The Weekly Focus. A Market and Economic Update 7 May 2018

Transcription

1 The Weekly Focus A Market and Economic Update 7 May 2018

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 4 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 Recent dollar strength has put pressure on most emerging market currencies and on metal prices Market Comment The US dollar has continued its fight-back and has now gained over +4.5% versus the euro since its low on 15 February of $1.251 per euro ($1.193 today). The dollar is still down -9.2% from exactly one year ago versus the euro though. But recent dollar strength has put pressure on most emerging market currencies and on metal prices. The rand fell from 12 to the dollar two weeks ago to on Friday (similar to last June levels) and has recovered to this Monday morning, although it is now down about - 1% in The dollar has gained +5.7% versus the pound since its low of $1.433 three weeks ago and is now almost back at the end 2017 level at $ The one dollar-priced commodity that has bucked the trend is the oil price, which is up +12.7% in dollar terms in It is at a 3.75 year high in rand terms (+13% in 2018), while Sasol is up +6.1% in rands in Oil has firmed along with the global economic recovery, with excess oil having been mopped up. However, politics is adding a premium to the oil price, with Trump saying he will decide within the next week whether to re-impose sanctions on Iran. Venezuela s oil production is in trouble too, way down. Global stock markets have continued to drift closer to the lows of the year, with the trade discussions between the US and China being the biggest concern. The MSCI World Index is down -7% from its record high in late January, over 3 months ago, while the MSCI Emerging Markets Index is down -10.8% from that date, aggravated by weaker currencies. This index is now negative in It fell -1.8% last week. There has apparently been quite a lot of selling of the Emerging market exchange traded fund (ETF) in the US, which put pressure on Tencent (5% of the ETF) and also Naspers (almost 2% of the ETF). On the local front, the All Bond Index continues to lead the risk-oriented asset classes, with +6% so far in 2018 (a bit weaker of late as bond yields rose from 8% to 8.32%), while the ALSI has so far returned -2.3% in 2018 and SA Listed Property is back at -15.2% after slipping over the past week or so. The JSE All Share Index actually had a very good April, returning +5.4%, as did SA Listed Property (+7.7%). Resources were the standout performer in April with +8.6%, with General Mining (Anglo, BHP and Glencore) returning +10.7%. Last week the JSE Mining Index reached a 3 month high and is +2.1% in 2018 (+4.4% total return), while the JSE Financial & Industrial Index is -4% (Naspers -15.8%). In the US the S&P 500 Index is -0.2% so far in 2018, excluding dividends, which is not bad at all considering its superb 2017 (+19.4%). The Information Technology sector is back in the lead at +5.7% so far this year, followed by the +5.5% return of the Consumer Discretionary sector, then the +2.3% of the Energy sector. All other 8 sectors are still in negative territory in 2018, with Consumer Staples the worst at -12.5%, then Telecomms at -7.7% and Real Estate -4.9%. Financials are -2%. First quarter 2018 earnings have been superb, yet have so far had very little positive effect on shares. Credit Suisse says 86% of the S&P 500 Index have now reported earnings for Q1. It appears that Revenues are on track to be +8.3% year-on-year, while earnings per share are on track to rise by a phenomenal +25.1% year-on-year.

4 Lower taxes will contribute less than one third of this increase (7.5% of the +25.1%), meaning that excluding the reduction in taxes, earnings would still be up +18.1% year-onyear. Share buybacks contribute +1.6% of the +25.1% earnings growth. The Energy sector has the best earnings growth of +78% year-on-year, thanks mostly to the higher oil price (+52% in the past twelve months). Materials earnings is up +22%, with Metals & Mining +73%, while Industrial earnings are +25% and Financials are also +25%. Technology earnings are +31% and over 90% of companies have beaten expectations. So when will the stock market start to respond positively to these great earnings? Maybe this time the May to October period will be a positive period, because of the poor performance over the past 3 months. Obviously we need to get past the trade discussions reasonably unscathed and the Iranian sanctions too. Bank of America Merrill Lynch says in 3.5 months, on 22 August, this S&P 500 bull market will become the longest one in history. Other Commentators US Market Analyst, Elaine Garzarelli The Quants model reading rose to 77.5%, as the number of bullish investors declined (a contrary indicator). After a strong run-up last year, shares are taking a breather so far in 2018, creating a good opportunity for long-term investors to invest further. Investors are currently worrying about Fed tightening, trade risks and a possible acceleration in inflation. Shares do not normally peak until after the Fed has completed raising interest rates, normally just before a recession starts. Fair value for the S&P 500 Index is now at 2,808, which is +5.4% above current levels. The S&P 500 Index generally rises above fair value by 20-50% when the model s indicators are bullish. The April employment report showed a modest +164,000 new jobs (net), a slow and steady rate. Average hourly earnings were weaker than expected, up +2.6% year-on-year, suggesting that the labour market is not overheating or showing an acceleration in compensation pressures. Technology, globalisation and competition are helping to hold down wages. Economic stats this week continue to indicate a solid economy with mild inflation. The dollar has bounced because of rising interest rates in the US, coupled with no sign of hikes in most other developed markets. The surprising fall in core European inflation to just +0.7%, way below the 2% target, extends the zero interest rate period in Europe. BCA Research Weaker global growth is usually bullish for the US dollar. Growth seems to be pulling back a tad in the world outside the US. BCA things the dollar s rally can continue to $1.15 in the next 3-6 months, from the current $1.193, although they were certainly wrong about expecting dollar strength last year. The chart below, courtesy of JP Morgan, shows the Emerging Market Currency Index having weakened lately from 72 to 68.

