The Weekly Focus. A Market and Economic Update 5 September 2016

Transcription

1 The Weekly Focus A Market and Economic Update 5 September 2016

2 Contents Newsflash... 3 Market Comment... 3 Other Commentators... 5 Economic Update... 6 Weekly Market Analysis 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... 11

3 Newsflash Market Comment The MSCI World Index is +18% higher in dollar terms from the low on 11 th February. The bull market remains intact and will turn 7.5 years on Friday. September is apparently the worst month for returns though. There has been quite a big change in the total returns of the four SA asset classes during the past 5 weeks, thanks to the ongoing saga about our Finance Minister and the resulting pressure on the rand, our bonds (higher yields, lower prices), our financials, especially the banks and of course SA listed property (following the higher bond yields). The JSE ALSI gained +0.25% on a total return basis in August, while the All Bond Index fell back by % and SA Listed Property lost -4.9%. Cash returned +0.66%. Source:I-Net BFA Looking at the graph of the four asset classes above, one can see the sharp correction in the blue line (property), which has fallen -6.5% from its high over the past 6 weeks, also the pink line (bonds), while the red line (equities) has remained stable, thanks to improved rand hedge shares with the weaker rand. The latest 2016 total returns are: All Bond Index 12.5% All Share Index 7.4% = 15.3% in dollar terms SA Listed Property 6.3% Cash 4.8% In fact this morning the JSE ALSI hit a 3 month high, just below 54,000, while the Financial & Industrial Index and the ALSI 40 Index both hit 10 week highs. Thanks to the weaker US jobs report on Friday (about 29,000 fewer jobs created in August than was forecast), risk-oriented markets have perked up on the view that the US Fed is unlikely to raise rates later this month. This helped the Nikkei hit a three-month high this morning and helped Asian markets in general close better.

4 Rand weakness has pushed some of our big offshore industrial companies like British American Tobacco and SAB stronger, plus Naspers has soared to new highs on the back of Tencent s strength ( Naspers is +20% so far in 2016 in rand terms or +27.7% for dollar investors). So now the Financial & Industrial Index has pushed up into positive territory for 2016 with a total return so far of +2.9%. The JSE Resources Index is still up +32.6%, sitting at 18,254; so it is holding the 18,000 level, but so far has been unable to break out. Lower for longer yields are certainly positive for commodity prices and today the Brent oil price is up +4% at $ August was a difficult month for commodity prices though, because of fears of a US interest rate hike. Platinum, silver and nickel all fell over -8% in dollar terms, while copper fell - 6.3%, palladium fell -4.7% and gold fell -3.1%. The charts still look constructive for the JSE Resources Index to probably finally break upwards sometime quite soon, after trending sideways for over 5 months. The rand and many emerging market currencies have probably now mostly unwound their stretched elastic condition after months of appreciating - thanks to the latest declines. We have no idea if or when our Finance Minister saga will end and how it will end. Obviously the rand is hostage to some extent to this issue. It weakened by -5.7% against both the dollar and euro in August and by -5.1% against the pound. One positive for markets is that finally the northern hemisphere summer months end today with the Labour Day holiday in the US. So fund managers and investors will be returning to their desks this week. In August the best performing JSE sector were Construction & Materials (+12.1%), Media being Naspers (+10.3%) and Travel & Leisure (+7.2%). The worst were Gold Mining (-16.3%), General Retailers (-11.3% after poor results from Mr Price) and Mobile Telecoms (-10.9%). The global stock market continues to do well, with the MSCI World Index now +18% higher in dollar terms from its 11 th February low. So far in 2016 the total return is +6.4%. The MSCI Emerging Markets Index is +15.7% so far in 2016 and has only declined slightly with weaker currencies from a number of countries like ours. The biggest portion of this index, the MSCI China Index, is at a 10-month high and gained +7.4% in August. Meanwhile the MSCI Europe Index, which includes the UK, has perked up to a 10-week high in dollar terms. Recent pound strength is helping, with the pound continuing to show some possible signs of bottoming against the dollar. In the US, the S&P 500 Index is very close to its record high, while the broader Russell 2000 Index hit a 14-month high on Friday. This index is up a whopping +30% in dollars from its 11 th February low! The Nasdaq is also very close to its high and is +24% from the 11 th February low. The global equity bull market remains intact. It will turn 7.5 years on the 9 th of September, ie on Friday, just as the volumes begin to pick-up again with the holidays over. Global bonds have been quite steady of late, with very little change in yields from the lower levels. So listed global property has held up well, with the STANLIB Global Property Feeder Fund +5.2% so far in 2016 in dollar terms (-2% in rands). Rand weakness has certainly assisted the rand-based offshore funds, with the STANLIB Global Equity Feeder Fund +9.2% in rands in the last 3 weeks and the STANLIB European Equity Feeder Fund +11.1% (Global Property Feeder +8.3%).

