Newsflash Market Comment... 3 Bank of America Merrill Lynch optimistic about QE Snippets of Info Economic Update...

Transcription

1 11 October 2010

2 Contents Newsflash... 3 Market Comment... 3 Bank of America Merrill Lynch optimistic about QE Snippets of Info... 6 Economic Update... 7 IMF & IIF Annual Meetings... 7 IMF Report... 8 Weekly Market Analysis Rates Standard Bank Money Market Fund STANLIB Cash Plus Fund STANLIB Dividend Income Fund Glossary of terminology

3 Newsflash Growth in emerging market economies remains robust and looks sustainable Market Comment US Fed Governor, Ben Bernanke, made it clear in his speech last week that premature fiscal tightening by the government (such as raising taxes and/or cutting back on government spending) could put the recovery at risk. He also said that inflation is undesirably low. With the risk of growth in the US running below 2% in the 2 nd half of 2010, it is expected that the US Fed will announce a new program of so-called quantitative easing /asset purchases (buying back bonds, thereby releasing cash into the system) at its November meeting. This should be positive for shares as it helps profits in various ways, one due to a dollar decline leading to a rise in foreign earnings from foreign subsidiaries, another due to lower interest costs for companies. Growth in emerging market economies remains robust and looks sustainable. They currently account for one third to one half of world economic growth. Some of the strong emerging stock markets so far in 2010 in dollars - include Estonia (up 49%), Kenya (up 42%), Indonesia (up 41%), the Philippines (up 37%) and Chile (up 34%). By comparison the MSCI Emerging Markets Index is up 11.5% so far in 2010 (back at June 2008 s level). Mexico s stock market broke out to an all-time record high last week, Turkey s market is up 27% so far this year and is also at an all-time record high and the JSE Financial & Industrial Index in dollar terms is up 22.3% so far in 2010 (14% in rand terms). Last week China s Shanghai Index broke upwards out of a three month trading range. This is also very positive as we pointed out a month or so ago that this index looked like it was leading the world s stock markets into the second leg of the bull market, which seems to have started in late August. On the JSE itself, while the Industrial Index broke out to an all-time record high a few months ago - and is now 15% above its previous record high established in 2007, the Resources Index was until recently lagging badly because of the strong rand (squeezing profits) and the global fear of a double-dip recession. Lately, strong foreign buying of resource shares (in response to hopes of US quantitative easing and lower interest rates) has given new life to our resources index and it looks like it may play more catch-up in the short term. 3

4 Meanwhile the JSE Financials Index, which has an historic dividend yield of 3.9%, much higher than the 2.3% yield of the All Share Index, is also looking promising. The Life Insurance Index (see chart below), which comprises 21% of the Financials Index, is in a powerful uptrend and we pointed out a few months that this index has for obvious reasons badly underperformed the All Share Index for many years. Could this be changing? It is too early to say as yet, but the early signs are quite good. Source: I-Net Bridge The JSE Banks Index (47% of the Financials index), has been consolidating for much of 2010 (see chart below), trading not far from its record highs seen in 2007 (just 5% below October 2007 s record high). It appears from the chart that this index has a fairly good probability of also having its day in the sun and rising to record highs in the not-too-distant future. Source: I-Net Bridge 4

