Newsflash Market Comment... 3 Snippets of Info Economic Update South Africa... 6 United States... 7 Globally...

Transcription

1 13 September 2010

2 Contents Newsflash... 3 Market Comment... 3 Snippets of Info... 4 Economic Update... 6 South Africa... 6 United States... 7 Globally... 8 Weekly Market Analysis... 9 Rates Standard Bank Money Market Fund STANLIB Cash Plus Fund STANLIB Dividend Income Fund Glossary of terminology

3 Newsflash Most of the emerging market world is still growing at a rapid pace Market Comment BCA Research notes that there are various scenarios that could unfold in the next few months to cause global stock markets to break out of their four month old trading ranges. The scenario with the highest probability (60%) is one where economies do better than currently expected, where the current slowdown turns out to be a temporary pause. They note that bond yields in the US are now 1.3% lower than they were only 5 months ago, home mortgage rates are at record lows and the household sector savings rate seems to have stabilized (consumers have been paying back debt rather than borrowing to spend). Merger & acquisition activity and private-equity deals are recovering briskly, while capital spending is accelerating. Meanwhile the odds of the rest of the world (non-usa) growing better than expected are also quite high. Most of the emerging market world is still growing at a rapid pace, with most Asian developing economies growing above potential. China remains key. The latest reports from China show that despite attempts to cool the property market, manufacturing activity is still growing nicely (13.9%), as is retail sales (18.4%). Import growth has slowed off a higher base, but is still robust. Money supply growth and bank lending growth are quickly returning to more normal levels for China (16-18%). So Chinese growth is holding up well after 4 months of slowing. Interestingly, the Chinese economy is not as dependent on exports as is often thought. Capital spending and private consumption together account for more than 80% of economic growth (GDP), while net exports (exports minus imports) amount to less than 10% of the economy. Meanwhile a number of commodity prices, such as that of copper (and the CRB commodity Index itself) have firmed recently. Global trade has also picked up sharply. These indicators are supportive of a pickup in economic growth, rather than a further slump. BCA thinks that on balance there is likely to be broad-based dollar weakness, more strength in the commodity currencies (Aussie, Canadian, Brazilian, and SA) and also in the regional Asian currencies. 3

4 Snippets of Info For those who follow the charts, we are seeing possible early signs on a number of shares and country indices that the down-trends in place since late April are in the process of being broken. This is the case with Anglo American (despite the strong rand), the MSCI World Index, and the Hang Seng Index (Hong Kong), amongst others (see chart below of the MSCI World Index in dollars). If these signs are correct (we need a bit more conviction), then it is quite feasible that the next leg of the bull market has indeed begun (in early September). Source: I-Net Bridge On the JSE today (Monday), the JSE All Share Industrial Index (J257) has broken upwards to a new all-time record high. This index is up 10.2% so far in 2010 (excluding dividends), whereas the Resources Index is still down around 7% and the All Share Index is up 2.5% (excluding dividends). With R76.7bn (R9.8bn in the last 10 days) having flowed so far in 2010 into our bond market from foreign investors, plus another R25.9bn into our stock market (total of R102.6bn), it is not surprising to see the rand strengthening yet again, especially considering the recent firmness in many commodity prices; plus the dollar has weakened a tad against other currencies. If the rand continues to trade under the R7.20 level, as it is now, chartists say we may quite quickly reach the next technical level of for the first time since January

5 BCA thinks that European shares are very undervalued on a forward PE (price-to-earnings) ratio of just 9.8. Assuming no renewed recession, this PE could expand to quite easily, giving a potential return of 30-40% excluding dividends and further earnings growth. Also, while the dividend yield on the MSCI World Index is now 2.6%, the yield in Germany is higher at 3%, even higher in the UK at 3.5% and France at 3.6% (SA s div yield is 2.3%). Paul Hansen (Director: Group Advisory Services - Investments) 5

