Contents Newsflash Economic Update Weekly Market Analysis STANLIB Money Market Fund STANLIB Enhanced Yield Fund...

Transcription

1 25 April 2016

2 Contents Contents... 2 Newsflash... 3 Economic Update... 3 Weekly Market Analysis... 6 STANLIB Money Market Fund... 7 STANLIB Enhanced Yield Fund... 7 STANLIB Income Fund... 7 STANLIB Flexible Income Fund... 8 STANLIB Multi-Manager Absolute Income Fund... 8

3 Newsflash Please note that Paul Hansen is currently on leave and there will be no commentary from him this week Economic Update 1. SA consumer inflation eased to 6.3%y/y in March 2015, helped by base effects. Food inflation continued to increase and is almost at 10%y/y, while tertiary education inflation is now down at 0%y/y. 2. SA Rand is now one of the best performing emerging market currencies in 2016, but so is the Russian Ruble and the Brazilian Real 3. US housing market activity have lost momentum in recent months, but 7 out of the 20 largest cities are experiencing new record high prices. 4. Hidden Mozambique loan could cascade into debt crisis. 1. In March 2016, South Africa s headline CPI inflation increased by a substantial 0.8%m/m. Despite the relatively large monthly increase, the annual rate of change in consumer prices slowed to 6.3%y/y, down from 7.0%y/y in February The annual increase in inflation during March was slightly lower than market expectations for a rise of 6.4%y/y. Food prices, in particular, rose fairly significantly during the month. In contrast, tertiary education inflation dropped to 0%y/y. Consumer inflation is still expected to move noticeably higher over the coming months, ending 2016 at an estimated 8.0%y/y. Food prices rose by a very substantial 1.7%m/m in March, pushing the annual rate of food inflation sharply higher to 9.8%y/y, up from 8.8% in February and 7.0%y/y in January All indicators suggest that food inflation is going to continue to increase over the coming months, reflecting partly the effect of the weaker Rand, but also the impact of the current drought conditions. We expect food inflation to end 2016 higher at around 14%y/y. (Food has a weight of 14.2% in the inflation basket). This will help to push overall consumer inflation higher to around 8% by end Encouragingly, tertiary education inflation dropped from 9.8%y/y in February to 0.0%y/y in March This largely reflects the impact of the fees must fall campaign. Education inflation has been one of the highest components of consumer inflation in recent years, averaging 9.2% in The most recent drop in tertiary education inflation means that total education inflation has fallen from 9.3%y/y in February 2016 to only 4.6%y/y in March. Primary and secondary school inflation remains relatively high at 8.0%y/y. Other noticeable changes in inflation during March 2016 included a 69c/l drop in the fuel price, which subtracted 0.1 percentage points from the monthly change in inflation. CPI excluding food and petrol is still within the inflation target at 5.7%y/y, while core inflation (CPI excluding food, fuel and electricity) eased to 5.4%y/y in March, down from 5.7%y/y in February Services inflation was recorded at 5.7%y/y, while administered price inflation has eased to 6.4%y/y helped by the lower petrol inflation. The inflation rate for pensioners was recorded above the target at 6.3%y/y.

4 For 2014 as a whole, SA CPI inflation averaged 6.1%, up slightly from an average of 5.8% in 2013 and 5.7% in For 2015, SA inflation averaged an impressive 4.6%. However, we are very concerned about a sharp upward trend in SA inflation during the second half of 2016, and expect inflation to average 6.7% for the year as a whole, ending 2016 at around 8.0%. This expected increase in inflation is due to a combination of factors, namely unfavourable base effects, a sharp increase in food inflation as a result of drought conditions and weaker exchange rate, higher electricity and water prices, a further increase in excise duties and the fuel levy in the 2016 National Budget, and an increased pass-through impact on inflation of the weaker exchange rate. Our inflation forecast model suggests this risk of higher inflation in 2016 could manifest more noticeably in the second half of The Rand has strengthened by 8.5% against the US Dollar since the beginning of 2016 (up until 19 April 2016). This makes it one of the best performing emerging market currencies in This follows a decline of 25.4% against the Dollar in Equally the Russian Ruble has risen by 11.6% against the Dollar in 2016, after a decline of 23.5% in 2015, while the Brazilian Real has gained 11.6% against the Dollar after a loss of 32.6% in In other words, the worst performing emerging market currencies in 2015 are tending to be the best performing currencies in Even the Argentinian Peso has managed to re-trace some of its lost ground in recent weeks but is still down year-to-date. Importantly, this improvement in the performance of emerging market currencies does not reflect an improvement in the economic fundamentals of these countries. Although there have been, perhaps, one or two positive economic developments in some of the emerging economies during the early part of 2016, this is not enough to suggest a massive turnaround in currency performance. Rather, the strength in many emerging market currencies appear to reflect a combination of factors that have led to an increase in bond and equity portfolio flows from developed markets back into emerging markets (after significant portfolio outflows in 2015). These factors include improved economic data out of China (which has helped to reduce investor concerns about further weakness in emerging markets) coupled with a more dovish tone from the US Federal Reserve as well as the extension of QE in the Euro-area and the ECB s decision to introduce a negative deposit rate. It also helps that many of the emerging market currencies (including the Rand) have been regarded as being significantly undervalued. This does not mean that the current reversal of emerging market capital flows will be sustained. Instead, the flows could prove to be extremely sensitive to changes in the growth outlook for developed markets (especially the US, which is facing an especially weak Q estimate of GDP) as well as the likelihood that the Federal Reserve will resume the process of normalising short-term interest rates before the end of Furthermore, a return of growth uncertainty in China could also interrupt emerging market capital flows and undermine the relative strength of these currencies in A range of US housing data suggests that housing market activity has lost some momentum in recent months. This includes a release of housing permits approved (for March 2016) as well as housing-starts (also for March 2016), which were both well below expectations. In particular, housing-starts for multi-family homes have fallen noticeably since the record high in There has also been a steady decline in home ownership levels since the peak prior to the global financial market crisis; at least until the first quarter of 2016, which saw a welcome rise in home ownership. Oddly, the sharp decline in the building of multi-family homes in recent months is perhaps a positive indication, when linked with the rise in home ownership in the first quarter of It could suggest that people have become less inclined to rent a home and more inclined to buy a home. (Home vacancy levels have dropped back in-line with the historical average). This argument is supported by the on-going increase in US house prices as well as the solid rise in the traffic of prospective home buyers.