5 Other Commentators US Market Analyst, Elaine Garzarelli Garza s proprietary quantitative model for the US stock market stands at a bullish 75% (out of a maximum 100%). How sustainable is the US stock market rally after almost 7.5 years? She notes that the feared US recession has failed to materialize, concerns about growth in China have subsided and the Eurozone s economy has held up despite the Brexit vote in late June. Also, the S&P 500 has risen during past Fed tightening cycles, usually peaking after the last rate hike - which is usually before the recession starts. While sentiment towards the US market has improved, with the contrarian indicator, the number of bullish advisors in the US, at 55.9% from the February 11 th low of 24.7%, Garza says her valuation indicator remains bullish and she believes improved US company earnings will support shares. US shares are 6% undervalued at present. Both the Bloomberg financial conditions index (for the health of the financial industry) and the economic cycle research institute weekly leading index (ECRI ) continue to be ranked bullish in her model. US consumer spending remains solid, with the Conference Board s measure of consumer confidence at its highest level in a year. It is likely the Fed will remain cautious and the pace of rate hikes should be slow to avoid damaging the consumer. So far the S&P 500 Index is up +7.1% in 2016 (excluding dividends). Oil related shares now have the best return of +14.7%, with Materials at +13.1% and IT at +10.5%. Health Care has the lowest return of +0.8%, followed by Financials with +3%. BCA Research BCA s view is that the Fed is unlikely to hike before December. They think the post-brexit rebound in shares (MSCI World +10.8%) has pushed shares into overbought territory and US equities in particular look increasingly priced for perfection. The US market is trading at 18 times earnings looking one year out, which is much higher than the post-1980 average. The median share trades at a record 21 times earnings, based on earnings of the past 12 months. If earnings are set to expand strongly, that could validate the current PE levels, but BCA does not expect this to happen. So BCA is expecting a correction. They see higher US rate expectations as December nears pushing the dollar higher (+10% over the next 12 months), further hurting company earnings. Share buyback activity and dividend growth are slowing, while US election risks are likely to rise. Also September has the worst average monthly return of -1% for the US stock market since The best month is July with +1.5%, then December with +1.48%. One positive for US shares is the American Association of Individual Investors survey, which shows that only 29% of individual investors are bullish on US shares, versus an average of 38%. BCA continues to expect Japan, the Euro area and Emerging Asia to outperform the US market. Paul Hansen Director: Retail Investing

6 Economic Update 1. SA recorded a further trade surplus in July 2016 of R5.2bn. SA trade account has improved meaningfully, on a trend basis, over the past year, but this largely reflects a slowdown in economic activity. 2. SA petrol price to decline by 18c/l in September. The decline is less than expected due to recent currency weakness that largely reflects renewed political turmoil. 3. US created a somewhat disappointing jobs in August. Unfortunately wage growth slowed and the intention to hire surveys have also softened. Rate outlook is uncertain again. 4. Nigerian economy falls into recession for the first time in two decades. 1. In July 2016, South Africa s trade balance recorded a further surplus of R5.2 billion. This compares with an impressive trade surplus of R12.5 billion in June 2016 and a massive surplus of R18.3bn in May The market was expecting a trade surplus of around R8.0 billion, although the trade data is extremely difficult to forecast accurately on a month-by-month basis, especially since the data is not seasonally adjusted and prone to revisions. Over the past three month South Africa has recorded a cumulative trade surplus of R36.0bn, which appears to be the largest trade surplus over any three-month period South Africa have ever recorded. During the month exports declined by a substantial R9.44 billion, while imports fell by R2.18 billion. In the first seven months of 2016 South Africa recorded a trade surplus of R17.4 billion, compared with a deficit of R24.7 billion during the same period in During 2015 as a whole, South Africa recorded a much improved trade deficit of R48.63bn compared with a deficit of R82.27bn during This improving trend is expected to continue in the second half of 2016 and South Africa is forecast to record a trade surplus for 2016 as a whole. The value of imports fell by -2.4%m/m (R2.18bn) in July This decline included a R1.4 billion (6%m/m) decrease in machinery imports, and a R0.87 billion (-10%m/m) drop in imports of vehicle parts. Over the past year, South Africa s imports have declined by -3.9%y/y in Rands. This is an extremely weak level of import demand given the fact that the Rand has weakened by about 9% against the Dollar over the past twelve months. In other words, in volume terms the growth in imports into South Africa has declined sharply. This is closely linked to the country s overall economic performance. Given that economic growth is expected to remain subdued over the coming months, import demand should remain relatively subdued in 2016/2017. The value of exports fell by a surprise and fairly substantial -9.0%m/m (-R9.4bn) in July This decline included a massive R5.3 billion (-22%m/m) slump in precious metal exports as well as a R1.26bn drop in base metal exports. Over the past year, South Africa s exports have risen by 3.5%y/y in Rand; yet the Rand has declined by -9.0%y/y against the Dollar over the same period. In other words, although the weaker Rand might be slowly helping some of South Africa s exports, the improvement is not broad-based and has not had a meaningful impact on South Africa s trade account. Instead, South Africa s trade balance has largely improved due to a systematic slowdown in import demand as a result of South Africa s weaker economic performance. Unsurprisingly, South Africa s tax collection of import duties is now well behind budget. In conclusion, South Africa s trade balance has generally improved over the past year, at least on a trend basis, helped largely by slowing import growth and some growth in selected export categories. Unfortunately, the slowdown in import growth largely reflects the weakness in the South African economy, rather than an improvement in import substitution. This overall trend is expected to continue during the remainder of 2016 and into early 2017, which should help to substantially narrow South Africa s current account deficit, which was measured at just over 5% of GDP in the first quarter of 2016.