6 Economic Update The South African economy s key indicators measured over the week surprised to the upside. The main focus was the Reserve Bank s decision to cut the Repo rate by 50bps to 6.0%. This was in-line with market expectations. In total, interest rates have now been cut by 600bps. Interest rates are now at a 30 year low. Also particularly encouraging, is the latest data indicating improvement in business confidence which has, in part, been propelled by the World Cup. SA business confidence jumped in Q3 2010, to its highest level since Q Confidence is still well below the previous peak, but back above the long-term average of 44.8 helped significantly by the motor trade. South Africa Manufacturing for July improved. Overall, manufacturing activity has held-up remarkably well in the first 7 months of We still expect activity levels to soften somewhat in the second half of 2010, hurt by the relatively strong Rand as well as the lack of new investment initiatives within the private sector. Importantly, though, we do not expect the manufacturing sector to return to a state of recession. In the US, consumer's continue to reduce their debt. In the past year, the US consumer has repaid $510bn in debt, although that is less than 5% of the total amount outstanding. Ideally, the US needs to see a combination of modest increases in credit coupled with a healthy and sustained increase in private sector employment. Globally, the OECD revised down its projections for world growth. The OECD is a little unsure whether the current loss of momentum is temporary, but concludes that it is "unlikely that we are heading into another downturn". South Africa SA Interest Rates SA Repo rate cut by 50bps to 6.00%. In making the decision to cut rates, the Reserve Bank highlighted the following changes to economic conditions since the last MPC meeting in July 2010: Inflation has surprised on the downside, and the Reserve Bank has reduced its own inflation forecast. The growth momentum in the domestic economy has slowed, with SA expected to grow well below potential. The global economic outlook remains depressed with some concerns about deflation. 6

7 By cutting interest rates, the Reserve Bank hopes to provide further stimulus to the economy. The next MPC meeting is on 17/18 November 2010, which is the last meeting of the year. SA Business Confidence In Q the RMB/BER Business Confidence index rose by a very significant 11 index points to The improvement in business confidence is reflected in a wide range of domestic economic conditions including much better vehicle sales, improved retail sales, and rising manufacturing production. This does not imply that trading and business conditions are vibrant. Rather it reflects the fact that the economy appears to be moving past the worst of the recession and that most sectors have seen an increase in activity relative to an extremely low or depressed base. A breakdown of the confidence index by sector reveals that confidence levels have risen in all five of the major sub-sectors measured, namely wholesale trade, retail trade, motor industry, manufacturing, and building activity. The largest increase occurred in the motor industry, which rose by 30 index points to 79. This is the highest level of confidence in the motor industry since Q There was also a large jump in confidence within the retail trade business (up 14 index points to 52). SA Manufacturing SA manufacturing production rose 0.7% m/m (seasonally adjusted), compared with a revised increase of 0.9%m/m in June. On an annual basis, production is still up a very healthy 7.5%y/y, which is below the previous peak annual growth rate of 9.3%y/y in June. During the three month period from May 2010 to July 2010, manufacturing activity rose by 1.5%q/q (seasonally adjusted, but not annualised). This will tend to boost the Q estimate of GDP. Capacity utilisation rose to a more encouraging 80.4% in Q2 2010, from 78.5% in Q United States US Cosumer Debt US consumer credit fell by a further $3.6bn. The previous month s data was revised from an initial decrease of $1.3bn to a decline of $1.0bn. US consumer credit (which excludes mortgage finance) has fallen in 21 of the last 24 months. Prior to January 2009, US consumer credit rose each month for a consecutive 125 months. 7

