Market and Economic Report. January 2014

Transcription

1 Market and Economic Report January 2014

2 MARKET DATA Total returns in ZAR as at December 2013 South African Market Equities December months 6 months 12 months Year-to-date All Share 2,98% 5,53% 18,76% 21,43% 21,43% Top 40 3,35% 5,57% 20,26% 22,77% 22,77% Mid Cap 1,23% 5,67% 10,77% 12,99% 12,99% Small Cap 0,67% 3,89% 16,33% 26,31% 26,31% Financials 2,44% 6,91% 14,24% 19,10% 19,10% All Share Industrials 3,80% 6,70% 18,74% 34,96% 34,96% All Share Resources 1,66% 2,14% 22,26% 1,38% 1,38% Property and Fixed Interest December months 6 months 12 months Year-to-date SA Listed Property 1,00% 0,99% -0,34% 8,39% 8,39% All Bond 1,10% 0,13% 2,00% 0,64% 0,64% Bonds 1-3 Years 0,55% 1,48% 3,06% 4,40% 4,40% Bonds 3-7 Years 0,87% 0,79% 3,0,% 1,45% 1,45% Bonds 7-12 Years 1,17% -0,01% 2,12% -0,21% -0,21% Bonds 12+ Years 1,35% -0,66% 0,84% -0,68% -0,68% Cash 0,43% 1,30% 2,63% 5,32% 5,32% Longer Term Returns 2 years 3 years 5 years 10 years All Share 24,03% 16,42% 19,93% 19,46% Resources 2,21% -0,77% 8,23% 12,43% Financials 28,24% 20,87% 21,39% 18,78% Industrials 37,82% 27,52% 28,09% 25,38% Property Unit Trusts 15,21% 14,19% 17,27% 19,08% All Bond 8,04% 8,30% 7,65% 9,03% Cash 5,45% 5,55% 6,48% 7,84% 5,40% 5,62% 5,32% 5,78% Global Markets - Return in Base Currency Developed Markets December months 6 months 12 months Year-to-date Cac 40 1,50% 6,06% 22,69% 27,74% 27,74% Dax 30 2,79% 13,14% 27,23% 31,15% 31,15% Hang Seng -2,41% 2,22% 13,71% 6,51% 6,51% Nikkei 225 (not TR) 1,41% 5,34% 13,40% 31,09% 31,09% FTSE 100 2,70% 7,49% 20,40% 20,91% 20,91% S&P 500 2,53% 10,51% 16,31% 32,39% 32,39% Global Market -Return in Base Currency December months 6 months 12 months Year-to-date Bovespa -2,94% -7,14% 1,62% -26,66% -26,66% MSCI China -3,43% 3,81% 16,52% 3,96% 3,96% MSCI India 3,31% 10,34% 4,55% -3,83% -3,83% MSCI Russia 1,59% 0,36% 14,09% 1,35% 1,35% Foreign Exchange December months 6 months 12 months Year-to-date USD/ZAR -0,93% -3,14% -4,64% -18,86% -18,86% GBP/ZAR -4,13% -6,38% -13,42% -19,52% -19,52% EUR/ZAR -4,16% -6,05% -10,95% -23,30% -23,30% Source: Deutsche Bank / I-Net Bridge

