The Weekly Focus. A Market and Economic Update 13 March 2017

Transcription

1 The Weekly Focus A Market and Economic Update 13 March 2017

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 5 Economic Update...6 Weekly Market Analysis...9 Rates STANLIB Money Market Fund STANLIB Enhanced Yield Fund STANLIB Income Fund STANLIB Extra Income Fund STANLIB Flexible Income Fund STANLIB Multi-Manager Absolute Income Fund... 10

3 Newsflash Bull markets are born amidst maximum pessimism, they grow on scepticism, they mature on optimism and die on euphoria. Market Comment Last week we saw a small correction in global stock markets as the US S&P 500 Index fell by admittedly just -0.4%. The MSCI World Index fell by just -0.2% in dollars, while the MSCI Emerging Markets Index fell by -0.5% in dollars. The global share bull market turned 8 on Thursday 9 March, which is very impressive considering that on average most bull markets appear to last about 4 years, maybe 5. This is now officially the second longest bull market. The longest ran for 12.5 years from December 1987 after the 1987 crash up until the TMT bubble burst in March The current bull market started on 9 March 2009 with the MSCI World Index at around 680. It is currently at 1,835, so that s a return of % in dollars, excluding dividends or % including dividends. Bull markets do not die of old age. They usually die when short-term interest rates have risen sufficiently to tip economies into recession, because of rising inflation. They also typically only end amidst investor euphoria. As Sir John Templeton wrote back in the early 1990s: Bull markets are born amidst maximum pessimism, they grow on scepticism, they mature on optimism and die on euphoria. Where are we today? The US is the only major market that is showing some signs of optimism, but not euphoria. None of the other big markets are in an optimistic state and our stock market has been dead in the water for two years and eight months. Our market is riddled with scepticism, partly due to politics. Importantly the US is still very early in its interest rate hiking cycle and interest rates and bond yields remain extremely low, relative to history. So the economy is still looking good, as confirmed by the creation of a net 235,000 jobs last month. Other developed countries have not even started raising interest rates yet, not Europe, the UK, Australia, Japan and many emerging markets are now lowering rates, led by Brazil and India. In fact last week Mario Draghi, the calm-and-collected chief of the European Central Bank, declared victory over deflation, forget about inflation. This comment appears to have bolstered the euro, pushing it firmly from $1.05 to the dollar to $1.07 in just the past few days, despite the excellent jobs number in the US. It also pushed the German 10-year yield up from 0.2% two weeks ago to almost 0.5% this morning, which is a big capital loss for investors holding those bonds. US market analyst, Steve Sjuggerud, is of the view that the US bull market could last another year and that it is entering its so-called 9 th inning, using the baseball terminology, where the 9 th inning is the last inning. He believes the last inning will be the most exciting and the Dow could possibly even double from here as more and more investors join in!! Our JSE ALSI got hit last week, losing -1.5% as mining shares and Sasol hit the skids. The JSE Mining Index lost -6.25% last week to be down -5% so far in 2017 (from +16% in early February). The JSE Resources Index was +13% in late January and is now -4% in The oil price came off sharply last week on a big jump in US oil inventories and concerns that the increase in US oil production may more than offset the cut in OPEC production. A number of commodity prices fell, including iron ore and copper, but especially the precious metals, aggravated last week by the stronger dollar and near-certainty of a Fed interest rate hike on Wednesday, although this strength has lately reversed, as noted above.

