The Weekly Focus. A Market and Economic Update 14 November 2016

Transcription

1 The Weekly Focus A Market and Economic Update 14 November 2016

2 Contents Newsflash... 3 Market Comment... 3 Other Commentators... 5 Economic Update... 7 Weekly Market Analysis... 9 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 Usually a recovery in commodity prices is positive for emerging markets. Hopefully this will still prove to be the case. Market Comment What an action-packed week just went by!! Wow, all over the place...one suspects more positive overall than not. The sages out there said the markets would have a relief rally if Clinton won the US election, but get hammered if Trump won. The popular press had painted an ogre-like picture of Trump, not helped by his various controversial utterances, although I am told that more women voted for him than voted for Hillary, which is intriguing, if correct. Anyway, markets surprised by rallying strongly in the US after Trump won, supposedly on the back of his intention to spend $500m or more on much-needed infrastructural renewal (roads, bridges etc.), plus his intention to cut very high corporate taxes (39%) and also cut individual taxes. The fact that the Republicans maintained a majority in both the Senate and the House of Representatives clearly has helped, although we re not sure how Trump will finance this infrastructural spending, because the $17 trillion US government debt is at over 100% of the GDP (up from 65% when Obama entered the White House). Perhaps he will engineer a cancellation of the debt acquired by the Fed during the quantitative easing programs, which would lower the debt to GDP - and then borrow anew. He is of course a master at raising finance for his various property deals, one advantage of having a creative entrepreneurial mind in the White House, rather than a career government employee. Our STANLIB Economist, Kevin Lings, has said that the one crucial element missing from the US economy in this recovery (and many other economies including ours) is the lack of infrastructural spending, so clearly markets are hoping this is set to change for the better, at least in the US. Of course, the recovery in commodity prices should help the mining and oil side too. Anyway, last week the stock markets in the US had their best week in 2 years, rising by +3.8% for the S&P 500 Index, by +3.8% for the tech-heavy Nasdaq Index and by double this amount, or +7.6%, for the smaller-cap Russell 2000 Index, which is now just -0.9% below its record high. That the Nasdaq rose as much as the S&P 500 did is surprising, because there was a big portfolio shift last week out of the expensive, hot IT shares (growth shares) like Facebook and Google into value shares like the banks and other financials, as well as cyclical industrial shares like Caterpillar. The rising cost of medium-term money assists the banks in boosting their profit margins. Our Naspers share has come under big selling pressure because of this switch, as has Tencent. Naspers is now down -17% from its record high in September. Apparently since the 1928 US presidential election race, the S&P 500 has rallied an average of +5.1% in the first full year after an election (+23% in both 2009 and 2013). At this stage the S&P 500 Index is just -1.2% from its August record high, while the MSCI World Index is -6.1% from its record high in May last year, 2015 (in dollars), or -9% in rands from the peak in May this year.