7 2. On Friday, 2 September 2016, the Department of Energy announced that the petrol price (95 and 93 ULP & LRP) will decrease by a modest 18c/l with effect from Wednesday, 7 September Earlier in the month there was an expectation that the petrol price could drop by as much as 50c/l. The latest announcement means that the price of 95 Octane (ULP, Gauteng) will now cost R12.17 per litre. The price of diesel will decrease by 48c/l (0.05% sulphur), while the price of paraffin will decline by 63c/l (retail price), and gas by 9c/kg. During the latest fuel price review period, from 29 July 2016 to 01 September 2016, the average Rand/US Dollar exchange rate was R compared to R during the previous period. The strengthening of the Rand against the US Dollar during the month decreased the contribution to the Basic Fuels Price on petrol by c/l. In contrast, the oil price moved slightly higher during the month, adding an average of 6c/l to the fuel price. The net effect is a decrease of 18c/l in the petrol price. Worrying, the Rand exchange rate remains extremely volatile, but with a weakening bias. This suggests that the petrol could increase in the coming months. Clearly, though, a lot can happen to the exchange rate and oil price in a month. The petrol price decrease in September 2016 will reduce the monthly consumer inflation rate by a very modest 0.1 percentage points, which will help to ease inflationary pressure and allow the Reserve Bank to leave interest rates unchanged for an extended period. Since the peak in April 2014, the petrol price has now declined by total of R2.22/l or 15.4%. Unfortunately, other cost pressures are still likely to push SA consumer inflation over 7% in late 2016, but at least the upcoming spike in inflation appears likely to be much more modest than what was envisaged in early In August 2016, the US unemployment rate remained unchanged at 4.9%. This was slightly higher than market expectations for the rate to fall to 4.8%. The US unemployment rate has moved steadily lower from a peak of 10% in late The labour market participation rate also remained unchanged in August 2016 at 62.8%. Overall, the relatively low unemployment rate is still somewhat misleading given that the participation rate remains extremely low by historical standards. Non-farm payrolls rose by a somewhat disappointing jobs in August The market was expecting a gain of only around The change in total nonfarm payroll employment data for the previous two months was revised down by a mere jobs. Over the past 3 months, job gains have averaged per month. The level of US employment is now 6.2 million above the peak prior to the global financial market crisis. During the financial market crisis the US lost a total of 8.7 million jobs. Consequently, the US has created more than 14 million jobs since the financial crisis ended. The private sector added jobs in August 2016, after gaining a revised jobs in July The private sector has gained employment in 77 out of the past 78 months at an average of jobs a month and is at a record high, comfortably surpassing the previous peak in January During 2010 as a whole, the US economy created jobs, or an average of jobs per month. In 2011, the job gains averaged a far more respectable a month, while in 2012 job gains averaged a month. In 2013 employment rose by an average of jobs a month, suggesting that although the labour market was still struggling to gain significant upward momentum, the rate of increase remained encouraging. In 2014 employment rose by a very impressive monthly average of jobs, but then slumped somewhat to an average gain of in 2015, hurt by the especially weak job reports in March and September Over the past 8 months, job gains have averaged per month.

