The Weekly Focus. A Market and Economic Update 17 October 2016

Transcription

1 The Weekly Focus A Market and Economic Update 17 October 2016

2 Contents Newsflash... 3 Market Comment... 3 Other Commentators... 4 Economic Update... 5 Weekly Market Analysis... 7 Rates... 8 STANLIB Money Market Fund... 8 STANLIB Enhanced Yield Fund... 8 STANLIB Income Fund... 8 STANLIB Extra Income Fund... 8 STANLIB Flexible Income Fund... 8 STANLIB Multi-Manager Absolute Income Fund... 8

3 Newsflash Market Comment Politics is currently negatively affecting our currency, bond market, SA Listed Property market and our stock market, in particular the banks and other financials shares The JSE ALSI is down around -1.5% over the past week, including early this morning, with in particular the Banks Index down -6.2% (Financials -3.6%) and SA Listed Property shares -2.2%. The stronger US dollar (at a 7-month high versus the euro) has hurt the commodity prices a bit - although not much at this stage - and the mining shares did decline -0.6% over the past week in rand terms, but closer to -4% in dollar terms, because the rand is down around -3.5% in the past week. The stronger dollar is a negative for the US because it is equivalent to a monetary tightening in the economy, it hurts exports and it enhances the possibility of deflation (from imports), plus it hurts profits of the multinational companies based in the US. It is also a negative for many other countries, especially emerging markets, boosting the price of imported oil and other imports and adding to inflation. However, over the past month, while the S&P 500 Index is slightly negative in dollars, the FTSE 100 Index in London is +4.5% in pounds, the Euro Stoxx 50 Index is +3.1% in euros and the Nikkei is +2.4% in yen, while the MSCI Emerging Markets Index is +1.3% in dollars. The JSE SWIX (Shareholder weighted Index) is -2.65% in rand terms over the past month and the TOP 40 is -1.7%. The ALSI is -2.2% over this period, although this reduces to -0.9% if you include the dividends paid in the past month. Naspers is 18.7% of the ALSI 40 now, with SAB gone, with Richemont second at 9.1% and BHP Billiton at 8.5%. Naspers has just sold its Polish e-commerce business Allegro for $3.2bn. It is estimated it received triple, in dollars, what it paid for the business eight years ago, if one includes the free cash flow generated during this period by Allegro. The 2016 total return for the JSE ALSI is now +3.3%, although excluding the dividends it is a mere +0.4%, which is barely positive. Thank goodness for dividends. The market has definitely been drooping a bit of late, although there is no question that politics is hurting it, especially the Banks and other Financials. Although the Platinum price has fallen sharply of late (perhaps in sympathy with gold, which has fallen because of the stronger dollar and imminent hike in US rates), from $1180 in August to $945, it is good to see that the biggest user of Platinum, the European auto industry, is showing new passenger vehicle sales +7.3% year-on-year in September. The market share for VW is at 22.9%, down from 23.3%. Foreign investors were clearly spooked by the politics as they sold a net R6.6bn of bonds last week and a net R6.5bn of equities too.

