The Weekly Focus. A Market and Economic Update 13 November 2017

Transcription

1 The Weekly Focus A Market and Economic Update 13 November 2017

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 4 Economic Update...7 Rates...9 STANLIB Money Market Fund... 9 STANLIB Enhanced Yield Fund... 9 STANLIB Income Fund... 9 STANLIB Extra Income Fund... 9 STANLIB Flexible Income Fund... 9 STANLIB Multi-Manager Absolute Income Fund... 9

3 Newsflash The Japanese Nikkei is currently at its highest level since 1992, i.e. in a quarter of a century! Even in dollar terms, it is at its highest in 21 years. It peaked in 1999 above 39,000 (now 22,540). Market Comment The JSE All Share Index continues to lead the SA asset classes in 2017, with a total return of +20.4%, followed by Property with +10.1%, Cash with +6.5%...and the All Bond Index +4%. Property has gained +3.6% in the past 2.5 months, the ALSI has gained +7.3% in the past 6 weeks and the All Bond Index return has fallen by -3.5% over this period, in response to the worsening position of government finances and the threat of a downgrade of our local debt to junk by Standard & Poors and Moodys. STANLIB Economist Kevin Lings says the numbers do validate a downgrade later this month to junk by both these rating agencies, but recent meetings with the two agencies hinted that they may give us a bit more time, i.e. delay the downgrades either to December or after the February budget speech. So the likelihood of a downgrade to junk this month by both agencies is probably more like at this stage. Obviously the fall in the value of the rand of late isn t helping the bonds either. The rand is at its lowest against the Aussie dollar in 14 months at eleven to one. The rand is also at its lowest versus the US dollar in 13 months. One of the chartists noted that was a key level. If the rand stays lower than this for a week or so, the next target on the chart becomes This morning we are at The rand was at to the US dollar at end September, so is down -6.7% since then and is -5.9% so far in 2017; very nice for Branden Grace s golf victory yesterday at Sun City, as he earned some $1.25m or R18.1m; nice for his caddy too, if he gets 10% or R1.8m! Against the pound, the rand is -11.9% in 2017, and a very substantial -16.8% versus the strong euro in Wow, sad for ski trips to Europe this year. Apart from the mighty Naspers share price, up no less than +75% in 2017 (+70% in dollar terms), the JSE Mining and JSE Resources Indices have continued to impress, since their lows in June (see a graph of the Resources Index below). Source: I-Net Bridge

4 The JSE Mining Index is now +28.4% in 2017, including dividends, at another new 2.5 year high this Monday morning. The JSE Resources Index, which includes Sasol, Mondi and a few others, is +20.8% in Since end September (just 6 weeks ago), Sasol s share price has rocketed by +20% to a 17-month high, thanks to the weaker rand and higher dollar oil price (two year high). Prudence would indicate that this is probably not the time to be buying Resources; it may, however, be time to take some profits if you ve been waiting for a decent move, simply because it is the most unpredictable of the sectors. On the offshore front, we have noticed a bit of profit-taking lately in the hottest market, the Japanese Nikkei, also in Europe. The Nikkei is currently at its highest level since 1992, i.e. in a quarter of a century! Even in dollar terms, it is at its highest in 21 years. It peaked in 1999 above 39,000 (now 22,540). The MSCI Japan Index has returned +22.9% in dollars in 2017, including dividends, ahead of the MSCI World Index s +18.9%; also ahead of the MSCI USA Index s +17.5% total return and now ahead of the MSCI Europe Index s +21.7%. In particular, despite declining over the past few days, the MSCI Japan Index is up a highly impressive +7.4% in the 6-7 weeks since end September.in dollar terms. The MSCI Europe Index has fallen -2% in dollars over the past month, partly because of the euro s decline against the dollar. The euro peaked at around $1.20 to the euro and is now at $1.164 to the euro. However, even in euros the Dow Jones Euro Stoxx 50 Index of the 50 biggest shares in Europe has declined by -2.6% in the past eleven days, back to where it was in May. The MSCI Emerging Markets Index is still the best in 2017, with a total dollar return of +33.8%, led by the phenomenal dollar return of the MSCI China Index of +54.3%, at another record high. This index comprises around 29% of the MSCI Emerging Markets Index and includes Tencent and Alibaba. Looking at some of the rand-based STANLIB offshore funds, the STANLIB Global Equity Feeder Fund is +29.5% in rands so far in 2017, at a record high, the STANLIB European Equity Feeder Fund is +28% (record high), while the STANLIB Global Property Feeder Fund is +7.2% (+5% so far in November). Although the property fund has been disappointing in 2017, it appears that its turn is coming. It is up +5% so far this month. Last week the US Real Estate Investment Trust Index gained +1.7% in dollars, one of its best returns this year, easily beating the S&P 500 Index. Typically during rising interest rates in the US, global property has done well because of stronger economies and more demand for space. Other Commentators US Market Analyst, Elaine Garzarelli There is some concern in the US that the Senate tax bill proposes a delay in the company tax cut until Legislators are worried that the cut will add significantly to the government deficit (expenses exceeding income). The problem is that shares have been discounting the benefits of the tax cuts to company profits, so a step back from that could cause uncertainty and fear for investors. Company cash levels continue to be ample, as indicated by all current business deals. Most recently Broadcom made a bid of $105 billion for Qualcomm and Disney is talking about buying 21 st Century Fox for $50 billion.

