The Weekly Focus. A Market and Economic Update 21 August 2017

Transcription

1 The Weekly Focus A Market and Economic Update 21 August 2017

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 4 Economic Update...6 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 In dollar terms, the MSCI Europe (including the UK) Index is -2.5% from its recent peak and is trading at the same level as just two months ago. It is +14.9% so far in 2017, excluding dividends. Market Comment Despite concern about the start of a global stock market correction early last week, the S&P 500 Index was only down by around -0.3% last week. With the northern hemisphere holiday season currently at its peak, markets are very quiet at this stage, similar to our market in December. The US dollar remains very weak at around the $1.174 to the euro, down around -11.6% so far in It did hit a low of $1.19 briefly in early August. The weak dollar and positive global economic recovery are helping to boost the dollar price of a number of commodities, including gold, platinum, palladium, iron ore, copper, zinc and aluminium, amongst others. Meanwhile the euro is at an 8-year high against the pound, +7.2% so far in RMB Morgan Stanley noted this morning that global trade, which had been weak for some time, continues to improve, with global container port throughput growing by +6.7% yearon-year in the first half of 2017, the highest in six years, resulting from the synchronised global economy recovery. South-east Asia is showing the best growth of +9.3%. We have lately seen the Baltic Dry Index of shipping rates (for carrying dry bulk cargoes like iron ore) gain +11% last week to a 4-month high. Economic growth rates of many countries in the second quarter of this year have been impressive, notably Eastern Europe and parts of Asia. Europe, Japan and the US look solid. Company earnings growth has also been good. Meanwhile SA asset classes have been fairly steady over the past few weeks, with the ALSI and the SA Listed Property Indices broadly moving sideways, while the All Bond Index has picked up (see below in pink), now only just below SA Listed Property (in red). Source: IRESS So the ALSI continues to lead at +11% total return so far in 2017, helped largely by Naspers rising +5% last week on the back of superb Tencent quarterly results. Naspers is almost back at its early August record high, although it remains at a big discount to the value that Tencent represents in the Naspers share price.

4 Next comes SA Listed Property with +7.1%, now closely followed by the All Bond Index at 6.9%, after bond yields fell (prices rose) over the past week or so. Cash is at +4.8%. On bonds there is an expectation that CPI inflation will fall to around 4.6% for the latest month (down from 5.1% last month) when announced later this week. This could encourage the Reserve Bank to cut rates further when they meet next month, all positive for SA bonds, although discussions of a much higher budget deficit than forecast in SA are negative. We ll find out just how big that is in October when the Finance Minister delivers his budget update. An interest rate cut next month would be positive for local shares. On the offshore front, the strong euro is having a dampening effect on the European stock market. The DJ Euro Stoxx 50 Index of the biggest shares in Europe is -6.3% in euros from the peak in early May, trading now at the same level as back in March, some 5 months ago. In dollar terms, the MSCI Europe (including the UK) Index is -2.5% from its recent peak and is trading at the same level as just two months ago. It is +14.9% so far in 2017, excluding dividends. If you take the MSCI Europe (excluding the UK) Index, this index hit a new 2017 high just two weeks ago in early August in dollar terms and is now just -1.9% from that peak. The MSCI USA Index is down -2.25% from its 2017 high in early August, trading at early June levels now. It is +8.5% so far in 2017, excluding dividends. The S&P 500 Index is +8.9%, while the tech-heavy Nasdaq Index is +15.5% so far in Given that the dollar is down -11.6% against the euro in 2017, both the MSCI USA Index and the S&P 500 Index are down over -2% in euro terms in In fact the S&P 500 Index is -2.95% in euros (MSCI USA -2.6%). The best bigger market this year remains the MSCI China Index (+34.5% in dollars), trading now just below its high from the 9 th of August. This index is approximately 27% of the MSCI Emerging Markets Index, which is +22.9% in 2017, excluding dividends. The MSCI World Index of mostly developed markets is +10.2% in dollars in 2017, down - 2.1% from its recent high (-1% in euros so far), excluding dividends. This index is +6.8% in rand terms in 2017, behind the +11% of the ALSI, although as mentioned Naspers is the dominant feature of the ALSI s gain this year. Other Commentators US Market Analyst, Elaine Garzarelli The minutes of the US Fed continue to lean towards gradual rate hikes. There remains some surprise about the weakness in inflation. The lower dollar contributes to easier financial conditions and stronger US earnings. Garza s quants model reading rose by 2 points to 85.5% (out of a maximum of 100%) due to the upgrade of her bullish sentiment indicator. The fear factor has risen amongst investors, causing the number of bullish US investment advisors to fall to 50.5% from 57.5%. Garza still believes that US stock market corrections will be limited to 4-7%. Second quarter earnings estimates continue to rise and support US stock market valuations, which remain healthy. The S&P 500 is estimated to be 6.2% undervalued at present. Globally, economies are healthy with strong year-over year real GDP growth in the 2 nd quarter of +5.7% for Romania, +4.5% for the Czech Republic, +4.4% for Poland, +3.6% for Hungary and +3.1% for Slovakia (all Eastern European countries). German GDP was up +2.1% and the Eurozone s GDP growth was +2.2%, while the US grew +2.1%.

