The Weekly Focus. A Market and Economic Update 29 January 2018

Transcription

1 The Weekly Focus A Market and Economic Update 29 January 2018

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 5 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 So far it has been a blockbuster January for global stock markets and this uptrend is certainly being helped by the weaker dollar. Market Comment OFFSHORE MARKETS So far it has been a blockbuster January for global stock markets. The MSCI World Index has already gained +6.9% in dollar terms, after returning +23.1% in One can see from the chart below of the MSCI World Index that the trajectory of the uptrend has steepened in 2018, leaving some with the impression that the market is in a blow-off phase, often regarded as the final move in a bull trend. Source: I-Net Bridge Certainly the weaker dollar is helping because the 45% or so of the index that is comprised of non-us shares is translating back into more dollars (at a much better exchange rate). The euro has gained +3.4% against the dollar in January, while the pound is up +4.8% and the rand +4%. The Aussie dollar is up +3.6% at an almost 3-year high and the Japanese yen is up +3.3%. The MSCI Japan Index in dollars is leading so far in 2018 with +7.7%, followed by the MSCI US Index with +7.5% (same as the S&P 500 Index), then the MSCI Europe (excluding the UK) Index with +7.3% and the MSCI Europe (including the UK) Index with +6.5%. The MSCI Europe (excluding the UK) Index is at its highest level since 2008, so in 10 years, in dollar terms. But once again it is the MSCI Emerging Markets Index that is beating the lot, +10% in dollars so far in January. Last year this index returned +37.8%. The JSE ALSI is +8.1% in dollars in January. The MSCI Emerging Markets Index bottomed on the 9 th of February two years ago and has gained +72% in dollars since then. It is currently at a 10.5 year high and is -4.8% below its all-time record high of October The MSCI China Index (over 30% of the MSCI Emerging Markets Index) returned +54.3% in 2017 and is +14.5% in January In the US the Health Care sector is leading with +10.2% so far, followed by Consumer Discretionary shares with +10%. Financials are third with +7.8%, then IT with +7.7% (did best last year). Later this week lots of the big IT companies are reporting results. Otherwise, global developed markets have not had a 5% or more correction since the Brexit story about 18 months. So clearly one needs to be aware of that.

4 But of course Mr Market has a mind of his own and will not bow to pressure from those waiting impatiently on the side-lines for a correction. On the Global Property side, the index has broadly traded sideways for the past 3 years and is still about -9% below its 2007 record high. It is flat so far in January. There is some optimism that this index will finally break upwards in response to the stronger economy (more demand for space and stronger retail spending). In the past during rising interest rate cycles, the property index has moved higher because of stronger economic growth. STANLIB is anticipating a +6.6% dollar return this year from global property, assuming earnings growth of +5% and a current dividend yield of 4%. LOCAL MARKETS SBG Securities, the stockbroker in the Standard Bank Group, notes that the positives for the SA share market are: o Sentiment uplift from political reform, o Renewed foreign inflows into SA equities o Relatively strong rand and o Monetary easing - potential interest cuts. The negatives for our share market are: o The risk of a credit rating downgrade by Moodys and o SA s strained fiscal position (government finances), heightening the need for some government spending tightening and for tax hikes, especially if free education is factored in. SBG Securities is forecasting double digit SA equity returns in 2018, which should outpace low teens bond returns and single digit cash returns. So they recommend overweight SA equities, neutral SA Bonds and underweight SA Cash. The JSE has an attractive dividend yield of 3%, better than the 2.2% of emerging markets. The MSCI South Africa Index, excluding Naspers, is currently trading on a trailing (historic) price-to-earnings ratio of just 13 times, which seems to offer good value, especially with earnings expected to pick up by around 8-13% over the next year. The current or trailing PE ratio of the top 100 shares on the JSE, excluding Naspers, is around 17 times, with the rand-hedge shares the expensive ones. The JSE Industrials Index is trading at 19 times forward earnings one year out, or 15.3 times excluding Naspers. The rand hedges are on a forward 20 times, so are somewhat more expensive than the pure SA-Inc. shares. For example Naspers is trading at 30.5 times its forward earnings expected in 12 months. Banks, General Retailers and listed property funds should benefit from any interest rate cuts in SA and renewed foreign inflows. Banks are trading at around 11.5 times forward earnings and General Retailers at 15.5 times. The SA Banks Index is already up +3.6% in January after returning +30% in In fact, Firstrand is up +31.5% since mid-november or +60% in dollar terms! According to the chart, it is on an historic or trailing PE ratio of 16.6, the highest (most expensive) in 18 years and a trailing dividend yield of 3.7%. Standard Bank is on a trailing or historic PE ratio of 13.7 and dividend yield of 4.1%. The General Retailers Index is already up +7.6% in January after returning +12.6% in December. Should there be any interest rate cuts, this usually benefits these shares. SA has had foreign inflows into our equity market of $0.8bn in 2018 after $2bn flowed in December. But in 2017 as a whole foreigners sold R42bn of SA equities (about $3bn). Below we show a chart of the JSE All Share Index, showing the breakout in June from the three year sideways trend. This breakout continues in a firm uptrend.