4 Other Commentators US Market Analyst, Elaine Garzarelli The 10-year US Treasury bond yield has risen from 1.59% to 1.79% this month so far with the increased likelihood of a Fed rate hike in December. Also oil prices and inflation expectations continue to advance. Garza s quants indicator remains in bullish mode at 77%. The US earnings cycle is in a recovery phase and she expects double-digit quarterly gains (y/y) through At this stage she calculates that the S&P 500 Index is 10% undervalued (below fair value, based on earnings expectations, the 10-year bond yield etc.). Money supply (M2) in the US rose by +7.9% year-on-year and is up 30% over the past 4 years. With credit expanding, wages accelerating and employment advancing, the US expansion has become self-sustaining. Garza expects solid and steady growth in the US economy to continue. Monetary policies are expansionary, the rig count is rising, inventories are being rebuilt, house prices continue strong and the US consumer remains strong with nominal income in September up +4% year-over-year (hours worked up +1.4% and wages up +2.6%). Garza also expects business fixed investment to pick up, as the recovery in commodity prices triggers an upturn in capital spending in mining and petroleum structures. The US rig count has rebounded +30% over the past 5 months as the oil price has recovered. Also positive is the strengthening in global growth because of an improvement in China s growth, the easing of Brexit worries (as it relates to the economy) and more monetary stimulus as the ECB and BOJ continue to aggressively expand their balance sheet. BCA Research US GDP growth is likely to accelerate further in 2017 on the back of stronger business capex, a turn in the inventory cycle and a pickup in government spending. Faster wage growth should also support consumption (very similar to Garza s comments above). The real broad trade-weighted dollar should appreciate by +10% over the next 12 months, as the market prices in more Fed tightening. The stronger dollar will pose a headache for US multinationals, as well as emerging markets and commodity producers. However, it will help boost the economies of Europe and Japan. Global equities are vulnerable to a near-term correction, but the longer-term outlook for developed market shares outside the US looks reasonably good. Investors should overweight euro area and Japanese equities in currency-hedged terms. BCA thinks the US stock market could correct by -10% short-term. Paul Hansen Director: Retail Investing

5 Economic Update 1. SA Manufacturing Production growth rose 2.2% y/y in August. 2. UK renewed concerns about the impact of Brexit, especially as the process and nature of exit is discussed more fully. These concerns are now showing up in key business surveys. 3. Nigeria inflation outlook improving however risks are still to the upside. 1. SA manufacturing production growth rose 2.2% y/y in August from a revised -0.3% the previous month. This was higher than market expectation which was 1.3% y/y. Conversely, manufacturing growth at -1.0 m/m (seasonally adjusted), was weaker than expected. The main contributors towards the rise in manufacturing growth in August were improvements in growth of production of petroleum, chemical, rubber and plastic products most likely as a result of higher oil prices, food and beverages and motor vehicles, parts and accessories and other transport equipment. The positive manufacturing contribution to GDP growth gained in Q2 will most likely be reversed by the poor Q3 manufacturing performance. Manufacturing inflation increased in August to 7.6%, from 5.1% in July. This suggests that the sector may still be facing rising input costs for production due to the depreciation of the Rand in Looking ahead and taking into account the announcement made by the NPA (National Prosecuting Authority), to summons the Minister of Finance to appear in court on 2 November, the rand is unlikely to gain lost ground any time soon. In turn, this may result in a rise in inflation which could have disturbing effects on economic growth domestically which will adversely affect the manufacturing sector outweighing any potential benefits for exports. 2. A key feature of this year s IMF and IIF Annual meetings in Washington has been renewed concerns about the impact of Brexit. In the weeks and months following the Brexit referendum in June 2016, a consensus quickly started to emerge that Brexit would be a non-event. This was premised on the idea that the exit would be in name only and that in reality most of the current trade and access arrangements would remain largely unchanged a so-called very soft exit or what is now referred to as BENO Brexitin-name-only. Obviously, this did not stop the Pound from weakening (the Pound has depreciated by almost 16% against the US Dollar since 23 June 2016), but other short-term economic indicators have been much more resilient (or even positive) prompting comments that markets and companies are unconcerned about Brexit or that the impact of Brexit will be favourable for the UK. UK manufacturing is certainly benefiting from the weaker pound. However, at a very recent Conservative Party conference, Theresa May announced that she will invoke Article 50 of the EU Treaty by the end of March 2017, triggering a two year countdown that will culminate in the UK leaving the EU. Importantly, she stressed that exit means exit, which has been commonly interpreted as a harder-exit. This change in expectations around the nature and impact of Brexit has been accentuated by a clearer understanding of the process to exit. For example, in this week s IIF discussion on Brexit all the participants highlighted that while there are at least three or four options on the type of exit deal the UK could pursue, all of the options will take many years (way more than two years) to resolve and get ratified by all the members of the EU. This means that the UK will first have to negotiate a transition arrangement within the first two years, before trying to negotiate a final exit agreement. Without the transition agreement there would quickly emerge a large number of important legal disputes. It is also very clear that the UK is a long way from detailing the type of deal they are likely to pursue and that the scope and complexity of the exit is immense. Lastly, the large EU countries are unlikely to approach the exit favourably, while some of the negotiations could become hostile especially considering that there are a large number of important government elections in the EU over the next two years, including within France and Germany.