8 This measure of US consumer credit excludes any mortgage advances and is split between revolving and non-revolving credit. The total amount of consumer credit (excluding mortgages) outstanding is currently $2.419 trillion, which is an amazing $163 billion below the peak level of consumer credit, which was recorded in July Since the middle of 2008 the US consumer has been trying to de-leverage. The ratio of US household debt to disposable income was last recorded at 125.9% Globally OECD World Growth Projection OECD revised down its projections for world growth, especially the growth estimates for the G7 countries. Growth in the G7 countries is expected to be around 1.5% on an annualised basis in the second half of 2010 compared with the previous estimate of around 1.8% (which was done in May 2010). The OECD argues that private consumption growth may be constrained by further balance-sheet repair on the part of household. In addition, uncertainty about unemployment could put a damper on growth in consumer spending. While consumer spending is set to remain weak, a combination of robust corporate profits and low business investment suggest that capital spending is unlikely to weaken further. Because inventories are now close to desired levels, a renewed depletion of stocks is also unlikely. Overall financial conditions have stabilised. It is not yet clear whether the loss of momentum in the recovery is temporary or whether it signals greater underlying weaknesses in private spending at a time when policy support is being removed. According to the OECD, if the ongoing slowdown is temporary, the appropriate policy response would be to postpone the withdrawal of monetary support for a few months, while maintaining planned budget consolidation to address unsustainable fiscal positions. Market conditions allowing, the automatic stabilisers should be allowed to work unimpeded around the planned consolidation path. On the other hand, if the slowdown reflects longer lasting forces bearing down on activity, additional monetary stimulus might be warranted in the form of quantitative easing and commitment to close to zero policy interest rates for a long period. Where public finances permit, planned fiscal consolidation could be delayed. Kevin Lings and Laura Jones (STANLIB Economics) 8

9 Weekly Market Analysis Currencies/ indices/ Friday s Close Weekly Move YTD commodities 10/09/10 (%) (%) 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 * MSCI - Morgan Stanley Capital International Source: I-Net Bridge 9

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: 6.51% per annum 6.71% 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 11 September 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 Cash Plus Fund Effective Yield: 6.99% STANLIB Dividend Income Fund Effective Yield: 4.87% 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 10 September 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. The Manager has received a circular, (CISCA Circular No.11), from the Registrar of Collective Investment Schemes regarding a joint investigation of National Treasury, SARS and the FSB, which is currently in progress with regard to dividend income fund type portfolios. The Manager is obliged, in terms of this circular, to bring the following to your attention with regard to this investigation. The outcome of the investigation could affect certain structures and SPVs (special purpose vehicles) used by underlying investments of these types of portfolios, which may result in possible adverse tax consequences, and may require amendments to existing legislation. The abovementioned regulators still have concerns which could impact negatively on the future of these portfolios and the continuation of these portfolios can therefore not be guaranteed. The Manager however do not believe that there is any current cause for concern regarding the STANLIB Dividend Income Fund and should there be a more definitive outcome from the investigation investors in our STANLIB Dividend Income Fund will be informed timeously of any legislative changes that may affect their investment. 10

11 Liberty Investments Life Annuities Current Rates for 13 th August 17 th September 2010 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 718 R 782 R 864 R 647 R 692 R 755 R 250,000 R 1,816 R 1,978 R 2,183 R 1,638 R 1,751 R 1,909 R 500,000 R 3,646 R 3,970 R 4,382 R 3,289 R 3,516 R 3,832 R 1,000,000 R 7,307 R 7,955 R 8,780 R 6,591 R 7,046 R 7,678 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. 11

12 Glossary of terminology Bonds Cash Collective Investments Compound Interest Dividend Yields Dividends Earnings per share Equity 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. 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. A share represents an institution/individual s ownership in a listed company and is the vehicle through which the 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. 12

13 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 Smaller Companies Funds Value Funds 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-than-average 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. 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. 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

14 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. Forward pricing is used. 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) 17 Melrose Boulevard, Melrose Arch, 2196 P O Box 202, Melrose Arch, 2076 T (SA Only) T+27(0) E contact@stanlib.com Website 24 Ameshoff Street, Braamfontein, 2001 P O Box 10499, Johannesburg, 2000 T E info@liberty.co.za Website STANLIB Wealth Management Limited Reg. No. 1996/005412/06 Authorised FSP in terms of the FAIS Act, 2002 (Licence No. 26/10/590) 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 175ZB1 14