MARCH 2016 PROSPERITY IN THIS CLIENT NEWSLETTER. Economic and market outlook Local and global equities

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1 MARCH 2016 PROSPERITY IN THIS CLIENT NEWSLETTER Economic and market outlook Local and global equities

2 The first quarter of 2016 has been one of the most volatile periods in recorded market history. After a very poor performance during January and February, markets recovered most of the losses during March to end the quarter at levels close to where the year started and in the case of emerging markets, the quarter delivered a positive return. The expected further delay of interest rate hikes in the United States coupled with more monetary policy easing in other developed markets were key factors in this recovery. Notwithstanding the recovery in markets, we reiterate our concern that underlying earnings growth will be hard to find in 2016 and our portfolios remain positioned for defensive quality earnings. Investors should remain focused on the prospects of companies to grow earnings over the longer term (three to five years) and not to be caught in the noise. Don t pay for attention. Our local and global model portfolios comprise companies with strong and growing multi-national franchises, excellent stewardship and good prospects for earnings growth over the long term. ECONOMIC AND MARKET OVERVIEW The US Federal Reserve (Fed) opted to leave interest rates unchanged at its March meeting as expected. Members of the rate-setting committee also scaled down their expectations for rate hikes in 2016 from four to two. In a speech at the Economic Club of New York, Fed Chair, Janet Yellen, insisted that caution in hiking rates was especially warranted given weak global growth, market volatility and uncertainty over whether the increases in inflation over the past few months would prove durable. Yellen also set out a list of conditions that will influence future rate hikes. One of these was that the dollar shouldn t strengthen further. The dovish Fed supported a rebound in risk appetite, especially for emerging markets and this led a recovery of the rand to levels below R15 to the dollar. The European Central Bank (ECB) expanded its asset purchases to 80 billion a month until March The ECB will also start buying corporate bonds. Furthermore, it cut its refinance rate (its main policy rate) to 0% and its deposit rate to -0.4%. But it will also make funds available to banks at negative rates, effectively paying banks to lend. The ECB is attempting to avoid second-round impacts of lower oil prices as inflation forecasts continue to indicate that the 2% target remains out of reach. The ECB slashed its inflation forecast for 2016 to 0.1%, from the 1% it predicted as recently as December. In contrast to developed markets, the South African Reserve Bank s Monetary Policy Committee (MPC) hiked the repo rate by 0.25% and consumer inflation jumped to 7% year-on-year in February, up from 6.2% in January and above expectations. Food inflation rose to 8.6% yearon-year and was the main contributor to higher inflation along with petrol inflation. The latter was 20% year-on-year, largely because there was a steep cut in the petrol price a year ago. Core consumer inflation excluding food, petrol and energy - rose slightly to 5.7% year-on-year. In hiking the repo rate to 7% earlier in the month, the Reserve Bank noted its concern that the rand was still vulnerable to further weakness, and that the pass-through from currency weakness to higher inflation could accelerate. While there are some signs of pass-through picking up, inflation has on the whole been remarkably low given that the value of the rand halved on a trade-weighted basis over the past five years. After a generally poor performance in February, major markets rallied and ended the month higher. Emerging markets outperformed their developed counterparts, with the MSCI Emerging Markets Index ending the month 13% higher while the MSCI World Index gained 6.5% (US$). Emerging markets have now ended the first quarter of 2016 in positive territory (5.4%) while developed markets are slightly in the red (-0.9%). In the US, the S&P500 returned 6.6% during the month and 0.8% over the quarter. The UK s FTSE 100 was 1.4% ( ) higher over month but 1.1% lower over the quarter. In Asian markets, the Nikkei 225 and Hang Seng returned 4.6% and 8.7% respectively during the month but lost 11.9% and 5.2% over the quarter. Locally, the ALSI gained 6.4% in March, buoyed by gains in Financials (11.5%), Industrials (5.3%) and Resources (5.1%). The ALSI ended the first quarter 3.9% higher. Resources (18.1%) outperformed Financials (6.2%) and Industrials (-0.4%) over the quarter. 02