5 Source: I-Net Bridge Other Commentators US Market Analyst, Elaine Garzarelli The lower dollar (-3.4% so far in 2018 and -13.9% from its peak just over one year ago) is good for S&P 500 earnings growth, since a large proportion of earnings is derived from overseas. Garza s quants stock market model remains at a bullish 74.5% reading (a level below 30% is bearish). So she continues to recommend full exposure to equities. Corrections should be limited to 4-7%. The S&P 500 Index is currently 4.6% above Garza s calculation of fair value, but shares usually rise 20-50% above fair value when her quants model is as bullish as it currently is. The economy is being supported by synchronised accelerating foreign economies, tax cuts, a lower dollar and high consumer net worth. The IMF raising its global GDP forecast from +3.7% to +3.9% for both 2018 and 2019, the fastest pace in 7 years. Meanwhile US housing starts (construction of homes) in November climbed to their highest level since The house price index rose by +6.5% year-on-year in November. Garza recommends being overweight in Technology shares, Health Care, Financials, Consumer Discretionary, Industrials and Materials. BCA Research Stay with an overweight position in global equities and an underweight in global bonds. However, on purely valuation levels, US shares and increasingly global shares have become very expensive, although the price-to-book ratio and dividend yield of global shares are at the mean or average of the past 23 years. BCA says the market is unlikely to worry too much until the global economy and company earnings begin to stall, probably in late Historically, it has not paid to get defensive until six months before a recession starts. This suggests that shares could rally right through BCA has so far been wrong on the US dollar, because they expected the dollar to strengthen, not weaken further. They are sticking with their call for a stronger dollar as 2018 progresses. Paul Hansen Director: Retail Investing

6 Economic Update 1. SA consumer inflation slightly higher at 4.7%y/y in December, in-line with expectations. However, core inflation fell further to 4.2%, which further increases the chance of rate cuts this year. 2. US government debt servicing costs are expected to increase to historical highs over the next ten years, but remain manageable. 3. US GDP grew by 2.6%q/q in Q4 2017, below expectations. Final sales, however, grew by 3.2%q/q. For 2017 as a whole US grew by 2.3% and is forecast to expand by around 2.6% in Inability to form a quorum forces Central Bank of Nigeria to keep rates on hold. 1. In December 2017, South Africa s headline CPI inflation increased by 0.5%m/m, which was in-line with market expectations. As a consequence, the annual rate of inflation rose slightly to 4.7% from 4.6%y/y in November. Impressively, core consumer inflation fell further to 4.2% from 4.4% in November This is the lowest level of core consumer inflation since July In general, despite some upward pressure on fuel prices, SA inflation remains well under-control and is expected to remain well inside the inflation target over the coming year. For 2017 as a whole, South African inflation averaged 5.3%, down from 6.3% in 2016, but up from 4.6% in SA inflation has averaged a respectable 5.6% over the past five years, and 6.1% over the past 10 years. Food inflation moved lower in December to 4.9%. As recently as February 2017 food inflation was up at 10.0%y/y. The moderation is food inflation is, obviously, still due to the vast improvement in the summer agricultural season in Despite the moderation in food inflation, the pace of slowdown in consumer food inflation has been somewhat disappointing. This is partly due to the extremely high level of meat inflation, which is relatively high at 14.0%y/y, as well as the fact that producers and retailers have been trying to extract some operating leverage. Nevertheless, consumer food inflation should continue to ease a little further in the coming months. In that regard, the recent uptick in both agricultural and producer food inflation suggests that the moderation in food inflation is near an end. Petrol inflation rose by a substantial 4.2%m/m in December, with the annual rate increasing to 14.2%y/y. This largely reflects the 71c/l increase in the petrol price during the month. Fortunately, the petrol price declined by -34c/l in January, and is expected to fall further next month. This will help to offset some of the recent petrol price pressure. CPI excluding food and petrol is still well within the inflation target at 4.1%y/y, while core inflation (CPI excluding food, fuel and electricity) eased to a very respectable 4.2%y/y. Services inflation was also recorded lower at 5.3%y/y, while administered price inflation is above the target range at 6.9%y/y, mainly due to the higher petrol price. The inflation rate for pensioners has eased to 4.8%y/y. SA inflation is still expected to remain well under control over the coming year and is forecast to average 4.5% for 2018 as a whole, helped largely by the stronger exchange rate. It is also worth noting that SA inflation will most-likely test the mid-point of the inflation target in early 2018 before stabilising at around 4.5% to 5.0% in the second half of The average inflation rate for 2019 is currently projected at 5.4% Although the outlook for SA inflation has improved and economic growth remains subdued, the near-term event risks surrounding the National Budget and the Moody s credit rating decision convinced the Reserve Bank to leave interest rates unchanged last week. This is partly because a further credit rating downgrade could lead to Rand weakness.