5 If BCA is right about the dollar rallying all the way to $1.15 to the euro, then emerging market currencies must also be at risk of weakening further. BCA also thinks the global equity markets are still at risk of declining further in the shortterm; however BCA expects these risks to fade as global growth stabilises at an abovetrend pace. This should set the stage for a rally in developed market shares into year-end. The New York Fed model says that a 10% depreciation in the dollar would be expected to raise the level of real GDP by +0.5% in the first year and by a further +0.2% in the second year. On bond yields, BCA s view is that if bond yields pierce the 3% level, this will not be an impediment to rising share prices. Yields are still low enough relative to history. Meanwhile, BCA says anecdotal evidence suggests that US-China relations will worsen before they improve and that Trump will walk away from the 2015 Iranian nuclear deal, i.e. he will re-impose sanctions on Iranian oil. Paul Hansen Director: Retail Investing

6 Economic Update 1. SA petrol price increased by 49c/l on 2 May 2018 attributed to the rand s depreciation on average against the US dollar during the period under review as well as an increase in the international price of crude oil. 2. SA Rand has been the second worst performing emerging market currency in the past month. Rand weakness is only partly due to Dollar strength. 3. US added a modest jobs in April, slightly below expectations. US employment now 10 million above previous peak. Unemployment rate fell to 3.9%, but wages up only 2.6%y/y. Overall a solid report. 4. Kenya inflation eases further, opportunity for further rate cuts coming to an end for Kenya and the region. 5. April PMIs show a mixed bag for Sub-Saharan Africa however all countries are in expansionary territory. 1. The Department of Energy announced that the petrol price for both grades of petrol 93 and 95 ULP and LRP will increase by 49c/l today, 2 May The latest announcement means that the price of 95 Octane (LRP, Gauteng) will now cost R14.97 per litre, exceeding the record of R14.76 in December last year and the highest ever recorded. The price of diesel (0.05% sulphur) will increase by 59c/l while diesel (0.005% sulphur) will increase by 58c/l. Paraffin will rise by 69c/l (retail price), and gas will jump by a substantial 70c/kg. The Rand depreciated slightly against the US Dollar during the period under review, on average, when compared to the previous period. The average Rand/US Dollar exchange rate for the period 28 March 2018 to 24 April 2018 was R11.97 compared to R11.84 during the previous period. This led to a slightly higher contribution to the Basic Fuels Price. The average international product prices of petrol and diesel also increased during the period under review. The slight weaker exchange rate added 7c/l to the price of petrol, coupled with a higher oil price which added 42c/l to the fuel price. In the last two months, the petrol price has increased by R1.21c/l. In addition, the current average under recovery on the fuel price has been 94c/l for the past month which means that the petrol price will in all likelihood increase further by around 40 to 50c/l next month. The latest price increase will add 0.2 percentage points to the inflation rate in May. This, together with the recent 1 percentage point increase in the VAT rate, suggests that SA consumer inflation with start to drift higher, after reaching a low of 3.8%y/y in March Year-to-date (1 May 2018) the Rand has depreciated by a relatively modest -2.1% against the US Dollar. However, as recently as 27 March 2018 the Rand was up a compelling 6.3% against the USD. This means the currency has lost a substantial -7.9% of its value against the USD in a little more than a month. On a trade-weighted basis the Rand weakened by -1.5% in the first four months of the year, and by -3.2% in the month of April, highlighting that the Rand s weakness is only partly due to Dollar strength. Back in March 2018 many analysts had expected the Rand to continue to strengthen against a weakening Dollar. However, in the past month the US Dollar strengthened by around 3% against the Euro (after weakening by -2.5% in the first three months of the year), and at the same time most emerging market currencies have come under pressure. This pressure appears to be concentrated in emerging economies with weaker economic fundamentals, for example Russia, Turkey, Brazil, Argentina and South Africa. In terms of South Africa s economic fundamentals it seems fair to argue that although there has been an improvement in political leadership, a fundamental change in the government s approach to managing key SOEs and a more disciplined national budget relative to the October 2017 MTBPS, significant challenges remain.