5 US consumers remain the driving force of GDP growth. The US CPI inflation rose by +2.1% year-on-year in July, suggesting underlying inflation is increasing very slowly due to several reasons, including technology, moderate growth, competition and globalisation. While the S&P 500 Index is +8.9% in 2017, the IT sector is +18.4%, followed by Health Care at +13.5%, then Utilities at +12.4%. Energy remains very negative with -17.1%. Financials are just +6.1%. Below we show a chart of the MSCI World Index of mostly developed markets, showing the record highs recently attained and the strong uptrend. Source: IRESS BCA Research The cyclical recovery in global earnings should outweigh (trump) any negatives from political issues. The next recession is likely to be similar to the recessions of the 1970s and early 1980s, which were caused by the Fed raising interest rates, rather than by the bursting of bubbles. However, this recession is unlikely to occur before 2019 at the earliest, because inflation is likely to take a while to accelerate, perhaps another 12 months. Remain overweight global equities for now, favouring European and Japanese shares over US shares, in currency-hedged terms. Look to reduce exposure in the 2 nd half of Looking at the past, on average the US stock market has peaked about six months before a recession starts, although it has varied from as little as two months. The current economic recovery in the US has now lasted over 8 years, making it the 3 rd longest on record. If it continues until July 2019, it will take the top spot from the 1990s expansion. The Great Recession of 2008/9 was one of the deepest in history, while the recovery has been slow and fairly drawn out, which is not unusual. The US bond market has been more accurate in calling US recessions. Short-term rates have been higher than long-term rates (called an inverted yield curve) in every recession over the past 50 years. Also the Conference Board s Leading Economic Indicator has consistently fallen into negative territory on a year-over-year basis leading up to past recessions. It has accelerated since last summer, suggesting little risk of a near-term downturn. Paul Hansen Director: Retail Investing

6 Economic Update 1. SA retail sales, once again, better than expected in June Sales up 2.9%y/y in real terms, strongest growth rate this year. Latest data encouraging for Q GDP growth 2. US retail sales much better than expected in July, while previous month's data was revised higher. On-line shopping continues to gain market share, growing by 11.5%y/y 3. US business confidence rebounded surprisingly in July Most of the US confidence indicators are still suggesting a relatively robust 6-months ahead, despite Trump's politics 4. Bank of Namibia (BoN) decided to cut their repo rate to 6.75% at their meeting on 14 August 2017 from 7.00% 5. Moody s Investors Services downgraded Namibia s sovereign credit rating to Ba1 from Baa3 and maintained a negative outlook 1. Stats SA released the retail sales data for June 2017 today. According to this latest survey, retail sales rose by a modest 0.2%m/m during the month, after rising by a much more encouraging 0.9%m/m in May, in real terms (seasonally adjusted). The month-on-month sales performance was better than market expectations, which was for an increase of only 0.1%m/m; although the sample survey forecast for retail activity remains relatively small. The improved growth in recent months (positive growth in each of the past five months) follows a shock decline of -1.1% in January 2017 and a drop of -2.5%m/m in December Very encouragingly, in the past three months from April to June (Q2 2017) retail sales rose by a very substantial 2.1%q/q, which should help to boost the Q GDP growth estimate, helping to pull South Africa out of recession. On an annual basis, retail spending rose by a welcome 2.9%y/y (real) in June This is the strongest growth rate experienced in 2017 helped by a slowdown in the rate of consumer inflation. The latest annual growth rate was also better than market expectations for an increase of 2.4%y/y. More importantly, the 12-month moving average of the annual growth rate remains positive at +0.9%, suggesting the retail sector is still managing to avoid a recession, albeit by a relatively narrow margin. During 2015, South African consumers were helped by relatively low inflation (4.6%) compared with an average wage increase of 7.7%. Unfortunately, this systematically changed in 2016 as inflation moved noticeably higher, and the Reserve Bank continued to hike rates. In addition, the banks became much more circumspect in the granting of credit. The net result is that at the start of 2017 the consumer has less discretionary income available for general retail activity. At the same time consumer confidence has fallen and is well below the long-term average. Fortunately, inflation has moved back inside the target range during 2017 and is likely to slow further in the months ahead. This coupled with a reduction in interest rates should provide some support to the household sector in the second half of 2017, helping retail sales avoid an outright recession despite the weak labour market. 2. In July 2017, US headline retail sales rose by 0.6%m/m. This was better than market expectations, which was for sales to rise by only 0.3%m/m. On an annual basis, US retail sales were up a respectable 4.2%y/y (in nominal terms). If motor vehicle sales are excluded, retail sales increased by 0.5%m/m in July This was also better than expectations for growth of 0.3%m/m. Excluding both vehicle and gasoline sales, retail spending also increased by a solid 0.5%m/m. Again, better than expected. Overall, July s retail sales report was encouraging, supported by a sizeable upward revision to the previous month s data.