4 At the same time, the much talked-about and feared rise in bond yields (the medium-term cost of money) started in earnest, with the US 10-year yield shooting up by 43 basis points from 1.78% to 2.21% (price down) and the US 30-year yield up from 2.56% to 3%, both yields being the highest since early this year. This was in response to Trump s stated objectives, which, if he manages to carry them out only partially, should help in boosting inflation. Already the latest year-on-year wage inflation is up at 2.8%. Strangely this expectation of higher inflation has not helped precious metals like gold, silver and platinum, which all plummeted last week as the US dollar firmed on the back of rising yields. It seems that the worry factor about Trump may have receded a bit after his conciliatory victory speech and assisted in the sell-off of gold. This rise in the medium term cost of money spread to other markets around the world, including our 10-year bond yield, which jumped from 8.69% to 9.25%, the highest yield since August. Bonds have taken heat in the past week (lost value) and this hurt the JSE Listed Property sector too, so the latest situation in South Africa as far as the four assets classes goes is: All Bond Index +12.5% total return so far in 2016 Cash +6.3% SA Listed Property +5.0% JSE All Share Index +1.6% (+9.1% in dollars) So cash has risen up the rankings, even more so on a risk-adjusted basis. The crucial question of course is where to from here? Usually we follow the big market, the US S&P 500 Index, as do most other share markets, in the bull market as well as the bear market. Last week that didn t happen. Foreign investors dumped -R9.9bn of our bonds last week and -R6.7bn of our equities, with poor results from Woolies and Mr Price not helping, because they are widely held offshore, not to mention Naspers and the IT selloff. The MSCI Emerging Markets Index lost -3.5% last week, in dollar terms, partly of course because so many EM currencies took a knock, including ours, as fund managers sold emerging markets to invest back in the US on their good story. The rand lost almost -6% versus the dollar in the past week and -7.6% versus the resurgent pound. The MSCI Emerging Markets Index is still +9.5% (including dividends) in 2016, ahead of the +4.5% total return of the developed market MSCI World Index (both in dollars), but last week the EM Index got hurt. Usually a recovery in commodity prices is positive for emerging markets. Hopefully this will still prove to be the case. Despite the very strong dollar (at its highest level versus the euro since January) hurting the precious metal prices (and gold and platinum shares), the big industrial metals of copper and iron ore had big price gains over the past week on the possibilities for Trump s infrastructural spending. The iron ore price jumped +14% in dollars last week, while the copper price seems to have soared by +19%. This sent mining shares on the JSE into orbit, with Glencore +24% last week, Kumba +19%, BHP Billiton +18%, Assore +15%, Anglos +13%, South % and African Mineral Resources +11%. The JSE Mining Index rose by +11.5% in the week, breaking out and upwards on the charts, to be up +71% so far in 2016, as the big one, BHP Billiton, finally took off. The JSE Resources Index, which had traded sideways for some 7 months and had been up and down around the 18,000 level for some time, finally broke upward to the 19,000 level, despite a still-depressed Sasol share price, also Mondi. The Resources Index gained +8.9% last week to be up +39.1% so far in 2016 (see chart below).

5 Source: I-Net Bridge So portfolios that are light in Mining Shares will be looking very sad and vice versa. It is interesting to reflect over the past 10 months or so. So many investors were highly sceptical of the recovery in the mining shares and as the great, late Sir John Templeton said. Bull markets are born amidst massive pessimism, they grow on scepticism. The scepticism on mining shares this year reminded me so much of the scepticism of the global share recovery in 2009: ( It cannot be happening.it s a dead-cat bounce!). Well the democratic election of one Donald Trump has certainly re-ignited the rally! However, on the other side of our JSE ALSI coin, the industrial and financial shares have been very disappointing, dominated of course by the big rand hedge industrials that have struggled amongst other things from the stronger rand. The JSE Industrial Index (J257) is at its low for the year, having lost -0.5% last week and -9.6% so far in 2016, excluding dividends (-7.7% including dividends or -0.8% in dollars). The top 5 shares (60% of the index) are all rand-hedges, with Naspers by far the biggest at 27.2% of the index, followed by 14.6% for Richemont, 6.7% for British American Tobacco, 6% for MTN and 5.4% for Steinhoff. All 5 shares have had dismal years so far, with Naspers -17% from its record high in September and -0.9% so far in 2016, Richemont -13% in 2016, despite a very good bounce from its low point, British American Tobacco -10.7% in 2016, MTN -15.7% and Steinhoff -11.1%. Apparently the value of the investment in Tencent held by Naspers is now equal to 130% of the Naspers share price, which means Naspers is trading at about a 30% discount purely to its investment in Tencent, forget about all its other businesses. Meanwhile Financials are -3.9% so far this year, so are also struggling. Other Commentators US Market Analyst, Elaine Garzarelli Garza says that one of the hopes of the market under Trump is a reduction in the heavy burden of regulations that have crept in since the great recession. It is expected or hoped that financials and healthcare shares will benefit from reduced regulations. Garza s quants model reading rose to 74.5% last week from 71.5% due to the upgrade of the Bloomberg financial conditions index.

6 She calculates a fair value for the S&P 500 Index at 2,304, which is +6.5% higher. With credit expanding, wages accelerating and employment advancing, the US expansion has become self-sustaining. Over the past month, the ECB s balance sheet has increased by +1.9%, the BoJ s has increased by +1.5% and the BOE (Bank of England) by +5%. The global composite purchasing managers index or PMI (which includes manufacturing plus services) rose to 53.3% in October, up from its recent low of 50.8%, indicating a recovering global economy, gathering some steam. BCA Research All three of Trump s signature policy proposals fiscal stimulus (government spending), a more restrictive immigration policy and trade protectionism - are dollar bullish. The implementation of these policies could cause the US economy to overheat, forcing the Fed to raise rates more than it otherwise would. Trump is okay with a stronger dollar and higher interest rates, as long as these do not cause growth to stall. Investors have swung from being too bearish to too bullish about what a Trump victory means for equities. A tactically cautious stance is still appropriate. BCA believes that the flow of drugs into the US from the southern border (Mexico) is a legitimate problem. BCA says even if Trump only gets one quarter of the revenue and expenditure measures that he is seeking, this would be enough to boost aggregate demand growth in the US by +0.5% to +1% per year over the next two years. The current US immigration system is sub-optimal because it allows unskilled or low-skilled workers who enter the US illegally to evade detection and prosecution, while the highly skilled immigrants have to go through all sorts of hoops to gain entrance legally. So an excess of unskilled and low-skilled workers builds up, robbing Americans of such jobs. Paul Hansen Director: Retail Investing