5 Garza s quants model reading remains bullish at 74.5% and she still thinks US stock market corrections should be limited to 4-7%. She remains unhedged and recommends buying into weakness. One of her indicators, the yield curve (difference between short and long rates), is very good at predicting recessions. An inverted yield curve occurs when short-term rates rise above long-term rates. Lately the short rates have been rising because of the Fed s hiking, while the medium-tolong term rates have been kept low by low inflation, leaving a gap of only 0.83% between the short-term rates at 1.5% and the 10-year bond yield of 2.33%. Garza believes an inverted yield curve would not occur until the Fed tightens significantly by at least another 100 basis points (1%).so from the current 1.5% to 2.5%. While US investment advisors are quite bullish currently (64.4%), investors sold a net -$3 billion out of equity unit trusts in the US and invested a substantial +$8 billion in bonds last week, indicating bearishness from investors. So it s a mixed bag currently. With the S&P 500 Index +15.3% in 2017 (excluding dividends), the IT sector is now over double that with a return of +31%, followed way behind by Health Care with +17.2% and Materials (including mining) with +17.1%. Energy/oil has been recovering with the higher oil price and much better profits, but is still - 7.4% in Real estate is now +10.1%. BCA Research Global growth has continued to fire on all cylinders and global industrial activity is at its strongest in 13 years. However, it looks like a temporary and mild slowdown will materialize, although the global economy remains fundamentally sound. Yet this cooling of growth could have implications for commodity currencies and emerging market assets. Global money growth has been decelerating and historically this leads to a slowdown in industrial production, global trade and commodity prices. Also, Chinese monetary and fiscal conditions are tightening. This could create a dent in global industrial activity. Also the average of Korean and Taiwanese export growth has decelerated sharply. After having hit a peak of 32% in September, they have now decelerated to 5%. Additionally Swedish and Australian manufacturing leading indicators (PMIs) have also rolled over. These numbers, together with the above Korean and Taiwanese numbers, are highly sensitive to global trade and the global industrial cycle. We have already seen a softening in commodity currencies, which normally heralds a period of softening growth. The Aussie dollar has weakened despite strengthening metal prices and the Canadian dollar has weakened despite Brent oil holding above $60 per barrel. Junk bond prices in the US have started to decline of late, breaking below their 200-day moving average for the first time in over 3 years. Emerging market bond prices have also broken below their moving average (meaning yields have been rising). Lately the Russian ruble, Turkish lira, SA rand, Brazilian real and Mexican peso have all been weakening since the end of September. This suggests outflows out of these markets have begun, which tends to cause liquidity conditions in these economies to tighten, hurting economic activity. However, this softness in global economic activity is unlikely to be very pronounced. In particular, three key factors that created a strong deflationary effect in the global economy seem to have been vanquished: US deleveraging (reducing debt) is over, the euro area has healed as banks have been cleaned up and Chinese excess capacity has been purged.