7 All US retail sales data is measured in nominal terms. This means that changes in price (especially gasoline prices) can have a significant impact on both the monthly and annual rates of change in retail activity. Perhaps the stand-out features of the latest US retail sales report is the fact that the US continues to experience very strong growth in nonstore retailing which includes electronic on-line shopping. For example, in July 2017, nonstore retail sales rose by a further 1.3%m/m and by a massive 11.5% year-on-year. Furthermore, nonstore retailing has achieved an average annual growth rate of 11.2% in the first seven months of 2017, after having grown by an average of 11.2% in 2016 as a whole and by an average of 8.8% over the past five years. On a trend basis, US retail sales have clearly gained some momentum in recent months and are likely to out-perform the average sales growth achieved in For example in the first seven months of 2017, US retail sales averaged an annual growth rate of 4.5%. This compares with an average of only 2.7% during the same period in 2016 and an average of 2.9% for 2016 as a whole. In fact, it is very likely that the pace of growth in retail spending during 2017 will be the highest since While the current annual rate of growth in retail spending is still not up at the pace US policy officials might ideally want, the expansion appears relatively consistent and sustainable, especially considering the steady increase in US employment, a rise in wage growth, reasonably high consumer confidence and positive wealth effects. 3. Earlier this year we introduced a new economic research product that aims to score US business confidence on a monthly basis. This has been done as part of our ongoing evaluation of the effectiveness of President Trump s policy initiatives. Many media stories still focus on the negative social and political aspects associated with President Trump, and don t monitor the sharp jump in US business confidence that occurred immediately after Trump was elected. It seems clear that the boost in US business confidence is linked to Trump s promises regarding tax cuts, less business regulation, greater trade protection and increased spend on economic infrastructure. Importantly, there is a strong and positive correlation between US confidence and economic growth, hence a sustained rise in business confidence should lead to a noticeable improvement in GDP growth. The confidence indicators we have chosen to monitor each month include the following: ISM manufacturing index ISM non-manufacturing index NFIB Business Confidence NFIB Hiring Plans Wells Fargo Small Business Confidence US consumer confidence (Conference Board) US prospective home buyers US leading indicator Each of the above indicators are scored (subjectively) on a scale of 1 to 10, with 10 being extremely high confidence. Currently (mid-august 2017), the average of all eight indicators scored 7.5 out of 10, which is slightly above the previous month s score of 7.4. A score of 7.5 would suggest that the US is still experiencing a high level of confidence. Surprisingly, the NFIB small business confidence index rebounded sharply in August, while the Wells Fargo/Gallup also moved noticeably higher. Furthermore, the business sector s intention to invest is trending higher and private sector fixed investment has grown more convincingly in the past two quarters. The one key indicator that did weaken in August was the ISM services index, which dropped noticeably from 57.4 to 53.9 in July, its lowest level since August It is worthwhile noting, however, that US retail sales was especially robust in July 2017.