7 Importantly, the latest downward revision to the inflation forecast coupled with still subdued economic growth implies that a confidence boosting National Budget in February that helps South Africa avoid any further rating downgrades could open the door for the Reserve Bank to cut interest rates modestly into the middle of 2017; possibly two cuts of 25bps each, after which interest rates would then remain on-hold into Recently the CBO updated their ten-year government budget projection (the ten-year projection is typically updated twice a year), using a wide range of economic assumptions. Over the years we have found this ten-year analysis very useful since it provides a user-friendly, but comprehensive assessment of the outlook for US government finances. In particular, we have focused on the CBO projection of the budget deficit, government debt and most importantly the cost of servicing debt. It is very unlikely that US government debt will moderate to any meaningful extent over the next ten years, especially given the aging population and the need to normalise interest rates. Instead, the focus will remain on whether or not the growth in government debt exceeds the growth in GDP, and what happens to the cost of servicing debt. While we don t always agree with the CBO s base assumption on GDP growth, bond yields etc., we have found their research to be very valuable and a fairly realistic point of reference. Some of the CBO s vast array of 10 year projections/forecasts are as follows: GDP growth to average 1.8% over the next ten years. (The CBO s projection for growth in 2018 already seems too low. A higher growth rate should result in a more favourable outcome relative to the CBO s current budget projections) Consumer inflation to trend slightly higher, averaging 2.3% over the next ten years. US headline inflation is currently 2.1% and averaged 2.1% in Unemployment rate to average 4.8% over the next ten years. The current unemployment rate is 4.1%, averaging 4.4% in 2017 A net gain of 7.4 million jobs over ten years. The US gained 2.0 million jobs in 2017 and has gained a remarkable 17.6 million jobs since the previous recession ended The Federal Funds rate to trend higher, averaging 2.9% over next ten years, implying a positive real federal funds rate. The Federal Funds Target rate is currently 1.5% and averaged 1.125% in The 10-year government bond to average 3.5% over the next ten years. The US 10-year bond yield is currently 2.6% and averaged 2.3% in 2017 The federal government s annual budget deficit is on an increasing trend is projected to end 2027 at a substantial 5.2% of GDP. Federal government debt held by the public (which is different from total government debt) is expected to rise from 77% of GDP ($15 trillion) at the end of 2017 to 91% of GDP ($26 trillion) by 2027 In detailing their 10-year view, the CBO made a number of important points. In particular, they highlighted that the aging US population means that spending on Social Security and Healthcare will rise significantly. According to CBO s baseline projection, spending for people aged 65 or older on social security and healthcare increases from about 33% of all federal non-interest spending in 2017 to about 42%. This means that the contribution of Social Security and healthcare to the federal deficit would rise from 1.9% of GDP in 2017 to an average of 3.6% over the period. The CBO also highlighted that because interest rates and the federal debt are expected to rise further over the next ten years, the interest payment on government debt is expected to increase from around 1.4% of GDP in 2017 to 2.9% of GDP in While the 2.9% is in-line with previous historical highs (in the 18 years from 1982 to 1999 the cost of borrowing for the US government averaged 2.9% of GDP, spiking to above 3% of GDP on a regular basis, the rapid increase in borrowing costs could create some concerns amongst bond investors.