7 Economic Update 1. The United States elected Trump as president, a political outsider. Overall, the outcome was largely unexpected, leading to a high level of political and economic uncertainty. 2. Namibia inflation increased in September. 1. Trump emerged victorious over Clinton in a Presidential election that defied expectations. In fact every single election poll in the past four months predicted a Clinton victory. Trump won more than 270 of the electoral votes, over-turning many states that were previously held by Democrats, but did not win the popular vote. The Republicans now have control of the Senate and the House of Representatives, which gives them control of the US Congress. It is important to point out however, that within the United States political system, a number of checks and balances exist to prevent the President from having free reign. A number of key economic policy issues were vigorously debated during the tumultuous election campaign. These included proposed changes in taxes, the extent of government spending, the need for additional trade restrictions, and the appropriateness of current monetary policy. Aligned to these areas of contestation, was the US s policy on immigration and the government s foreign policy approach to China and Russia. However, whether or not Trump will enact all of his campaign rhetoric remains to be seen. The United States is one of South Africa s largest trade partners (both in terms of imports and exports), and President-elect Trump made it clear in his campaign that he will look to review exiting as well as proposed foreign trade agreements. The economic implications are potentially far-reaching and could ultimately undermine South Africa s ability to export to the United States. In particular, the Trump presidency could also lead to a review of The African Growth and Opportunity Act (AGOA). In terms of the direct foreign aid that South Africa receives form the United States, Trumps victory is likely to create some anxiety and uncertainty. According to the US Global Development Policy, South Africa continues to be an important strategic partner of the United States receiving around $269 million in foreign aid from the United States each year. While Obama and Clinton have generally been sympathetic towards Africa, this approach could be reviewed by the new US administration. The outcome of the election is another clear indication of the rise of right-wing politics, in-line with the Brexit vote, and will be seen as an anti-establishment vote, as well as a vote for selfdetermination, the protection of jobs, and anger at how Washington has ignored the middle class American. 2. The Namibia Statistics Agency released inflation data for the month of October 2016, which indicates that inflation had accelerated to 7.3%y/y from 6.9%y/y in September 2016 and 6.8% in August This is the ninth consecutive month that inflation has been outside of the target band of 3% 6% in Namibia and is likely to stay so for the remaining two months of the year. Food inflation was recorded at 11.9% mainly due to increases in Fish (26.2%), Fruit (17.1%) as well as Bread & Cereals (13%). On a monthly basis, food price increases were lower at 0.6%m/m compared to 0.9%m/m in the previous period. Administered prices were recorded at 7.8% mainly as a result of increases in Electricity and Water tariffs. Together these categories constitute 40% of the inflation basket and drive the overall headline inflation figure. Transport inflation was recorded at 3.6%, mainly as a result of increased prices of vehicles and parts. Fuel prices are also expected to exert upward pressure on the figure, due to a low base effect. The stronger currency should offset this effect somewhat.

8 It is possible that the Namibian inflation rate could slow from the end of the first quarter of next year as food price increases slow. The strengthening currency could also help alleviate imported inflation. However administered prices could continue to rise above the inflation target as water and electricity shortages continue. It is possible that the Bank of Namibia will look past the current breach in the inflation target (with the expectation that it returns within the target next year) and keeps rates on hold. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

9 Weekly Market Analysis Currencies / Indices / Commodities Friday s Close 11/11/16 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

10 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 7.57% Effective: 7.86% 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 11 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: 8.07% 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 11 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 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: 8.69% STANLIB Extra Income Fund Effective Yield: 8.18% STANLIB Flexible Income Fund Effective Yield: 7.56% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.80% 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 11 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.

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 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