8 The average workweek for all employees on private nonfarm payrolls decreased by 0.1 hour to 34.3 hours in August. Average hourly earnings for all employees on private nonfarm payrolls increased by only 3 cents to $ Over the year, average hourly earnings have risen by only 2.4%, well down from a revised 2.7%y/y in July Average hourly earnings of private-sector production and nonsupervisory employees increased by 4 cents to $21.64 in August. While wage growth is still low by historically standards, it is at least still trending modestly higher. The latest employment report is clearly a little discouraging, especially following the better than expected June and July employment data. Disappointment in the report was broad-based, including a slowdown in wage growth, no change in the participation/unemployment rate, and a decline in the workweek. There was also a worrying decline in the intention to hire survey. Overall, the US labour market continues to expand at a reasonable pace, but is still not reflecting outright vibrancy. From the Federal Reserve Bank s perspective the latest employment data will, once again, make the next FOMC decision uncertain, but the Bank is clearly edging closer to the next rate hike of 25bps. 4. The Nigeria National Bureau of Statistics released the GDP figures for the second quarter of 2016 as well as the inflation figures for the month of July. The GDP figures revealed that Nigeria s economy contracted sharply by -2.06%y/y in the second quarter of This is after the Nigerian economy had contracted by -0.36% y/y in the first quarter. This was also below market expectations of a -1.6% contraction. The Nigerian economy grew by 2.35% as recently as the second quarter of This puts Nigeria into a technical recession, and with a first half contraction of -1.21%, an outright recession for 2016 is a likely scenario. The oil sector, which is now 8.26% of the economy, contracted sharply by %y/y. Production levels fell from 2.11 million barrels per day (mbpd) in the first quarter to 1.69 mbpd in the second quarter. Oil production was disrupted by militants in the Niger Delta region in the first half of the year, which moved Nigeria to being the second largest producer of oil in Africa after Angola. It is not unusual for the oil sector to be in contraction but the magnitude of this contraction is high by historical standards. The Mining and Quarrying sector contracted by % y/y in real terms as a result of this. The sector contracted by -3% in the first quarter of 2016 and by -6.6% in the second quarter of The non-oil sector contracted by -0.4%y/y from -0.2%y/y in the first quarter. This is sharply down for the 3.5% growth rate in the second half of last year. Nineteen out of twenty six sectors within the non-oil sector registered negative growth as they were indirectly affected by the oil sector. Because the non-oil sector contracted slower than the oil sector it now constitutes 91.74% of economic output. Agriculture, which is one of the most resilient sectors, actually grew by 4.5%y/y the highest figure in a year and amongst other sectors. This was higher than the 3.1% recorded in the previous quarter and 3.5% in the second quarter of Both Fiscal and Monetary policies have been supportive towards the Agricultural sector which is now 22.6%. Manufacturing, which is 9.4% of the Nigeria economy, contracted by -3.4%. This was better than the first quarter figure of -7%. The sector relies heavily on electricity production as well as supply of foreign exchange which were both in short supply during the first half of the year. The sector was in recession for most of 2015 from growing at an average of 15% in This was even higher in 2013 at over 20%. Construction activity has slowed further to -6.3% from -5.4% in the previous quarter. Foreign Direct Investment has slowed in the economy which has affected fixed investment. The Telecommunications sector is one of the few sectors that registered positive growth at 1.5% although this is sharply lower than 2015 s average of 4.5% and the first quarter growth rate of 5%y/y. This is as operators are signing up less active subscribers.

9 It is clear that the recovery in Nigeria could be further pushed out as the supply of foreign exchange remains problematic even after the currency has been free-floated by the Central Bank of Nigeria. Government s expansionary budget has also been delayed which could have provided a welcome uplift in economic activity, especially on infrastructure spend. Although the oil price has increased from the first quarter this was offset by lower oil production. Even though preliminary data has shown that activity has improved somewhat in the third quarter, an outright recession for Nigeria in 2016 is a very likely outcome. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

10 Weekly Market Analysis Currencies / Indices / Commodities Friday s Close 12/08/16 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

11 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 7.54% Effective: 7.83% 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 03 September 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: 8.17% 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 02 September 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: 8.66% STANLIB Extra Income Fund Effective Yield: 8.19% STANLIB Flexible Income Fund Effective Yield: 7.46% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.83% 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 02 September 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.

12 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