8 Other issues flagged by the CBO is the expected decline in remittances from the Federal Reserve to treasury over the coming years. These remittances have been very substantial in recent years. Also, when outstanding government debt is relatively small, the federal government is better able to borrow money to cover unexpected costs, such as helping institutions during recessions, responding to a financial crisis, dealing with natural disasters, or the need for military activity. By contrast, high levels of outstanding debt (which is the current situation), implies that the government has less flexibility to address these types of events. Overall, there is little doubt that US government s financial position is likely to deteriorate over the next ten years. The extent of the deterioration will depend on the pace of GDP growth (especially household income growth), the pace of interest rate hikes by the Federal Reserve, the long-term benefits of cutting corporate taxes and the magnitude of any unanticipated demands on the Federal Government to deal with an inevitable crisis. More positively, the CBO has factored most of these variables into their ten-year fiscal projection and it appears that although the government s fiscal position will deteriorate further the extent of the deterioration should remain manageable, especially if economic growth can surprise a little to the upside. However, a further 10 years of fiscal deterioration beyond 2027 (as highlighted in the CBO s 20-year projections to 2047) would have disastrous consequences. Increasingly, the US is going to have to learn to live with average lower growth and the government is going to have to learn to live within their means. 3. In the final quarter of 2017, US GDP grew by a slightly disappointing 2.6%q/q, annualised. This compares with growth of 3.2%q/q in Q The GDP performance in the fourth quarter of 2017 was below market expectations for growth of 3.0%q/q, although if the Q4 decline in inventories is excluded, final sales grew by a solid 3.2%q/q. For 2017 as a whole the US economy grew by 2.3%, up from 1.5% in US GDP is forecast to grow by around 2.6% in 2018, which is above the average growth rate over the past eight years of 2.2%. The key areas of strength in Q were, once again, household consumption (including spending on durable goods), and investment on machinery and equipment. There was also a welcome rebound is residential property investment. In total, household spending contributed a very substantial 2.6 percentage points to the quarterly GDP growth rate, while fixed investment in machinery and equipment added a further 0.6 of a percentage point. On the downside, net exports subtracted 1.1 percentage points, reflecting mainly a pick-up in imports. This GDP estimate represents an initial assessment of US economic activity in Q4 2017, and is based on source data that are incomplete or subject to further revision. The "second" estimate for the fourth quarter of 2017, based on more complete data, will be released on 28 February The US GDP data is readily available from the US Department of Commerce, specifically the Bureau of Economic Analysis. Overall, on a trend basis, US economic activity continues to expand at a solid pace of around 2.5%. While this is still below the longer-term average growth performance, there has been a noticeable acceleration in US economic growth during the past six to nine months. Furthermore, a wide range of US leading indicator models and their components are all suggesting that the expansion in US economic activity should continue in the months ahead, and may even pick-up momentum in the near term. This improvement in the outlook partly reflects the impact of President Trump s tax changes, but also a broadening of the US economic recovery. Importantly, the pick-up in business confidence also appears to be fueling an increase in private sector fixed investment. As mentioned previously, a more robust acceleration in US GDP growth is going to require a sustained and robust pick-up in private-sector fixed investment activity, coupled with an acceleration in productivity growth, as well as a noticeable improvement in wages but also only a modest increase in inflation.

9 At this stage, while there are encouraging signs that some of these factors are moving in the right direction (especially investment in machinery and equipment), the improvement in productivity and wages (which is obviously linked) are not yet compelling or broad-based enough to meaningfully revise up our GDP growth estimate for 2018 further. 4. The Central Bank of Nigeria kept interest rates on hold at 14% according to a communiqué sent out last week. The Cash Reserve Ratio (CRR) was maintained at 22.5% and the Liquidity Ratio was maintained at 30%. There was no meeting as there was an inability to form a quorum, which is 6 members of the monetary policy committee according to the Central Bank of Nigeria Act Of the 12 member positions available on the committee, eight were vacant. Therefore, no press conference was held and only a communiqué was sent out. Four members in the MPC had their terms expire in December However, their nominated replacements have not yet been confirmed by the senate. In the communiqué the bank noted that it was satisfied with the current economic indicators which showed that the recovery in the Nigerian economy is gaining momentum. Especially considering that oil prices and production levels have increased. This has allowed foreign exchange reserves to grow by $17.7 billion between October 2016 and January 2018 to $40.78 billion. The Investors and Exporter s window has attracted $13 billion of inflows since inception last year which has helped FX reserves. The Nigeria Stock Exchange All Share Index grew by an impressive 44% in 2017 (25.4% in Dollar terms) and has already given a return of 18% this year (both Naira and Dollar terms). Inflation ended the year at 15.4% y/y from 15.9% y/y in November, averaging 16.5% for The currency was devalued in the beginning of 2017 and stubborn food inflation kept the overall figure high. The 2017 inflation rate was higher than the 15.6% average recorded in 2016 as the black market Naira rate increased to over 400 Naira per Dollar. Throughout this period Nigeria s real rate fell into negative territory and has stayed there since. However, this could change as soon as the end of the first quarter of 2018 which will give the central bank impetus to cut rates. This is especially considering that the economic recovery is still fragile. The Central Bank is considering holding an emergency meeting in February and resume the normal schedule with a meeting in March. Even though rates are on hold we believe that there is still a bias towards monetary policy easing. We are of the opinion that the CRR will be lowered too. 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: 6.83% Effective: 7.05% 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 26 January 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: 7.85% 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 26 January 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: 8.37% STANLIB Extra Income Fund Effective Yield: 8.09% STANLIB Flexible Income Fund Effective Yield: 6.37% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.65% 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 26 January 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 (RF) (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 (RF) (Pty) Limited Reg. No. 1969/003468/07