7 These include, inter alia, the need to demonstrate more success in reforming key SOEs (for example SAA), on-going policy uncertainty (for example the mining charter and land redistribution), a lack of private sector capital expenditure, including maintenance capex, a relatively large current account deficit, and an unfortunate increase in the VAT rate as well as other taxes that will tend to dampen economic activity. Lifting South Africa s growth rate up above 3% on a sustained basis is going to require a significantly larger effort than is currently evident, including the co-ordination of policy efforts across key government departments. This does not mean that we expect the Rand to weaken significantly further in Instead, we have kept our currency forecast unchanged at R13.00/$ by end of 2018, which suggests a modest weakening bias for 2018 as a whole. 3. In April 2018, the US unemployment rate fell to 3.9%, after remaining unchanged at 4.1% for six consecutive months. This was fractionally better than market expectations, which was, once again, for the unemployment rate to fall to 4.0%. The US unemployment rate is at its lowest level since December The labour market participation rate edged lower to 62.8% from 62.9%. Overall, the participation rate remains extremely low on a trend basis, which means that the decline in the unemployment rate is still somewhat misleading given that the participation rate remains well below its historical average. Non-farm payrolls rose by a slightly disappointing jobs in April 2018, which was below market expectations for an increase of (Bloomberg). Despite the disappointing increase in employment, over the past 6 months, job gains have averaged a remarkable per month. The level of US employment is an impressive 10.0 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 18 million jobs since the financial crisis ended. The payroll data for March and February 2018 was revised up by a combined jobs. The private sector gained jobs in April 2018, after gaining a revised jobs in March The private sector had gained employment in each of the past 98 months at an average of jobs a month and is at a record high, comfortably surpassing the previous peak in January In April 2018, average hourly earnings for all employees on private nonfarm payrolls rose by a mere 4 cents to $ Over the year, average hourly earnings have increased by 67 cents, or 2.6%. The growth in US wages remains very modest given the low unemployment rates, record number of job openings and ongoing rate of monthly job gains. However, the modest wages growth should continue to ease concerns about a possible rapid rise in wage inflation that leads to much higher inflation, forcing the Federal Reserve to tighten rates more aggressively. As the US continues to add jobs on a monthly basis, it is logical to expect that wages will continue to trend higher, creating some upward pressure on inflation and interest rates. Clearly, however, the pace of this upward bias remains modest. Overall, while the number of jobs added in April 2018 was a little disappointing, the labour market report was solid enough including a further decline in the unemployment rate. The trend growth in the labour market coupled with solid business activity data, strong confidence indicators, as well as Trump s fiscal stimulus package, should encourage the Federal Reserve to continue to hike interest rates. Especially since the US inflation rate is now above 2% and expected to maintain a slight upward bias over the coming months. Consequently, we expect the US Federal Funds Target Rate to increase three more times in 2018, and by 25bps on each occasions, with the next rise taking pace in June Obviously, the current modest pace of wage gains remains something of a mystery, but it provides the FOMC with a degree of flexibility as to how quickly they normalise interest rates.

