is a current yield as at 24 January Liberty Investments Life Annuities Current Rates for 27 th January st January 2014 Payments are assumed to be paid monthly in advance with no guarantee period or annual escalation in income. Ages indicated assume client is the exact age shown. No tax has been deducted. Gender Male Female Age last birthday Contribution R 100,000 R 786 R 824 R 881 R 713 R 746 R 793 R 250,000 R R R R R R R 500,000 R R R R R R R 1,000,000 R R R R R R The table above shows the monthly annuity that an annuitant will receive for life in return for the single premium in the left hand column. Note that the annuity depends on the annuitant s exact age and gender. The rates above were calculated assuming maximum commission and will be enhanced if a commission discount is selected.

12 Glossary of terminology Bonds A bond is an interest-bearing debt instrument, traditionally issued by governments as part of their budget funding sources, and now also issued by local authorities (municipalities), parastatals (Eskom) and companies. Bonds issued by the central government are often called gilts. Bond issuers pay interest (called the coupon ) to the bondholder every 6 months. The price/value of a bond has an inverse relationship to the prevailing interest rate, so if the interest rate goes up, the value goes down, and vice versa. Bonds/gilts generally have a lower risk than shares because the holder of a gilt has the security of knowing that the gilt will be repaid in full by government or semi-government authorities at a specific time in the future. An investment in this type of asset should be viewed with a 3 to 6 year horizon. Cash Collective Investments Compound Interest Dividend Yields Dividends Earnings per share An investment in cash usually refers to a savings or fixed-deposit account with a bank, or to a money market investment. Cash is generally regarded as the safest investment. Whilst it is theoretically possible to make a capital loss investing in cash, it is highly unlikely. An investment in this type of asset should be viewed with a 1 to 3 year horizon. Collective investments are investments in which investors funds are pooled and managed by professional managers. Investing in shares has traditionally yielded unrivalled returns, offering investors the opportunity to build real wealth. Yet, the large amounts of money required to purchase these shares is often out of reach of smaller investors. The pooling of investors funds makes collective investments the ideal option, providing cost effective access to the world s stock markets. This is why investing in collective investments has become so popular the world over and is considered a sound financial move by most investors. Compound interest refers to the interest earned on interest that was earned earlier and credited to the capital amount. For example, if you deposit R1 000 in a bank account at 10% and interest is calculated annually; your balance will be R1 100 at the end of the first year and R1 210 at the end of the second year. That extra R10, which was earned on the interest from the first year, is the result of compound interest ("interest on interest"). Interest can also be compounded on a monthly, quarterly, half-yearly or other basis. The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. The higher the yield, the more money you will get back on your investment. When you buy equities offered by a company, you are effectively buying a portion of the company. Dividends are an investor s share of a company s profits, given to him or her as a part-owner of the company. Earnings per share is a measure of how much money the company has available for distribution to shareholders. A company s earnings per share is a good indication of its profitability and is generally considered to be the most important variable in determining a company s share price.

13 Equity Financial Markets Fixed Interest Funds Gross Domestic Product (GDP) Growth Funds Industrial Funds Investment Portfolio JSE Securities Exchange Price to earnings ratio Property Resources and Basic Industries Funds A share represents an institution/individual s ownership in a listed company and is the vehicle through which they are able to share in the profits made by that company. As the company grows, and the expectation of improved profits increases, the market price of the share will increase and this translates into a capital gain for the shareholder. Similarly, negative sentiment about the company will result in the share price falling. Shares/equities are usually considered to have the potential for the highest return of all the investment classes, but with a higher level of risk i.e. share investments have the most volatile returns over the short term. An investment in this type of asset should be viewed with a 7 to 10 year horizon. Financial markets are the institutional arrangements and conventions that exist for the issue and trading of financial instruments. Fixed interest funds invest in bonds, fixed-interest and money market instruments. Interest income is a feature of these funds and, in general, capital should remain stable. The Gross Domestic Product measures the total volume of goods and services produced in the economy. Therefore, the percentage change in the GDP from year to year reflects the country's annual economic growth rate. Growth funds seek maximum capital appreciation by investing in rapidly growing companies across all sectors of the JSE. Growth companies are those whose profits are in a strong upward trend, or are expected to grow strongly, and which normally trade at a higher-thanaverage price/earnings ratio. Industrial funds invest in selected industrial companies listed on the JSE, but excluding all companies listed in the resources and financial economic groups. An investment portfolio is a collection of securities owned by an individual or institution (such as a collective investment scheme). A funds portfolio may include a combination of financial instruments such as bonds, equities, money market securities, etc. The theory is that the investments should be spread over a range of options in order to diversify and spread risk. The primary role of the JSE Securities Exchange is to provide a market where securities can be freely traded under regulated procedures. Price to earnings ratio or p: e ratio is calculated by dividing the price per share by the earnings per share. This ratio provides a better indication of the value of a share, than the market price alone. For example, all things being equal, a R10 share with a P/E of 75 is much more expensive than a R100 share with a P/E of 20. Property has some attributes of shares and some attributes of bonds. Property yields are normally stable and predictable because they comprise many contractual leases. These leases generate rental income that is passed through to investors. Property share prices however fluctuate with supply and demand and are counter cyclical to the interest rate cycle. Property is an excellent inflation hedge as rentals escalate with inflation, ensuring distribution growth, and property values escalate with inflation ensuring net asset value growth. This ensures real returns over the long term. These funds seek capital appreciation by investing in the shares of companies whose main business operations involve the exploration, mining, distribution and processing of metals, minerals, energy, chemicals, forestry and other natural resources, or where at least 50 percent of their earnings are derived from such business activities, and excludes service providers to these companies.

14 Smaller Companies Funds Value Funds Growth Funds Smaller Companies Funds seek maximum capital appreciation by investing in both established smaller companies and emerging companies. At least 75 percent of the fund must be invested in small- to mid-cap shares which fall outside of the top 40 JSE-listed companies by market capitalisation. These funds aim to deliver medium- to long-term capital appreciation by investing in value shares with low price/earnings ratios and shares which trade at a discount to their net asset value. Growth funds seek maximum capital appreciation by investing in rapidly growing companies across all sectors of the JSE. Growth companies are those whose profits are in a strong upward trend, or are expected to grow strongly, and which normally trade at a higher-thanaverage price/earnings ratio. Sources: Unit Trust and Collective Investments (September 2007), The Financial Sector Charter Council, Personal Finance (30 November 2002), Introduction to Financial Markets, Personal Finance, Quarter , Investopedia ( and The South African Financial Planning Handbook 2004.

15 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 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 15h30. Investments and repurchases will receive the price of the same day if received prior to 15h30. 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 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 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 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.: DR 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 Limited Reg. No. 1996/005412/06 Authorised FSP in terms of the FAIS Act, 2002 (Licence No. 26/10/590) 24 Ameshoff Street, Braamfontein, 2001 P O Box 10499, Johannesburg, 2000 T E info@liberty.co.za Website Liberty Group Limited Reg. No. 1957/002788/06 Authorised FSP in terms of the FAIS Act (Licence No. 2409) STANLIB Collective Investments Limited Reg. No. 1969/003468/06