5 The JSE Listed Property Index (j253), which is 2.7% of the JSE All Share Index or 13.5% of the Financials Index, has really sparkled this year (up 27% total return so far in 2010, including dividends). This index is almost back at its previous record high of November From a size point of view, the index is smaller than Anglogold, which is the tenth biggest share in the All Share Index. But it does look as if all or most of the constituents of the Financials Index are systematically working their way towards record highs. The strong rand plays into the hands of domestic companies by keeping inflation and therefore interest rates down and to an extent by helping importers too. Most of the financials are domestic companies, with Old Mutual, Investec and Standard Bank a little more negatively affected because of their offshore operations. Although strong global stock markets are leading our market higher, the implication is that our economy should follow the market in terms of activity picking up generally over the next six to twelve months. So in a year s time, if the stock market is doing its job correctly as a discounting mechanism of the future, the economy should be a lot more buoyant. Note that recent net foreign sales of our bonds and equities (R6bn of equities and R6bn of bonds) is not surprising when one considers that so far in 2010, the JSE Financial & Industrial Index is up over 30% in euro terms, over 27% in pound terms and over 25% in dollar terms. Those returns are way higher than anyone could have predicted in January, so some profit taking is occurring. Bank of America Merrill Lynch optimistic about QE2 (quantitative easing 2...quantitative easing 1 occurred in March 2009) and US company earnings They expect third quarter earnings in the US to be strong, despite the weaker economy since June. The earnings season is just beginning. They also think that some, if not all, the Bush tax cuts, due to expire soon, may be extended. They anticipate that the US Fed will announce an initial buying program of $500bn over six months, with the promise that more will come if necessary. This should drive the US ten year bond yield down to 2% from 2.4%, which in turn should drive other interest rates, such as mortgage rates, down further. They anticipate that this may further weaken the dollar (which in turn implies the possibility of a stronger rand/dollar), boost commodity prices, help US exports and spur more Merger & Acquisition activity and share buybacks, funded with low interest rate debt. 5

6 The price-to-earnings (PE) ratio of the S&P 500 Index is still undemanding at less than 13 times Merrill Lynch s 2011 earnings forecast. This translates into an earnings yield (forecast earnings divided by the current index price) of 7.7%, which is exceptionally high relative to current interest rates. They forecast that the US stock market will be 16% higher in twelve months time. What effect would this have on SA bond yields and share prices? Merrill Lynch SA suspects that the JSE All Share Index could possibly reach 32,000 (up 7.7% from the current level) in the second quarter of 2011 as fears of US recession and other headwinds fade. This may be partially driven by higher commodity prices and higher resource and infrastructure shares. They think that SA bond yields could possibly drift down by another 50 basis points from current low levels, leaving the ten year yield at 7.5%. Snippets of Info The Emerging Markets free-float market value as a percentage of the MSCI All Country World index is at an all-time high of 13.8%. It now exceeds the size of the Eurozone and Switzerland combined. The total value of Japan s shares is now just 8.5% of the MSCI All Country Index, close to a 20- year low and an epic decline from its 45% peak in This is a huge negative for index trackers. Imagine buying the MSCI AC Index in 1990 when Japan comprised 45%. The Bank of Japan s stated intention to buy bonds (quantitative easing) should help address the downside risks to Japanese growth. Paul Hansen (Director: Group Advisory Services - Investments) 6

7 Economic Update The Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group each year bring together central bankers, ministers of finance and development, private sector executives, and academics to discuss issues of global concern, including the world economic outlook, poverty eradication, economic development, and aid effectiveness. This week, the overall focus is on the IMF, World Bank and IIF Annual Meetings which were held in Washington DC over the weekend. The meetings discussed a wide range of economic and financial issues. The most pertinent discussion points are discussed below and Kevin will discuss these in more depth over the coming weeks on his return from Washington. The IMF also released their updated World Economic Outlook last week. The over-riding conclusion is that world growth will slow in 2010, but avoid a double-dip recession. However, world growth is neither strong nor balanced and runs the risk of not being sustained. IMF & IIF Annual Meetings Pertinent discussion points from the IMF and IIF Annual Meetings: Competitive currency devaluation among emerging market countries. The weakness of the Dollar and the pegging of the Yuan is contrasted with the strength in emerging market currencies. The focus of the debate was on what can be done to halt the appreciation of emerging market currencies and thereby avoid a currency war. Emerging economies are expected to continue to far out-perform developed economies. Most of the attention is on the high growth in the ASEAN region, but is this out-performance sustainable? Should governments follow a policy of fiscal expansion or fiscal consolidation? Concerns about sovereign risk remain high especially in the developed world including the on-going risk of default among the southern European states. Financial sector weakness remains unresolved, which is partly reflected in a lack of credit provision. What would be the impact of further quantitative easing by the Federal Reserve; which now seems inevitable. What can China do to further stimulate domestic consumption? Financial sector regulation and supervision. There is a significant focus on improving existing regulation, introducing new regulation, and the need to establish an insolvency regime to deal with large bank failures. Much of the debate in terms of new regulation is focused on the introduction of macro prudential supervision and regulation. 7