8 4. Kenya s inflation rate slowed even further to 3.7% y/y in the month of April 2018 from 4.2%y/y in March. This is the lowest that inflation has been in Kenya in over 5 years. Inflation was recorded at 1.35%m/m. The lower inflation rate was driven by lower food inflation as the nation is recovering from a drought. Food inflation has now fallen to 1.6% y/y from 2.2% in the previous month. This is down from the peak of 21.5% in 2017 which was caused by the drought of 2016/17. The recent rains have caused a moderation in food price increases which has helped overall inflation. The latest food inflation print is the lowest since October All other items were well with the target range with the exception of the Housing, Water, Electricity, Gas and Other Fuels category which increased by 11.8% y/y with charcoal and cooking oils fueling the price increase. This now brings the real rate to 5.8% which gives the Central Bank of Kenya even more room to cut rates. However the window is closing fast especially considering that the Kenyan inflation rate troughs in this quarter, and starts trending upwards again. Inflation has been moderating across the whole Sub-Saharan Africa region as currencies have stabilized supported by improving current account balances. However we are coming close to the end of the disinflation cycle. This means that the window to cut interest rates is closing especially considering that developed markets are in a tightening cycle (with Europe due to start soon). As from the second half of 2018 we expect fewer interest rate cuts if any. With inflation at this low point it is likely that the Central Bank of Kenya will continue on its easing cycle with much reluctance. The monetary policy transmission mechanism in Kenya has been disrupted by the interest rate cap regulation (which legislates a maximum that banks can charge on lending rates and minimum offer on deposit rates). This has led to a fall in lending to the private sector in the country. At this point there is enough evidence to suggest that it has done more harm than good which should bring Kenyan authorities closer to deciding on an amendment on the regulation. Despite all of this we expect another 50 basis points cut to 9% at the next meeting. 5. The latest PMI figures reveal that the recovery across the region continues however, it is starting to soften in some regions. After a decent first quarter across the board, PMIs are starting to rollover somewhat, consistent with the global figure. A figure above 50 denotes expansion and below 50 shows contraction in private sector activity. Kenya s PMI has recovered from a record low in the third quarter of last year to 56.4 in April. This is up from last month s already impressive figure of Despite the interest rate cap regulation which has stifled credit growth in the private sector, there is a strong signal of underlying demand. This is whilst inflation has reached a five year low (even though it was largely weather driven as food prices stabilized). Kenya s PMI has now accelerated for the last 6 months. Job creation in the economy was also strong which should offset the lower credit advances. Agricultural activity will also remain supportive to growth this year as the country is recovering from last year s drought. Uganda continued its expansion in April 2018 albeit at a slower pace. The latest PMI print of 51.8 was lower than March s print of 53.2 however this still represents 15 straight months of expansion in private sector activity. Agriculture and construction were the best performers as better weather conditions helped. Consumer related activity slowed which is consistent with the lower credit growth in the region. This could explain the lower inflation figures as demand has been weak from the consumer front. Growth is expected to remain steady as agriculture and infrastructure led activities continue to support. Zambia s PMI improved somewhat to 51.2 from 50.7 in March, following the sharp contraction of 47.1 in February. Expansion in business activity for the first time in four months supported the overall headline figure. Jobs growth was flat for April after contracting in March which remains a concern.

9 Zambia s economy is likely to have had a weaker first quarter with some recovery expected in the second. A weaker Zambian currency should start affecting inflation as pass-through from currency movements to prices is quite strong. We remain concerned about economic activity in Zambia especially as the budget comes under pressure. Ghana s PMI fell slightly to 54.5 from 55.2 in March which is still a healthy expansion. Ghana s private sector expansion has now been uninterrupted for the last 26 months. This is supported by the disinflationary trend, subsequent monetary policy easing and the high real rates the country still has. The increase in cocoa prices should help boost the improving trade balance even further. The strong growth figures are not translating into better fiscal matrices quickly enough though. This is concerning and shows the improvements that are desperately needed in tax revenue mobilization. After a solid first quarter Nigeria s PMI maintained the momentum by growing recording a figure of 58.1, slightly down from last month s record figure of 58.8 but is still the second highest on record. The higher oil price and production levels have helped in increasing the availability of foreign currency which has translated into more robust economic activity. Both oil and non-oil exports have pushed up the export orders figure. Prices are moving sharply downwards but we suspect this could slow in the middle of the year. Nigeria s PMI tends to be strongly correlated with overall GDP. At this rate Nigerian growth has the potential of performing better than expectations. Overall the latest data shows that the recovery in SSA is still on track but the outlook still remains uncertain and divided across the region. External risks remain the tightening of monetary policy by the Fed which should make external borrowing more difficult and expensive. Country specific risks are still the politics, deteriorating fiscal balances and lack of credit growth in the private sector. 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: 6.59% Effective: 6.80% 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 04 May 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: 7.78% 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 04 May 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: 8.43% STANLIB Extra Income Fund Effective Yield: 7.93% STANLIB Flexible Income Fund Effective Yield: 6.23% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.50% 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 04 May 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