4 The latest local asset class performances for 2017 are: the All Bond Index in the lead with +3.4% (near its best for the year), then SA Listed Property with +2.9% (up from +1.3% at end February), the JSE ALSI +1.6% (it fell under 1% last week before bouncing a bit on Friday and early today) and finally Cash with +1.4%. The big question and concern obviously centres around the commodity complex. Why the sudden sharp correction? Is it all over? Admittedly oil is by far the biggest commodity and the huge rise in inventories in the US has hurt the oil price. So the increase in US production is a problem, although the world economy does seems to be growing better than in 2016, so demand for oil should be higher too. The rise in US bond yields and imminent rise in short-rates hurt the prices of gold and platinum, while the price of iron ore took a knock after the CFO of BHP Billiton mentioned that the price is too high and likely to drop as extra metal comes onto the market. Also with the US Congress and President Trump so tied up with the health care issue, finding an alternative to Obama-Care, the feeling is the infrastructure spending is going to be delayed until 2018, meaning a delayed pickup in demand for commodities there. Then also the CFO of BHP mentioned that Chinese infrastructure spending in 2017 is likely to be less than in 2016, when the government stimulated strongly. So all of these issues caused a sharp correction in mining shares, with both BHP and Anglos falling by as much as 20%. The JSE Mining Index is back where it was last April! Sasol has fallen by 16%. Resources are tough to call, very tough. At this stage, looking at the charts, it appears that this is a serious correction in mining shares and Sasol, rather than being the end of the upswing or uptrend, especially with world growth on the up (US, Europe, Japan). Even if China slows its infrastructural spending this year, the Chinese leadership is still targeting decent growth for the economy of over 6%. Capital Economics sees prospects for the world economy as reasonably bright, although they are lowering their forecast for 2017 for the US because they think the tax cuts will be delayed to 2018 and also they see China focusing more on structural reform than stimulation, leading to a slowdown in coming months. So they are cautious on the prospects for the precious metals and the industrial metals. Meanwhile the US 10-year government bond yield is currently trading at 2.59%, where it was trading in December last year. So at this stage one cannot say it has cleanly broken through to new highs as far as yields go (new lows for prices), not yet anyway, although it may still do so. The jump in the bond yields in the US and in Europe has upset the recovery in the global listed property index, which declined by around 5% over the past two weeks and is now up just +0.5% so far in 2017, in dollar terms. Getting back to the mining shares, JP Morgan s European Metals & Mining team have just upgraded Emerging Markets and the Mining sector in Europe to Overweight. They say they believe that a March rate hike by the Fed and a further two increases in 2017 are now essentially fully discounted (in the prices). Also they see potential for the US dollar to peak in mid-2017 before weakening in the 2 nd half of the year, which would support metal prices and mining shares. They view Chinese economic activity as resilient and feel that emerging market economic growth is turning positive, relative to developed market economic growth. Also emerging market share valuations are at a 30% discount to developed markets. Mining shares are showing improving free cash flow yields and have decent valuations after this sharp correction. Based on their earnings forecasts, Anglos is at 6.3 times expected earnings for 2017 and a possible dividend yield of over 6%, BHP is at 9.3 times their forecast earnings and Glencore at 11.4 times, all decent forward PE or price-to-earnings ratios. South32 is at 8.8 times, also decent.

5 Other Commentators US Market Analyst, Elaine Garzarelli Garza says apart from the rate hike expected this week from the Fed, there could be more hikes in September and in December. She notes that money is pouring into shares and bonds in the US, with +$27bn added into equity funds and +$43bn into bond funds over the past 5 weeks. Her quants model continues bullish at a reading of 74.5%, unchanged from the previous week. So she believes corrections should be limited to 4-7%. Last week s pullback in the US market caused the number of bullish investment advisors (her contrarian indicator) to fall from 63.1% to 57.7%, which is favourable, but is still ranked bearish since it is still above 53%. Fourth quarter 2016 S&P 500 earnings were +6% year-on-year, while Garza thinks 1 st quarter 2017 earnings could be up near +14% year-on-year and, she believes, continue strong through next year. Garza s PE model indicates a fair value PE for the S&P 500 of 18 times. Multiply that by her earnings forecast of 129 and she gets a fair value of 2,322, which is a bit below the current level of 2,371. US economic stats indicate steady growth going forward. The manufacturing sector is reviving as total new orders grew a solid +3.8% year-on-year, with most of the gain in oil, defense and aircraft. Low interest rates, solid employment and income growth and overall optimism in the economy will support consumer borrowing going forward. BCA Research BCA thinks reflation (economic stimulus) will triumph over deleveraging (cutting debt) over the next 12 months in Europe, which justifies an overweight position in euro equities. Germany will reluctantly accept an overheated economy and higher inflation, without interest rate hikes, so BCA recommends staying short the euro. Marine le Pen will lose this year s election in France, but Europe s populist parties will finally gain the upper hand by the end of the decade. Buy gold as a long-term hedge. Global equities are technically overbought in the short-term, but the longer-term (12 month) cyclical trend remains to the upside. Paul Hansen Director: Retail Investing