5 While US house prices (measured across the 20 latest cities) are still not back to previous record highs, prices have risen strongly in reach of the past five months and recorded positive growth in 16 out of the past 18 months. Furthermore, seven of the largest twenty cities in the US have seen their house prices regain record highs in recent months. In conclusion, the latest slowdown in US housing starts will further undermine the already weak US GDP performance expectation for Q At this stage the estimate for Q GDP growth is around +0.3% for Q1 2016, but it could easily record a small decline. More positively, the mix of housing data would perhaps suggest that there could emerge a slow transition towards buying rather than renting residential property, which would support house price growth and perhaps encourage additional household spending. (The housing affordability index also supports this idea). We will continue to monitor key development in the US housing market. 4. Mozambique s foreign denominated debt rose sharply last week after it was discovered that the country had an undisclosed debt of nearly $1 billion. This has resulted in the International Monetary Fund suspending aid. Yields rose from 12.7% to 14.2% over a period of a week. This is following the default of EMATUM bonds which were guaranteed by government. The debt now sits on government s balance sheet. Subsequent to that Mozambique s credit rating was downgraded by rating agencies. The undisclosed debt could add more than 10 percentage points to the debt to GDP ratio, which sits at over 55%. The Bank of Mozambique s Monetary Policy increased interest rates to 12.75% from 10.75%. This was in response to inflation remaining above 12.3% y/y, which is well in excess of the bank s target of 5.6%. Inflation is likely to remain well above the target for the remainder of the year due to weak currency pass-through and higher food inflation from a drought in the region. The discovery of the hidden $1 billion in debt could result in a fiscal and debt crisis for the country, which enormous promise after the offshore gas discoveries. What could compound that is the weakening currency, which has lost almost 40% in value since the beginning of Around $25 billion in investments was expected in the economy over the next several years. The resulting uncertainty will make investor more hesitant, and future debt more expensive. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

6 Weekly Market Analysis Currencies/ Indices/ Commodities Friday s Close 22/04/16 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 Source: I-Net Bridge * MSCI - Morgan Stanley Capital International

7 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: Effective: 7.53% per annum 7.82% per annum 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 22 April 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: 7.59% 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 22 April 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: 8.37% 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 22 April 2016.

8 STANLIB Extra Income Fund Effective Yield: 7.92% 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. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. The above quoted yield will vary from day to day and is a current yield as at 22 April STANLIB Flexible Income Fund Effective Yield: 7.42% 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 22 April STANLIB Multi-Manager Absolute Income Fund Effective Yield: 6.32% 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 22 April 2016.

