Contents Newsflash Market Comment Other Commentators Economic Update Weekly Market Analysis... 10

Transcription

1 21 September 2015

2 Contents Contents... 2 Newsflash... 3 Market Comment... 3 Other Commentators... 5 Economic Update... 6 Weekly Market Analysis STANLIB Money Market Fund STANLIB Enhanced Yield Fund STANLIB Income Fund STANLIB Flexible Income Fund STANLIB Multi-Manager Absolute Income Fund... 12

3 Newsflash Despite volatility in all risk-oriented asset classes of late, SA Asset Class returns so far in 2015 show SA Listed Property still way ahead Market Comment Source: I-Net Bridge After plenty of volatility in all risk-oriented asset classes of late, the picture above of SA Asset Class returns so far in 2015 shows SA Listed Property still way ahead at +13.6% (total return), followed by the All Share Index +5.3%, then Cash at +4.5%, then the All Bond Index at +3.3%. All 3 risk-related asset classes have perked up of late, last week in particular. Property is now once again not far from a record high, although it is back where it was in early March. The All Share Index had one of the best returns in the world last week, +4.3%, thanks to the bid for SAB, which gained about 20% (now the biggest share on the ALSI at 10.7% and 12.7% of the ALSI 40), plus a jump in Richemont on better sales and a bounce in some financials. SAB is now up 23% in rand terms this year, or +8% in dollars. It would be very sad to lose the share as an investment on the JSE. The share has returned about +14% average annual compound growth (before dividends) since the end of 1993 (i.e. the new SA), so for the past 22.5 years. Add dividends of about 3% or so and you have a total return of around +17% per year compounded for 22.5 years. This +14% before dividend annual average compound return compares with a return of +13% per year for the JSE Financial & Industrial Index over this period or +11.8% for the All Share Index. For a company of its size, that is very good. The S&P 500 Index has not risen for 7 consecutive years over the past 150 years or so. This year, after 6 years of rising, so far it is down -4.9%, similar to the MSCI World Index s -4.6%, both in dollars. The European market is slightly up in euro terms so far in 2015 (but down 6% in dollar terms), while London s FTSE is -7% in pounds this year and the Nikkei is +3.5% in yen and in dollars. Because of the rand s big fall so far in 2015 (-15.6% versus the dollar, -15.3% versus the pound and -8% versus the euro) the offshore funds still look good in rand terms, with the STANLIB European Equity Feeder Fund +15.5%, the STANLIB Global Equity Feeder Fund +12.7% and the STANLIB Global Property Feeder Fund +8.8% (-6.7% in dollars).

4 The Brent oil price is -16.5% this year, gold is -4%, platinum -19% and the US 10-year yield is lower by 4 basis points at 2.13% versus the end of Last week s US Fed decision to hold off on hiking rates has caused a bit of risk-off where nervous nellies are selling equities and buying bonds, interpreting Yellen s comments and the Fed s decision as negative for global economies and equities (hinting at worse than expected). However, delaying a rate hike makes sense at this stage simply because of all the ructions of the past month or so (market sell-off, weaker Chinese and other emerging market numbers, big falls in emerging market currencies and shares, lower oil and commodity prices leading to lower inflation etc. ). So it is probably a short-term sell-off being witnessed in markets now, providing an opportunity for the bold and brave, but staying conscious of the fact that the bull market, if it is still alive (still alive for the likes of SA Breweries), is over 6.5 years old now. The fall in the US ten-year bond yield to 2.13% from 2.29% last week, along with other bond yields around the globe (meaning the bond prices rose), is good news for global listed property shares, still down almost 7% in dollar terms in 2015 and back at May 2013 levels in dollars (yes, 2013), with a forward dividend yield of 4%-plus. Bond yields offshore are not as key for offshore listed property shares as is the case locally, but they still do influence them because of the comparison of bond yields with the dividend yields. Global growth is a big factor for offshore listed property shares, meaning more employment and more demand for space, better retail spending, holiday spending etc. Meanwhile the fact that interest rates remain so low is good for the gold price, which has perked up by around $15 or so dollars over the past few days. Because gold pays no interest, it does better when money markets pay little or no interest, because an investor buying gold is then not sacrificing much interest by being in gold instead of in a money market or interest bearing account. Although some of us at STANLIB (a minority it must be said) remain positive on the future of this 6.5 year old bull market, our STANLIB Balanced team, managing the STANLIB Balanced and Balanced Cautious Funds, is a lot more cautious and concerned about a possible crash in the next year or two. On their recent roadshow, they covered this extensively. They are underweight in equities, both locally and offshore, holding only 33% of the STANLIB Balanced Fund in local equities, quite heavily skewed to the global companies that trade on the JSE, plus 20% in offshore equities, with a partial hedge in place in case of a bigger fall in offshore equities. They also hold 26% in money market and income fund, plus 5% in dollar cash. After such a long bull market and concerns over China and emerging markets like Brazil, Russia, Turkey and SA (amongst others), it is understandable that views within one house may diverge at this stage, especially where we don t have a house view as such, because we have different franchises with different mandates. No-one has a monopoly on the future, but generally speaking it does make sense to lower one s risk profile after so many good gains (except for mining and construction shares) over the past 6.5 years; plus our money market and income funds are paying fairly decent rates of interest, especially where one s funds are tax free.