6 Economic Update 1. SA GDP for the last quarter of 2016 suggests weaker than expected growth. 2. US added a remarkable jobs in February, beating market expectations. Wages growth up to 2.8%, with previous month revised higher. 3. US debt ceiling firmly back in focus, after it was suspended from October 2015 until midnight on 15 March Namibian Ministry of Finance tabled their budget for the year 2017/18. The Namibian economy is estimated to have grown by 1.3% for 2016 dragged down by construction, mining as well as agriculture. 1. SA GDP contracted by 0.3%q/q seasonally adjusted and annualised in Q4 2016, which was slightly worse than the market s expectation for 0%. This is the lowest growth rate since the 2008 financial crisis. The annual increase was a positive 0.3% for 2016 as a whole, which means the country has avoided a recession. The pressure points appeared on the production side of the economy, which was the main reason for the 0.3% q/q decrease, In particular, there was a substantial contraction in the mining (-11.5%) and manufacturing (-3.1%) sectors, while there was an additional modest decline in the agricultural sector of 0.1%. The other sectors all expanded moderately. Overall, while production is expected to remain under pressure, we anticipate an increase in SA GDP growth during 2017, helped by a substantial improvement in the agricultural sector along with a very modest improvement in the mining and manufacturing sectors. 2. In February 2017, the US unemployment rate eased to 4.7% from 4.8% in January This was in-line with market expectations. The US unemployment rate moved steadily lower from a peak of 10% in late 2009, but has trended mostly sideways in the past year. Encouragingly, the labour market participation rate rose in February 2017, albeit fractionally to 63.0% from 62.9% in January. Overall, the participation rate remains extremely low on a trend basis. Overall, the relatively low unemployment rate is still somewhat misleading given that the participation rate remains extremely low by historical standards. Non-farm payrolls rose by a very respectable jobs in February The market was expecting a gain of around The change in total nonfarm payroll employment data for the previous two months was revised up by jobs. Over the past 3 months, job gains have averaged per month. The level of US employment is now 7.4 million above the peak prior to the global financial market crisis. During the financial market crisis the US lost a total of 8.7 million jobs. Consequently, the US has created more than 15 million jobs since the financial crisis ended. The private sector added an impressive jobs in February 2017, after gaining a revised jobs in January The private sector has gained employment in each of the past 84 months at an average of jobs a month and is at a record high, comfortably surpassing the previous peak in January During 2010 as a whole, the US economy created jobs, or an average of jobs per month. In 2011, the job gains averaged a far more respectable a month, while in 2012 job gains averaged a month. In 2013 employment rose by an average of jobs a month, suggesting that although the labour market was still struggling to gain significant upward momentum, the rate of increase remained encouraging. In 2014 employment rose by a very impressive monthly average of jobs, but then slumped somewhat to an average gain of in 2015, hurt by the especially weak job reports in March and September During 2016 job gains averaged per month and appear to have accelerated in early 2017.