9 Glossary of terminology Bonds A bond is an interest-bearing debt instrument, traditionally issued by governments as part of their budget funding sources, and now also issued by local authorities (municipalities), parastatals (Eskom) and companies. Bonds issued by the central government are often called gilts. Bond issuers pay interest (called the coupon ) to the bondholder every 6 months. The price/value of a bond has an inverse relationship to the prevailing interest rate, so if the interest rate goes up, the value goes down, and vice versa. Bonds/gilts generally have a lower risk than shares because the holder of a gilt has the security of knowing that the gilt will be repaid in full by government or semi-government authorities at a specific time in the future. An investment in this type of asset should be viewed with a 3 to 6 year horizon. Cash Collective Investments Compound Interest Dividend Yields Dividends Earnings per share An investment in cash usually refers to a savings or fixed-deposit account with a bank, or to a money market investment. Cash is generally regarded as the safest investment. Whilst it is theoretically possible to make a capital loss investing in cash, it is highly unlikely. An investment in this type of asset should be viewed with a 1 to 3 year horizon. Collective investments are investments in which investors funds are pooled and managed by professional managers. Investing in shares has traditionally yielded unrivalled returns, offering investors the opportunity to build real wealth. Yet, the large amounts of money required to purchase these shares is often out of reach of smaller investors. The pooling of investors funds makes collective investments the ideal option, providing cost effective access to the world s stock markets. This is why investing in collective investments has become so popular the world over and is considered a sound financial move by most investors. Compound interest refers to the interest earned on interest that was earned earlier and credited to the capital amount. For example, if you deposit R1 000 in a bank account at 10% and interest is calculated annually; your balance will be R1 100 at the end of the first year and R1 210 at the end of the second year. That extra R10, which was earned on the interest from the first year, is the result of compound interest ("interest on interest"). Interest can also be compounded on a monthly, quarterly, half-yearly or other basis. The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. The higher the yield, the more money you will get back on your investment. When you buy equities offered by a company, you are effectively buying a portion of the company. Dividends are an investor s share of a company s profits, given to him or her as a part-owner of the company. Earnings per share is a measure of how much money the company has available for distribution to shareholders. A company s earnings per share is a good indication of its profitability and is generally considered to be the most important variable in determining a company s share price.

10 Equity Financial Markets Fixed Interest Funds Gross Domestic Product (GDP) Growth Funds Industrial Funds Investment Portfolio JSE Securities Exchange Price to earnings ratio Property Resources and Basic Industries Funds A share represents an institution/individual s ownership in a listed company and is the vehicle through which they are able to share in the profits made by that company. As the company grows, and the expectation of improved profits increases, the market price of the share will increase and this translates into a capital gain for the shareholder. Similarly, negative sentiment about the company will result in the share price falling. Shares/equities are usually considered to have the potential for the highest return of all the investment classes, but with a higher level of risk i.e. share investments have the most volatile returns over the short term. An investment in this type of asset should be viewed with a 7 to 10 year horizon. Financial markets are the institutional arrangements and conventions that exist for the issue and trading of financial instruments. Fixed interest funds invest in bonds, fixed-interest and money market instruments. Interest income is a feature of these funds and, in general, capital should remain stable. The Gross Domestic Product measures the total volume of goods and services produced in the economy. Therefore, the percentage change in the GDP from year to year reflects the country's annual economic growth rate. Growth funds seek maximum capital appreciation by investing in rapidly growing companies across all sectors of the JSE. Growth companies are those whose profits are in a strong upward trend, or are expected to grow strongly, and which normally trade at a higher-thanaverage price/earnings ratio. Industrial funds invest in selected industrial companies listed on the JSE, but excluding all companies listed in the resources and financial economic groups. An investment portfolio is a collection of securities owned by an individual or institution (such as a collective investment scheme). A funds portfolio may include a combination of financial instruments such as bonds, equities, money market securities, etc. The theory is that the investments should be spread over a range of options in order to diversify and spread risk. The primary role of the JSE Securities Exchange is to provide a market where securities can be freely traded under regulated procedures. Price to earnings ratio or p: e ratio is calculated by dividing the price per share by the earnings per share. This ratio provides a better indication of the value of a share, than the market price alone. For example, all things being equal, a R10 share with a P/E of 75 is much more expensive than a R100 share with a P/E of 20. Property has some attributes of shares and some attributes of bonds. Property yields are normally stable and predictable because they comprise many contractual leases. These leases generate rental income that is passed through to investors. Property share prices however fluctuate with supply and demand and are counter cyclical to the interest rate cycle. Property is an excellent inflation hedge as rentals escalate with inflation, ensuring distribution growth, and property values escalate with inflation ensuring net asset value growth. This ensures real returns over the long term. These funds seek capital appreciation by investing in the shares of companies whose main business operations involve the exploration, mining, distribution and processing of metals, minerals, energy, chemicals, forestry and other natural resources, or where at least 50 percent of their earnings are derived from such business activities, and excludes service providers to these companies.

11 Smaller Companies Funds Value Funds Growth Funds Smaller Companies Funds seek maximum capital appreciation by investing in both established smaller companies and emerging companies. At least 75 percent of the fund must be invested in small- to mid-cap shares which fall outside of the top 40 JSE-listed companies by market capitalisation. These funds aim to deliver medium- to long-term capital appreciation by investing in value shares with low price/earnings ratios and shares which trade at a discount to their net asset value. Growth funds seek maximum capital appreciation by investing in rapidly growing companies across all sectors of the JSE. Growth companies are those whose profits are in a strong upward trend, or are expected to grow strongly, and which normally trade at a higher-thanaverage price/earnings ratio. Sources: Unit Trust and Collective Investments (September 2007), The Financial Sector Charter Council, Personal Finance (30 November 2002), Introduction to Financial Markets, Personal Finance, Quarter , Investopedia ( and The South African Financial Planning Handbook 2004.

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. Portfolios are valued on a daily basis at 15h30. Investments and repurchases will receive the price of the same day if received prior to 15h30. 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