3 GLOBAL The story in 2013 in financial markets was that developed markets were up 27.4% versus emerging markets, down 2.3%! The markets were preoccupied with the eventual shift away from accommodative monetary policies in developed economies as economic growth started showing improvement. This has proved to be troublesome for emerging markets, especially those with large external imbalances as capital is redirected. Since October, emerging market assets have experienced further strain. This pressure is expected to continue in Further weakening in several EM currencies is expected, which is likely to be the main channel of adjustment for correcting imbalances. According to Goldman Sachs, higher US Treasury yields combined with weaker EM fundamentals, more expensive equities, and tighter corporate bond spreads has diminished the search for yield motives across these assets since mid Market speculation that the Fed would slow its asset purchases sooner rather than later led to a sharp rise in bond rates. This anticipation was realised in the December 18 FOMC meeting when the Fed announced it would start to taper. The impact of the announcement on bond yields was muted, in part because the Fed simultaneously strengthened its forward guidance on the federal funds rate, reinforcing its commitment to keep rates exceptionally low. Given this strong commitment, government bond yields are expected to continue to rise only gradually in 2014, despite the slowdown in asset purchases. But investors may increasingly question this commitment as economic data continues to improve. The US fiscal situation has improved. Despite the unsettling economic impact inflicted by the US government shutdown in October, Congress has likely avoided some future turmoil by passing a small budget deal that substantially diminishes the likelihood of another shutdown early next year, although the debt limit still needs to be raised again likely by mid-march. Meanwhile, the deficit keeps on shrinking. Developments in the Euro Area have also generally been more favourable since the middle of Growth has stabilised in the second half of 2013 and continues to gain positive momentum. The German election was resolved with a Grand Coalition between the Conservatives and the Social Democrats, which should have potentially mixed medium term impacts on the German economy but little impact on the broader Euro Area. Chancellor Merkel re-emphasised the role Germany will have to play in addressing Europe's challenges: "We all know that the progress of our country is as dependent as ever on making headway in Europe and on enduringly overcoming the sovereign debt crisis in earnest." At the same time, she also reminded Germans of the need for measures to keep their own economy strong. In France, President Hollande acknowledged 2013 had been a "difficult year" as a consequence of the financial crisis, but pledged to cut government spending, reduce taxes and improve competitiveness (in particular, with regard to labour costs) in order to revive the French economy. Prime Minister Cameron argued that the UK was "turning the corner" in terms of economic performance and vowed that 2014 would see Britain become the "world's post Great Recession success story". Early 2013 we saw the Bank of Japan s new leadership delivering massive monetary stimulus resulting in a Yen/$ appreciation of 18% and a surge in the TOPIX of +40%. Any further shifts in the same direction for the Yen or the TOPIX will require further monetary stimulus, especially given the impact of the consumption tax hike on the economy and inflation in was also significant for China with an ambitious reform agenda, which suggests big changes ahead, some of which should help to ease the worrying growth in credit. The combination of still easy monetary policy and improving growth should, on balance, be a friendly one for equities and other risky assets, while at the same time preventing sharp increases in long term yields. On balance, 2014 should be another year in which equities and bond yields move higher together. Despite the outperformance of Developed Market assets, confidence is highest in the US, favouring assets exposed to the developed markets cyclical theme was a record breaking year of financial markets as economic uncertainty declined. The S&P 500 posted new highs in index level, Sharpe ratio, margins, earnings, inflows, dividends and cash balances. The S&P 500 closed 2013 at 1848, setting a new record on the final day of trading for a total return of 32.4%. Over the last 40 years only three years had a higher total return; 1997 (33.3%), 1995 (37.6%), and 1975 (35.9%). Goldman Sachs recommends focusing on how firms will spend their record cash balances as economic uncertainty continues to decline and that buybacks, cash M&A, dividends, and capex will all grow at a faster rate in 2014 than they did in In terms of financial market performances, December 2013 developed equity markets were up 2.2%, outperforming Emerging Markets which were down 1.4% in US$ terms. For the year, developed markets were up 27.4% versus emerging markets being down 2.3%. Europe rose 27% in the year, the S&P was up 32.4% and the UK FTSE 100 up 20.9% for the year. The MSCI China was up 4% in 2013, but Turkey and Brazil were down 26.5% and 26.7% respectively in US$ terms. The South African equity market was down by -5.8 % in US$ terms in Gold was down 3.63% in December and 27.3% in Since the beginning of 2013 gold has traded increasingly weaker, breaking down through several technical support lines in the last three months as investors have re-evaluated the likely timing of the first Fed taper. Physical demand from buyers in the two largest markets, India and China, has not emerged in sufficient size to provide a floor to the price. Consensus remains consistently bearish gold since February and a negative outlook is retained. In December, the US$ Palladium, Platinum and Silver prices declined 1.1%, 1.4% and 2.2% respectively. Among the selection of industrial metals, Zinc Cash LME (US$/tonne) (10.0%) was the best performing commodity. Brent Crude was down 0.9% in December In the past six months BRSPOT was up 8.78% but over the year is relatively flat at 0.48%. STONEHOUSE CAPITAL ABRIDGED MARKET AND ECONOMIC REPORT 3

