JUNE 2016 PROSPERITY IN THIS CLIENT NEWSLETTER. Economic and market outlook Local and global equities

Transcription

1 JUNE 2016 IN THIS CLIENT NEWSLETTER Economic and market outlook Local and global equities

2 The Brexit vote was a shock to the global political establishment and, at least for a short while, also to global financial markets. Immediately following the results of the vote, European markets fell and the pound dropped from US$1.50 to US$1.32 the lowest level in three-decades. Since then, markets have recovered from the losses, but British politics has gone the other way with a glaring leadership void now existing. The prevailing uncertainty will put a dampener on United Kingdom (UK) economic growth in the near term. US treasuries and gold have also attracted investors as deflationary pressures continue and insurance against uncertainty is sought. Yet, alongside this, equities have rallied as the relative yield and growth of this asset class becomes even more attractive. As with all surprises of this kind, markets reacted fiercely, then recovered and calmed down. Investors who sold investments along with the market would have been caught on the wrong side of the subsequent recovery. We are reminded that short-term market gyrations are driven almost entirely by speculation. There are likely to be more Brexit-type events as the year progresses the US elections representing the most obvious potentially disruptive event. The best strategy during such times is to do nothing, or even better, use these sell-offs to buy more of what you own or what you would like to own at a more attractive price. In investing, patience truly is a virtue. He that can have patience can have what he will. Benjamin Franklin Be Fearful When Others Are Greedy and Greedy When Others Are Fearful Warren Buffett ECONOMIC AND MARKET OVERVIEW The month of June was dominated by the UK s vote to leave the European Union (EU) after 43 years. This sent the pound into a tailspin and caused equity markets to sell-off. It also resulted in the UK being stripped of its AAA credit rating by S&P. While this climate of uncertainty is undoubtedly negative for the UK economy (businesses are unlikely to make long-term decisions until there is greater clarity and households will also hold back), the spill-overs to the rest of the world might not be as great as feared. This is because it is not even clear what the UK s future trade relationship with the EU will be, or whether Brexit will even happen. The US Federal Reserve (Fed) opted to leave rates unchanged despite its own stated intention to steadily raise interest rates. Over the past two years, it has on several occasions had to hold back on hiking when faced with an unexpected weakening of the US economy, falling inflation or financial market volatility (in the US and abroad). Notably, the Fed s rate-setting committee cut its projections for future interest rate increases. The Fed appears to be coming round to the argument that the neutral interest rate the rate consistent with stable inflation is structurally lower. The SA economy contracted by more than expected in the first quarter. Real Gross Domestic Product (GDP) fell by 1.2% quarter-on-quarter (seasonally adjusted and annualised) down from +0.4% in the fourth quarter of 2015, due largely to a slump in the mining sector. Excluding mining, growth would have been 0.5% in the quarter. On a year-on-year basis, the economy declined by 0.2%. Instead of rising from April s 6.2% as expected, consumer inflation declined to 6.1%. Food inflation was slightly lower on a year-on-year basis at 10.8%. Fruit and vegetable prices, which had surged the past few months, declined moderately in May. The combination of lower-than-expected inflation, worse-than-expected economic growth and a rand that was reasonably resilient despite the global volatility surrounding the Brexit vote, could give the South African Reserve Bank scope to pause on interest rate increases for now. Emerging markets rebounded strongly in June, with the MSCI Emerging Markets Index ending the month 3.3% higher (US$), while the MSCI World Index was 0.8% lower. On a quarterly basis, emerging markets were 0.3% lower during the second quarter and developed markets ended the period marginally higher (0.3%). In the US, the S&P500 ended the month relatively flat (0.1% in US$) and returned 1.9% during the second quarter. The UK s FTSE 100 ended the month (4.4% in ) and quarter (5.3%) in positive territory. In Asian markets, the Nikkei 225 was 9.6% lower over the month and 7.1% lower over the quarter. The Hang Seng was down 0.1% in June and remained relatively flat (0.1%) during the quarter. Locally, the ALSI lost 3.0% during June and returned 0.4% during the second quarter. During the month, Industrials (-3.5%), Resources (-2.5%) and Financials (-2.1%) were all lower. For June quarter end, Resources returned 6.4%, while Financials lost 4.3%. Industrials returned a muted 0.5% over the quarter. 02