6 It would appear that in order to get a good exit deal (secure maximum access to Europe s single market), the UK is going to have to be flexible on immigration; but that is at the core of why so many citizens voted for the exit. Also even if the UK can secure preferential access to the EU market post Brexit, without harmonised regulation (for example food labelling) many of the UK products might not meet European standards, while a trade deal that covers services is going to have to break new ground in the area of global trade. Hopefully, while the Brexit negotiations are under-way the UK can look to strengthen its trade relationships with other key countries, including China, but this is unlikely to fully compensate for the loss of easy access to the EU. These concerns about the impact of Brexit are starting to be reflected in the BoE s Agent surveys. In particular, the BoE survey of the intention to invest and hire by UK companies has slowed sharply since the June referendum and could decline significantly further over the comings months. (We will provide regular updates on the survey). This would support the consensus forecast that while the UK might avoid an outright economic recession in 2017, the growth rate is likely to slow sharply to between 0% and 1% compared with an estimated growth rate of 2.2% in 2015 and around 1.8% in The Nigeria National Bureau of Statistics released its latest inflation statistics and revealed that inflation had moderated to 0.8% m/m when compared from August to September. This is lower than the 1% m/m achieved in the previous period and significantly down from the peak of 2.75% m/m between April and May. This is somewhat encouraging suggest that there could be a turning point in Nigeria s runaway inflation. However on an annual basis inflation has accelerated to 17.9% y/y for the month of September, which is slightly higher than the 17.6% recorded in August and 17.1% in July. Inflation has now been above the target of 6 9% since May All items, except for Communications, experienced above target price increases. The highest increases were seen in Energy, Imported Food, Education and Transport. This makes sense considering that these items are sensitive to currency movements. For example some of the school fees in Nigeria are quoted in US Dollars. Inflation in Nigeria is expected to remain at elevated levels well into the first half of next year however favourable base effects could allow inflation to ease into low double digits in the second half of The risks to the outlook remain the continuing weakness in the Nigerian currency, the Naira. The interbank rate is currently at NGN320/$ (from NGN199/$ in the first quarter of 2016) however the parallel market rate, where participants are accessing Dollars, is around NGN430/$. The IMF revised its outlook for Nigeria down to 0.6% for 2017 (-1.7% for 2016) which implies that a recovery could only be expected further out. The Central Bank s dilemma becomes even more intensified, as the growth versus inflation consideration becomes a tougher one to decipher. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

7 Weekly Market Analysis Currencies / Indices / Commodities Friday s Close 14/10/16 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 * MSCI - Morgan Stanley Capital International Source: I-Net Bridge

8 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 7.53% Effective: 7.79% 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 14 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 Enhanced Yield Fund Effective Yield: 8.10% 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 14 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 and 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. STANLIB Income Fund Effective Yield: 8.68% STANLIB Extra Income Fund Effective Yield: 8.26% STANLIB Flexible Income Fund Effective Yield: 7.57% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.89% 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 14 October 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.

9 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. All portfolios are valued on a daily basis at 15h00 except for Fund of Funds which are valued at 24h00. For Non-Money Market funds, investments and repurchases will receive the price of the same day if a complete instruction is 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 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). 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 Limited Reg. No. 1996/005412/06 Authorised FSP in terms of the FAIS Act, 2002 (Licence No. 26/10/590) STANLIB Collective Investments Limited Reg. No. 1969/003468/06