4 SOUTH AFRICA Real economic outcomes for 2013 turned out to be weaker than anticipated this time last year, and this can mostly be attributable to weaker global economic growth in the first half of However, local economic factors have had their own part to play, with heightened industrial action and Rand weakness causing a huge loss of business confidence, notwithstanding the impact of a visual loss of confidence in the government. The key issue is that the local economy needs leadership and willpower to implement critical reforms which would overcome the structural weaknesses impeding the attainment of higher sustainable growth rates. Furthermore, increased inflationary pressures are eroding disposable income and consumer spending power. Consensus forecasts are looking for economic growth at or just under 3%, helped by an improving momentum in global growth. The continuation of exceptionally loose monetary policies in the world s largest economy (the US) has played its part in uplifting global economic conditions. Together with a much more competitive environment for South African exporters, following the 20%-odd depreciation of the Rand in the past year, the potentially more favourable global economic environment ought to help boost exports and, through this, overall economic growth. The biggest risk to the economic outlook this year is that the potential gradual tightening up of US monetary policy will not lead to a further sharp depreciation of the Rand which forces the domestic monetary authorities to raise interest rates by more than is currently anticipated. We should like to believe that the Rand will not depreciate substantially further. Reflecting the increased competitiveness of the Rand over the past year (as well as seasonal patterns) was a significant improvement in the trade balance, dramatically in November by R12.6bn, to a small surplus of R0.77bn, from a deficit of -R11.83bn in October. The surge of imports in the build up to the festive season, which one sees in September and October, fell away in November. This trend occurs seasonally during that month. Conversely, exports benefited from the depreciation of the Rand over the past year. Imports declined by -8.8% m/m whilst, conversely, exports rose by 5.3% m/m. Exports of non-minerals rose by 15.6% m/m in November due to the more competitive Rand and, more specifically, the recovery in vehicle exports following the ending of strikes. The publication of such an improvement in the balance of trade is likely to sow a seed in people's minds not to believe that the widening trend of the current account deficit is here to stay. This should assist in preventing the Rand from depreciating further in the short term. It will also entrench the belief that interest rates are not about to rise any time soon. The next MPC meeting is on 23 January and interest rates are expected to be left unchanged. The 38c/l increase in the petrol price on New Year's Day will have the effect of raising the inflation rate for January, compared with the most recent 5.3% inflation figure for November. For purely statistical reasons, by the second quarter of 2014, petrol will begin to exert significant upward pressure on the inflation rate unless the petrol price decreases substantially in the interim. Reflecting the slowdown in the growth of the economy compared with the same time in 2012 is the slowdown in the rate of growth in private sector credit extension and money supply growth. The growth in private sector credit extension declined 7% in November from 7.6% y/y, its lowest level in two years. Money supply (M3) declined to 6.3% y/y in November. Overall, however, economic growth and the willingness to borrow to finance that growth seems to have improved compared with what had been experienced in September and October. This is not altogether surprising, given that the damage to growth caused by strike activity in September and October had passed in November. Specifically, in the wake of the ending of strike activity in many sectors, month on month growth in unsecured lending to households, which had been negative in August and September and turned positive in October, rose again, albeit by less, in November. The low rate of growth in the monetary aggregates not only supports the view that overall economic growth is slow, but also that this is helping to limit the increase in inflation that one might have expected to have resulted from the Rand's steep depreciation during Pricing power is clearly very tight. In turn, the lower rate of growth in money supply should help to prevent the Rand from depreciating faster than it has been doing. Accordingly, these latest figures are supportive of the expectation that interest rates will stay put for a considerable period of time still, possibly even the entire duration of With regards to financial market performance, the MSCI World index gained 2.2% on a total return basis in US$ terms in December 2013, while the MSCI Emerging Markets index declined 1.4%. The best performing emerging market index from the selection of international equity indices in December 2013 was the MSCI India (+3.3%), while the worst performing was the MSCI Turkey (-15.1%). The FTSE/JSE All Share (ALSI) gained 2.98% on a total return basis in December The All Bond Index gained 1.10% and the Inflation Linked Bond Index gained 1.03%. Cash returned 0.43%. In December 2013, Large Caps (3.3%) outperformed Mid Caps (1.2%) and Small Caps (0.7%). Over a 10 year period, Industrials (+25.4%) outperformed Financials (+18.8%) and Resources (12.4%). Inflation, in the form of ECPI, has been 5.8% per annum. In December, the best performing sectors were Media (+12.6%), Household Goods (+11.7%) and Mobile Telecommunications (+9.3%). The worst were Gold Mining (-11.4%), Construction & Materials (-4.8%) and Technology Hardware & Equipment (-4.3%). The Rand weakened 1.9% against the US$ and 4.2% against the EUR in December From a foreigner s perspective, the Rand s depreciation against the US$ in December further reduced the performance of the ALSI (1.0% in US$ terms) and Bonds (-0.8% in US$ terms). Source: Goldman Sachs, Ecnometrix, Deustche Bank, JP Morgan and STANLIB. STONEHOUSE CAPITAL ABRIDGED MARKET AND ECONOMIC REPORT 4

5 Bay Wealth Management is an authorised FSP in terms of the FAIS Act, 2002 (14451) Bay Wealth Management is a member of StoneHouse Capital. Brenthurst Wealth Management is an authorised FSP in terms of the FAIS Act, 2002 (7833) Brenthurst Wealth Management is a member of StoneHouse Capital. Finmap Financial Services is an authorised FSP in terms of the FAIS Act, 2002 (10892) Finmap Financial Services is a member of StoneHouse Capital. Internasionaal Privaat Welvaart-Bestuur Hein Kruger Internasionale Fondsbestuur (Pty) Ltd is an authorised FSP in terms of the FAIS Act, 2002 (521) Hein Kruger Internasionale Fondsbestuur (Pty) Ltd is a member of StoneHouse Capital. StoneHouse Capital (Proprietary) Limited a subsidiary of Liberty Group Reg No: 2007/021785/07 Noble Private Portfolios (Pty) Ltd is an authorised FSP in terms of the FAIS Act, 2002 (568) Noble Private Portfolios (Pty) Ltd is a member of StoneHouse Capital. Three Oaks Capital (Pty) Ltd is an authorised FSP in terms of the FAIS Act, 2002 (43401) Seven Wood Trading 69 (Pty) Ltd t/a Three Oaks Capital (Pty) Ltd is a member of StoneHouse Capital. Zakly Investments One (Pty) Ltd. is an authorised FSP in terms of the FAIS Act, 2002 (15015) Zakly Investments One (Pty) Ltd. is a member of StoneHouse Capital.