6 So global capacity utilisation (the percentage of manufacturing plants being used) is in much better shape than it was in Also, commodity markets are not as oversupplied as they once were. In fact, oil inventories are falling as OPEC restrains production. So, since growth and inflation are likely to prove more resilient than in 2015, the slowdown is likely to provide a buying opportunity in risk assets. One area that could weaken in the meantime is emerging market equities, after their big run so far in BCA also thinks the Aussie dollar is the worst-placed commodity currency now, because speculators are very long the Aussie and also the currency is expensive against the USD, the NZD and the Canadian dollar. The euro could also experience some more weakness because Europe has a larger manufacturing sector and export sector as a share of GDP than the US. German exports, Europe s growth locomotive, are also highly geared to the Chinese industrial sector. So when Chinese investment slows, Europe feels it more acutely than the US. Investors still appear to be very long the euro relative to the US dollar. Paul Hansen Director: Retail Investing

7 Economic Update 1. SA manufacturing production decreases in September, weighed down by wood and paper losses. 2. China's foreign exchange reserves rose for the ninth consecutive month in October, as tight capital controls and a surging yuan continued to stem outflows. 3. Real rates have been increasing across Sub-Saharan Africa as inflation has started to ease. 1. Manufacturing production decreased 1.6%y/y in September Q seasonally adjusted manufacturing production saw a 1% rise when compared to Q2 2017, with six of the 10 manufacturing divisions reporting positive growth rates over this period. The largest contributors to the decrease in the September manufacturing numbers came from the following sectors: wood products, paper, publishing and printing (7% and contributing 0.9 of a percentage point). The largest contributions to the 1.0% increase were made by the following divisions: Petroleum, chemical products, rubber and plastic products (2.5% and contributing 0.6 of a percentage point); motor vehicles, parts and accessories and other transport equipment (4% and contributing 0.3 of a percentage point). The September purchasing managers index (PMI) suggested a slight expansion, however it remains below the neutral 50 mark. Despite the more favourable global backdrop, as the global economy experiences a synchronised upswing on higher levels of trade, industrial production and investment, growth in the local manufacturing sector has been constrained by weak domestic demand and depressed business confidence. 2. China s foreign exchange reserves rose in October for the ninth month in a row, albeit at a slower pace than market expectations based mainly on tighter regulations and a stronger yuan which continued to discourage capital outflows. Reserves climbed by $700 million in October to $3.109 trillion, compared with an increase of $17 billion in September. The People s Bank of China (PBOC) has essentially put a hold on yuan intervention as the currency has recently become more stable. In addition, China tightened rules on moving capital outside the country in late 2016 as it needed to support the yuan and stem a slide in its foreign exchange reserves. The yuan has gained about 4.9% against the US dollar so far this year. Overall, the regulatory measures, exchange rate forces and a stronger trade surplus may have brought China s capital flows roughly into balance for the first time in years. Both the PBOC and commercial banks recorded net purchases of foreign exchange in September, the first time in nearly two years, suggesting a major policy victory for authorities after a long battle to stabilise the country s currency. 3. Tanzania s inflation rate eased to 5.1%y/y in October from 5.3%y/y in September. Inflation returned to deflation m/m at -0.1% from being relatively flat at 0.02% in the previous period. Inflation m/m was negative for three consecutive months before that. All items were close to or below the target of 5%. The real rate is currently at 6.9%, and gives the Bank of Tanzania scope to ease rates further. East Africa inflation is easing and is the range of % for the region.

8 In the same period Ghana s inflation rate fell quite sharply to 11.6% y/y from 12.2% y/y in September. The stronger currency has helped to contain inflation to the lowest figure in over 4 years. Food inflation was stable at 8.2% y/y from 8.3% y/y in the previous period. The inflation rate should continue to decrease into This gives the Bank of Ghana space to cut rates which currently sit at 21%. Rates have already been cut by 500 basis points in the current easing cycle. Further rate cuts are expected as the Ghanaian authorities continue to try and stimulate economic activity outside of mining. Overall, real rates have been increasing across Sub-Saharan Africa as inflation has started to ease. This is due to a number of conditions namely better weather, which results in stable food prices, and stable currencies, which decrease import price pressures. This has given central banks across the region scope to cut rates and try to stimulate demand in the respective economies. This should help drive growth in 2018 as 2017 growth was mainly driven by a recovery in commodity prices and agricultural sectors. Structurally, the countries which are implementing the right reforms will be in a better position to benefit from better world growth. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

9 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 6.73% Effective: 6.94% 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 10 November 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: 7.68% 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 10 November 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: 8.30% STANLIB Extra Income Fund Effective Yield: 7.86% STANLIB Flexible Income Fund Effective Yield: 6.93% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.86% 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 10 November 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.

10 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