8 Overall, it still seems fair to argue that the business sector is still waiting to see if Trump can deliver on his election promises, in particular a cut in corporate taxes and the de-regulation of industry. It also seems fair to argue that the business sector will probably not maintain the same level of confidence if Trump does not actually deliver on his election promises. This is still no real progress on Trump s $1 trillion infrastructure development plan. Instead Trump appears determined to get involved more actively in geo-political issues and is spending less and less time focus on domestic economic considerations. As mentioned above, if the current level of confidence can be sustained, US economic growth would be expected to improve. Equally, a fall-off in confidence would argue that Trump's policies have been largely ineffective and the economic discussion will then start to focus on the prospect of the US economy slowing into a rising interest rate cycle. At this stage the data continues to support the upside scenario. Please watch for the next update in September The Monetary Policy Committee of the Bank of Namibia (BoN) decided to cut their repo rate to 6.75% at their meeting on 14 August 2017 from 7.00%. The decision to cut rates was made in an attempt to give some support to the Namibian economy whilst maintaining the currency peg between the two nations. Inflation has slowed noticeably in Namibia from a peak of 8.2% in January 2017 to 5.4% in July Inflation is expected to slow further as food prices continue to moderate. This should help to increase the positive real rate and give the central bank more room to cut rates. Private Sector Credit Extension slowed to 8.5% in the first six months of 2017 compared to 12.5% for the same period last year, reflecting weakness in the economy. Both households and businesses borrowed less with mortgages and instalment credit experiencing the lowest advances. This was reflected in the lower growth in house prices in Namibia. Namibia does not strictly have an inflation target band however they track the South African Reserve Bank s (SARB s) interest rate movements, occasionally with a spread. With slow growth and inflation within the 3 6% band, the Bank of Namibia is expected to take its que from the South African Reserve Bank (SARB) and continue to ease its monetary policy. Another two cuts of 25 basis points each are expected from the SARB and the BoN is expected to follow suit. 5. On 11 August 2017 Moody s Investors Services downgraded Namibia s sovereign credit rating to Ba1 from Baa3 and maintained a negative outlook. This puts Namibia s credit rating below investment grade or junk status. Because the negative outlook was retained the credit rating is more likely to be lowered again than to be raised. Fitch still rates Namibian sovereign debt at one notch above investment grade however this is at a negative outlook. This follows the downgrades to South Africa s downgrade to BB+ from BBB- by Standard and Poors in April. The review was largely unexpected although the market was only anticipating a move after the mid-term budget review in October The main reasons given for the downgrade were the erosion of Namibia s fiscal strength due to fiscal imbalance and increasing debt burden. Namibia s debt to GDP ratio has risen from 26% in 2011, when the first rating was assigned, to 42% currently. The second reason was a limited institutional capacity to respond to shocks. Namibia s budget relies heavily on SACU revenue which tends to be volatile. The increase in the wage bill was also a concern for Moody s as it constitutes 40% of total expenditure. Lastly was the risk of government liquidity pressures. The off balance sheet arrears to the private sector were also a concern for Moody s. Unbudgeted arrears have risen to 1 1.5% of GDP.

9 Moody s feels that an upgrade in the near term is unlikely however, what could stabilize the outlook would be fiscal consolidation, a slowdown in debt accumulation, improvement in the twin balances and an increase in foreign exchange reserves. Factors that could lead to further downgrades include ineffective implementation of the fiscal consolidation plan and declines in foreign currency reserves. The Namibian Ministry of Finance did not agree with the review citing that not enough analysis was conducted and the agency failed to meet with authorities before the decision. The ministry has stressed that steps had been take to address the factors highlighted by Moody s in December 2016 review. Therefore the current review done 4 months into the 2017/18 budget implementation was too early. Although foreign currency debt issuances had increased they were largely hedged or Rand denominated which mitigates the currency volatility. The ministry also highlighted that foreign exchange reserves had increased during the period under review to the current 5.5 months of import cover, above the 3 months target level. Namibia s debt profile has deteriorated in the last six years however it is projected to stabilize in the current financial year. The market has hardly reacted since the move, especially as the Namibian Dollar is pegged to the Rand. The fiscal deficit is expected to narrow this year, mainly as a result of the increase of SACU revenues. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

10 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 6.91% Effective: 7.14% 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 18 August 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: 7.80% 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 18 August 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: 8.62% STANLIB Extra Income Fund Effective Yield: 8.37% STANLIB Flexible Income Fund Effective Yield: 7.76% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 6.00% 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 18 August 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.

11 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 (Pty) 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 15h00. Investments and repurchases will receive the price of the same day if received prior to 15h00. 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 (Pty) 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 (Pty) 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 (Pty) 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.: HX 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 (Pty) Limited Reg. No. 1996/005412/07 Authorised FSP in terms of the FAIS Act, 2002 (Licence No. 26/10/590) STANLIB Collective Investments (Pty) Limited Reg. No. 1969/003468/07