7 In January, average hourly earnings for all employees on private nonfarm payrolls rose by only 6 cents to $26.09, following a revised 5 cent increase in January. Over the year, average hourly earnings have risen by 2.8%. While wage growth is still low by historically standards, it is at least still trending modestly higher, providing support to consumer spending. Clearly, US wage is constrained by structural impediments. The latest employment report is, once again, very encouraging across most of the key components. This together with the latest surge in US business confidence should lead to higher US economic growth during From the Federal Reserve Bank s perspective the employment data will further encourage them to hike rates. We expect the Fed to hikes three times in 2017, by 25bps each time, with the first of these three hikes taking place this month. However, the economic focus and debate has already switched away from the Fed and towards understanding the impact of Trump s policy agenda on US economic growth. 3. The United States Debt Ceiling is firmly back in focus, after having been largely forgotten since October This is because back in October 2015 the US Congress decided that instead of trying to set a specific dollar limit for the debt ceiling (which had proved extremely problematic in previous years, and almost lead to an extended shutdown of the US government and a debt default) they would simply suspended the debt ceiling until midnight on 15 March The last official debt ceiling limit was $ trillion. The decision to suspend the debt ceiling allowed normal borrowing to continue, and in February 2017 the US government debt that is subject to the debt ceiling limit stood at just over $19.92 trillion. Once the suspension of the debt ceiling expires on 15 March the ceiling will automatically reset to the total debt level outstanding at that time. However, the government will then not be allowed to borrow any additional funds until the US Congress approves a new debt ceiling or a new extension or suspension of the ceiling. Importantly, if the US Congress fails to increase the debt ceiling next week or within a week or two, the Treasury can embark on a fairly extensive range of cash conservation efforts (known at extraordinary measures ), such as suspending investments into federal employee pension plans, that will allow the government to operate for a number of months without an increase in borrowing. Exactly how long these extraordinary measures will last is uncertain, although the consensus is September Crucially, these extraordinary measures would ensure that the United States does not immediately default on its debt. It seems logical to assume that since the US Senate and the US House of Representatives are currently both controlled by the Republicans, an agreement on raising the debt ceiling should be a relatively simple process. However, much will depend on the size of the proposed limit increase, with President Trump expected to push for a fairly substantial increase in the limit. Prior to being elected President Trump stated on a couple of occasions that America should borrow more while interest rates are low. 4. The Namibian Ministry of Finance tabled their budget for the year 2017/18. The previous year was characterized by shortfalls in revenue with the current year s focus being on consolidation. Fiscal consolidation was the main focus with expenditure only growing by 1.7% for the next financial year. Revenue is expected to grow by 3.5%. This was almost entirely as a result of increased Southern African Customs Union which grew 39%. The National Treasury in South Africa decided to increase the revenue pool by 42% from R39.4 billion to R56 billion which should benefit member countries budgets (Botswana, Namibia, Lesotho and Swaziland). Namibia will be receiving R19.6 billion of that figure from R14 billion in the previous year.

8 What is worrying is the increase in Personnel Expenditure, which represents largely salaries. It moves from 39.7% of expenditure in the previous year to 45% in the current budget. There were reports of teachers going on strike in 2016 and this could be an effort to address that issue. As such the budget balance is estimated to narrow to -3.6% of GDP from -6.3% in 2016/17 and -8.3% in 2015/16. The primary balance is estimated to narrow to -1% for the coming year. Namibia s debt to GDP now stands at 42.1% with a split of 16.0% foreign debt and 26.1% domestic debt. Debt is expected to be lower at 41.9% of GDP for this financial year, decreasing to 40.1% and 37.7% for 2018/19 and 2019/20 respectively. Overall, it was quite a disciplined budget, but it also reflects the dependency that Namibia has on SACU revenues (as do other members). The Namibian economy is estimated to have grown by 1.3% for 2016 dragged down by construction, mining as well as agriculture. The construction sector is still expected to deliver low growth for 2017 as government has cut back expenditure. There should be some slight improvement in agricultural and mining output as there have been some rains in Namibia and some mines are expected to increase production. 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 10/03/17 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

10 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 7.09% Effective: 7.32% 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 10 March 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: 8.16% 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 March 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: 8.68% STANLIB Extra Income Fund Effective Yield: 8.30% STANLIB Flexible Income Fund Effective Yield: 8.05% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.93% 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 10 March 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.

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