3 LOCAL EQUITIES MEDICLINIC Newly promoted to the FTSE 100, private healthcare group Mediclinic International reported continued patient growth across all of its operating platforms in the 11 months to the end of February, with an associated rise in revenues. In the company s first trading update on the Index, it reported revenues of R12.26 billion ( 0.57 billion) in South Africa, 1.49 billion francs ( 1.08 billion) in Switzerland and 1.4 billion dirham ( 0.27) in the United Arab Emirates - which were all increases on the previous period. Patient bed days were 3.6% higher in South Africa, 4% in Switzerland and 5.9% in the UAE. Outpatient and accident and emergency patient attendance grew by 3.7% in the Emirates. The company also highlighted the completion of the combination of Mediclinic and Al Noor Hospitals on 15 February, and the acquisition of 19.9% of Spire Healthcare Group occurring during the period. Mediclinic s net debt at year end was expected to be below 1.65 billion. BIDVEST Bidvest Group, South Africa s second-largest company by revenue, said first-half earnings rose 9.5%, boosted by increased profit at its food services unit and the benefits of a weaker rand. For the six months to end December, net income rose to R3.03 billion and revenue was up 12% to R103.3 billion. Trading profit at the food services unit, Bidvest s largest by sales, rose 22% to R2.3 billion. Bidvest, which has interests ranging from car dealerships to catering and pharmaceutical products, also announced that it will sell shares in its food services business in Johannesburg, 15 months after abandoning a plan to list the unit in London. The company is also seeking to expand outside South Africa as trading conditions are likely to remain subdued. Bidvest reported a final cash dividend for the period of R4.82. VODACOM Vodacom Group Ltd has abandoned a R7 billion rand proposal to buy internet provider, Neotel, after almost two years of regulatory battles and legal opposition to the deal by competitors. Vodacom originally agreed to buy Neotel from Tata Communications Ltd. of India in May 2014 to boost its high-speed internet offering amid tougher pricing competition and regulatory constraints in the mobile-phone business. The company will continue to explore other options for gaining access to additional spectrum. SPAR Spar Group has agreed to buy a majority stake in the company that owns the brand in Switzerland as the South African food and liquor retailer seeks to boost growth outside its home market. Spar will buy 60% of Spar Switzerland for 44.5 million Swiss francs (US$45 million) on 1 April and the agreement also gives Spar the right to buy the remaining 40% of the company after five years for 6.3 million Swiss francs. The Spar Switzerland group supplies a range of food and beverage products to consumers through a combination of 58 company-owned Spar, Spar Express and convenience stores, 247 independent retailer stores trading under the Spar, Spar Express and Maxi brands, and 11 company-owned Cash & Carry outlets trading under the brand TopCC. OLD MUTUAL Old Mutual released a strong set of results for the year to December and announced plans to separate its business units into four standalone businesses. Pretax adjusted operating profit rose 11% to 1.7 billion, with strong growth in its wealth and institutional asset management businesses, which each grew 35% and 14% to 307 million and 149 million respectively. Nedbank and Old Mutual Emerging Markets remained the largest contributors to group profit, bringing in a combined 1.4 billion before costs. The company has appointed investment banker, Rob Leith, to lead the division of Old Mutual Wealth UK, Old Mutual Emerging Markets, Nedbank and OM Asset Management. Leith was previously global head of investment banking at Sberbank and head of group strategic development at Standard Bank. 03