3 LOCAL EQUITIES NASPERS In its financial results for the year ended 31 March 2016, Naspers, Africa s largest company by market value, reported an increase in core headline earnings of 21% (49% in local currency) to US$1.2 billion. In view of the business growing international spread, Naspers is now reporting in US$. Revenue grew 6% (22% in local currency) to US$12.2 billion. This was driven by growth from Tencent, as well as the classifieds, travel and retail segments within ecommerce. Some 77% of revenues were generated outside of South Africa. Development spend was stable at US$961 million and trading profit increased by 18% (38% in local currency) to US$2.2 billion. The board has proposed, for approval by shareholders, a dividend of 520 South African cents per share, up 11% year on year. Consolidated free cash flow of US$38 million was recorded, marginally higher than last year, as lower capital expenditure, a reduction in development spend and higher dividends from associates were offset by weaker cash flow from the sub-saharan video-entertainment business. Looking ahead, Naspers is seeking to further boost its international internet business as it grapples with falling PayTV subscription numbers in sub-saharan Africa. The company has successfully transformed itself from a South African newspaper publisher into a continent-wide multi-media provider and backer of emerging-market internet businesses. It now counts on internet businesses for about 70% of revenue BHP BILLITON With the iron ore market expected to take as long as 10 years to balance out, BHP Billiton has been looking to other market segments to generate earnings during a downturn in the commodity sector. After it divested of much of its energy coal, it has boosted its performance for coking coal, which is used in steelmaking. That has been a growth business for the company, but it s looking for other market segments to generate even more revenue and earnings. To that end, now that oil has moved off its February lows, BHP has started tapping into its backlog of drilled oil wells in Texas and could profitably drill new wells if oil prices hold above US$50 a barrel. Booming US shale-oil production was a key driver behind the months-long drop in oil prices that started in mid Oil producers, including BHP, slashed spending on new drilling in response to falling oil prices. But US oil output has declined more slowly than most expected, as producers were able to cut costs and increase efficiency. Many producers in the past two years opted to leave thousands of wells untapped and wait until prices improved to bring them online. As prices have climbed in recent months, some companies have talked about plans to bring those wells online. MONDI Mondi has agreed to buy 90% of Turkey s Kalenobel for about 90 million (US$101 million) as the South African manufacturer expands its international packaging business. Kalenobel makes consumer packaging for ice cream and other products from two manufacturing sites north-west of Istanbul. The purchase is expected to close in the second half of the year. 03

4 GLOBAL EQUITIES ACCENTURE Accenture posted better-than-expected third quarter results, with revenue being driven by demand for its digital services like cloud and security, particularly in its consulting unit. Profit for the third quarter ended 31 May increased 11.8% and earnings grew 13.7% year-one-year to US$1.41 per share from US$1.24 per share. Net revenue from Accenture s consulting business, which accounts for a little more than half of total revenue, rose 12.4% in the third quarter and outsourcing business revenue rose 4.2%. Net income rose to US$897.2 million from US$793.7 million a year earlier. The Dublin-based company, which offers consulting and outsourcing services, said it expects full year net revenue growth to be in the range of 9.5% % in local currency, up from the previous estimate of 8% - 10%. NIKE In its financial results for the fourth quarter and fiscal year ended 31 May, Nike reported revenue growth of 6% to US$8.24 billion, just below the US$8.26 billion analysts were expecting. During the fourth quarter, net income was US$846 million, down from US$865 million a year ago. Earnings per share came in at US$0.49. For the full year, net income rose to US$3.76 billion while reported revenue was at US$32.38 billion. According to Nike, the strong US dollar continued to have a negative effect on the company s international revenues after the currencies are exchanged. With sales in North America remaining flat, Nike s revenue growth was driven by double-digit increase in sales in Western Europe, Greater China, emerging markets and Japan. Nike said that worldwide futures orders, which represent products scheduled to be delivered from June through November, were up by 8%. This could indicate relatively strong demand going into fiscal MICROSOFT Microsoft is acquiring the professional social network, LinkedIn for US$26.2 billion. This is one of the largest technology industry deals on record and is a way for Microsoft, which largely missed out on the consumer web boom dominated by the likes of Google and Facebook, to sprint ahead in social tools for professionals. LinkedIn will retain its brand, culture and independence and Jeff Weiner will remain chief executive officer of the company. 04 The Estuaries, 2 Oxbow Crescent, Century City PO Box 207, Cape Town 8000, South Africa. Tel +27 (0) Fax +27 (0) Private Client Securities: Cape Town: +27 (0) Sandton: +27 (0) Pretoria: +27 (0) Durban +27 (31) PCS@omwealth.co.za Old Mutual Wealth is an elite service offering brought to you by several licenced Financial Services Providers in the Old Mutual Group. Old Mutual Wealth Private Client Securities ( PCS ) is a business unit of Old Mutual Life Assurance Company (South Africa) Limited ( OMLACSA ), a licenced Financial Services Provider, Reg. No: 1999/004643/06. PCS is authorised to provide financial services on the OMLACSA license. This document is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein. Old Mutual Wealth and its directors, officers and employees shall not be responsible and disclaims all liability for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of or which may be attributable, directly or indirectly, to the use of, or reliance upon any information contained in this document. To report unethical behaviour, call the Anonymous Reporting line or visit

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