8 IMF Report The following is a summary of the key points highlighted in the IMF report: Global GDP is forecast to grow by 4.8% in 2010, slowing to 4.2% in In advanced economies economic growth is forecast at only 2.7% in 2010, slowing to only 2.2% in 2011, with some economies experiencing noticeably lower growth during the second half of 2010 and the first half of In contrast, growth in emerging economies is expected to rise by an impressive 7.1% in 2010 and a healthy 6.4% in Interestingly, Sub-Saharan Africa is projected to grow by 5.0% in 2010 and by 5.5% in The risks to the above growth forecasts are mainly to the downside. However, the probability of a sharp global slowdown, including a double-dip recession in advanced economies, is still relatively low. World inflation is projected to stay generally low over the next 18 months, given continued excess capacity and high unemployment, with a few exceptions (India) among the emerging economies. Monetary policy is expected to remain highly supportive (record low rates) in most of the advanced economies. Central Banks may have to resort to further unconventional measures (QE) if private demand weakens unexpectedly as fiscal support is withdrawn. The economic recovery in most advanced economies still face a number of large adjustments, including the need to strengthen household balance sheets, stabilise and subsequently reduce high public debt, and the need to repair and reform the financial sector. Their economic recoveries remain sluggish, with high unemployment a major challenge. Low consumer confidence and reduced household incomes and wealth are holding consumption down in many advanced economies. Importantly, their economic recovery will remain fragile unless there is a meaningful and sustained improvement in employment growth. In contrast, many emerging and developing economies are experiencing relatively strong growth, because they did not experience the major financial excesses just prior to the Great Recession. Household spending is doing reasonably well; however, there is an over-reliance on exports growth to sustain the recovery. This could prove problematic given the expected slowdown in the advanced economies during A sustained global economic recovery requires two key adjustments. Firstly, there needs to be a strengthening of private sector (consumer) demand in advanced economies, which will allow for much needed fiscal consolidation. Secondly, there needs to be a strengthening of domestic demand in emerging market economies, which will allow them to maintain growth in the face of lower exports as a result of recent currency appreciation. 8

9 A number of policies are required to support these adjustments. In advanced economies, the repair and reform of the financial sector needs to accelerate to allow a resumption of healthy credit growth. In addition, fiscal adjustment (austerity measures) needs to be implemented more forcefully in Meanwhile, many emerging economies will need to further develop domestic sources of growth in order to compensate for a likely slowdown in export growth. Kevin Lings and Laura Jones (STANLIB Economics) 9

10 Weekly Market Analysis Currencies/ indices/ Friday s Close Weekly Move YTD commodities 08/10/10 (%) (%) 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 10

11 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: 6.48% per annum 6.68% 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 09 October 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: 6.86% STANLIB Dividend Income Fund Effective Yield: 4.76% 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 08 October 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. 11

12 Liberty Investments Life Annuities Current Rates for 11 th October th October 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 714 R 779 R 860 R 643 R 688 R 751 R 250,000 R 1,807 R 1,968 R 2,174 R 1,628 R 1,742 R 1,900 R 500,000 R 3,627 R 3,951 R 4,363 R 3,270 R 3,498 R 3,814 R 1,000,000 R 7,269 R 7,918 R 8,742 R 6,553 R 7,009 R 7,641 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

13 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. 13

14 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

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) 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 Z5B734 15