4 GLOBAL EQUITIES HONEYWELL Honeywell announced that its Elster business, a global provider of electricity, gas and water meters and related software and data analytics solutions, has been selected by Enexis for a five-year contract to deliver more than one million smart electricity meters in the Netherlands as part of the country s efforts to meet European Union energy efficiency goals. The awarded project builds on previous Honeywell Elster successes with Enexis that included the installation of smart gas meters in 2015 and a complete meter data collection and meter data management platform for smart metering in With the addition of the electricity meter award, Enexis will have an end-to-end smart grid solution using Honeywell Elster technology. The contract with Enexis is for five years, plus five optional years. Enexis, one of three multi-utility distribution system operators (DSOs) in the Netherlands, has opted for electricity smart meters based on LTE (long-term evolution) mobile communication technology. To date, Enexis is leading the rollout with over 1.3 million smart meters installed. AB INBEV Anheuser-Busch InBev (AB InBev) sold a record amount of corporate bonds in euros to raise funds for the SABMiller takeover. The world s largest brewer issued billion (US$15 billion) of notes in six parts. The deal follows a US$46 billion bond sale in January, which was also to back the US$110 billion SABMiller purchase. AB InBev is taking advantage of increased demand for investmentgrade debt in euros after the European Central Bank announced plans to start buying non-bank corporate bonds. The ECB move has spurred a flurry of sales and helped drive down borrowing costs for highly-rated borrowers. CONTINENTAL Continental AG reported higher profits with strong sales growth for the 2015 fiscal year. Net income attributable to shareholders increased to 2.73 billion from 2.38 billion in the previous year and earnings per share was euros, 15% higher than a year ago. Annual sales rose 14% to billion from billion in the prior year. The company s executive board proposed a 15% increase in the dividend to This equates to a total payout of 750 million and a dividend payout ratio of 27.5%. Looking ahead to 2016, the company expects to generate a similarly high level of organic profit growth of around 5% and also expects to comfortably achieve an adjusted EBIT margin of over 10.5%. ACCENTURE Accenture delivered better-than-expected second quarter fiscal 2016 results and provided encouraging third quarter and fiscal 2016 revenue guidance. The company reported 2Q16 earnings per share of US$1.34, beating consensus estimates of US$1.18 per share. On a year-on-year basis, earnings increased 92.6% from US$1.08 per share, largely driven by higher revenues, a lower tax rate and share count. Net revenue during 2Q16 increased 6% year-on-year to US$ In local currency terms, revenues increased 12% year-on-year. Accenture exited the quarter with a total cash balance of US$3.04 billion, operating cash flow was at US$317.3 million and free cash flow was US$169 million. In line with its policy of returning cash to shareholders, Accenture repurchased 8.1 million shares for US$829 million during the second quarter and declared its semi-annual cash dividend of US$1.10 per share during the quarter. Looking ahead, the company revised (upwardly) its guidance for fiscal Net revenue is now expected to grow in the range of 8% - 10% in local currency and earnings per share is expected to be between US$ US$5.32. Accenture s solid performance across insurance, banking and health care segments reflects strong demand for its services, which will boost its long-term growth prospects. 04 The Estuaries, 2 Oxbow Crescent, Century City PO Box 207, Cape Town 8000, South Africa. 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6 CONTACT US CONTINUED JOHANNESBURG TREVOR O CALLAGHAN Tel: (011) Cell: trevor.ocallaghan@omwealth.co.za GARY SMITH Tel: (011) Cell: gary.smith@omwealth.co.za DEAN GINSBERG Tel: (011) Cell: dean.ginsberg@omwealth.co.za SUSAN BUYS Tel: (011) Cell: susan.buys@omwealth.co.za LASCA JOUBERT Senior Administration Specialist Tel: (011) Cell: lasca.joubert@omwealth.co.za BRONWEN DE KLERK Tel: (011) Cell: bronwen.deklerk@omwealth.co.za PRETORIA GREG POTGIETER Tel: (012) Cell: gregory.potgieter@omwealth.co.za JACQUES THERON Tel: (012) Cell: jacques.theron@omwealth.co.za COLLEEN OLIVIER Tel: (011) Cell: colleen.olivier@omwealth.co.za LOUIS FOURIE Tel: (012) Cell: louis.fourie@omwealth.co.za NOXOLO ZWANE Tel: (012) Cell: noxolo.zwane@omwealth.co.za DURBAN HELMAR BREYTENBACH Tel: (031) Cell: helmar.breytenbach@omwealth.co.za LERATO LEBITSA Tel: (031) Cell: lerato.lebitsa@omwealth.co.za