5 Other Commentators US Market Analyst, Elaine Garzarelli Garza sees the latest global stock market correction as similar to the 1997 correction, because her quants indicators were at the same level then, as they are now. She still believes the bottom was reached on August 25 th. The S&P 500 is currently 5% higher than that level. Various pullbacks since then are merely attempts at retesting that low, which is not unusual after a sharp dip. She interprets the Fed s delay in hiking as a response to other countries (including the IMF) asking the Fed to hold off. It was not because the US economy is too weak. Yellen said the US economy is performing well and the Fed expects it to continue to do so. Garza s quants model is still bullish at 80% (out of a total possible 100%), so she remains a buyer of equities into the dips and assesses the S&P 500 Index as 12% undervalued at present. Her contrarian indicator shows that only 27% of US financial advisors are bullish, which is still extremely low, indicating a continuing high degree of pessimism out there. The CPI inflation in both the UK and in France was 0% in August, while the US CPI was at +0.2% year-onyear in August. US petrol prices are at $2.35 per gallon versus $3.40 a year ago. This -$1.05 in the petrol price translates into an annual savings of $200 billion for US consumers. US housing remains healthy, including new homes being built (housing starts are +14.9% y/y), while multi-family starts are +19.8% y/y (blocks of flats). Garza looks for steady and solid growth ahead with low inflation. She does not expect a recession in the US and expects it to be years away. BCA Research They expect the Fed to raise rates in December, but there is a one-in-three chance that the first rate hike could be postponed to 2016, because of ongoing problems in emerging markets. BCA recommends staying tactically cautious on equities because of the risks surrounding emerging markets, but to use any correction of 10% or more in developed market shares, like we had recently, as an opportunity to increase risk. They do not expect Treasury bond yields to spike sharply and in fact recommend being slightly overweight duration. Over the next six to twelve weeks, BCA sees bond yields trending downwards in the US, UK and Euro areas (prices up). Treasuries offer valuable protection against persistent deflation tail risks, meaning deflation causes yields to decline, prices to rise (as happened so vividly in Japan in the 1990 s and 2000 s). The world has too many goods chasing too few consumers, i.e. insufficient demand, too much savings, which is a deflationary risk and deflation is the biggest risk in the world at present (good for bonds, bad for profits and equities). Despite the 5% gain in US shares since the 25 th of August, the BCA financial conditions index has still tightened by the equivalent of around 50 to 100 basis points (i.e. 0.5% to 1%) of rate hikes over the past 12 months, mainly thanks to the stronger dollar and higher credit spreads (gap between government bond yields and corporate bond yields). Central banks outside the US hold 64% of their foreign exchange reserves in US dollars, the bulk of which is parked in US Treasuries, with 74% of these holdings having a maturity of under five years, while only 4% have a maturity of in excess of ten years. Paul Hansen Director: Retail Investing

6 Economic Update 1. SA household income and spending continued to slow in Q2 2015, but has avoided a return to recession conditions. Sustained and extensive job losses will push the household sector into recession. 2. SA fixed investment is stagnating with growth of only 1.0% in Q Private sector investment has actually declined in the past 18 months. Lack of confidence is a key factor. 3. US Federal Reserve decided to leave interest rates unchanged. The Fed is concerned about the impact of global economic developments on the US, as well as the sustained low inflation rate. 4. Nigeria's inflation rate continues to rise. 1. During Q2 2015, SA consumer spending rose by a very modest 1.2%q/q, annualised, down from growth of 2.4%q/q in Q This is well below the average rate of growth in consumer spending for the past five years of 3.1%. Unsurprisingly, household disposable income also slowed in Q to a growth rate of only 1.6%q/q, down from 2.2%q/q in Q The growth in household disposable income (which is measured as household income after tax) is also well below the five year average growth rate of 2.7%. Overall, it is clear that consumer activity has been trending weaker in the past two years and is expected to remain under pressure during the next 18 months, but possibly avoid a return to outright recession conditions; unless there are significant job losses. In 2014 consumer spending grew by a mere 1.4%, down from a more robust growth rate of 2.9% in 2013, and 3.4% in In 2015 and 2016 consumer spending is forecast to grow at an average of only 1.6%, before improving somewhat in This forecast is highly dependent on possible tax hikes in the February 2016 National Budget, further increases in electricity and other prices, the risk of additional job losses in the corporate sector and subdued consumer confidence. The risks to the forecasts are, unfortunately, weighted to the downside. Extensive job losses would, undoubtedly, push household consumer activity into recession. Because consumer spending represents more than 60% of the SA economy, the relationship between consumer income and consumer spending can be considered one of the most important economic variables in South Africa. The relationship is especially strong because consumer savings is essentially zero on a quarterly basis. This means that any change in income is immediately reflected in a change in consumer spending, irrespective of changes in consumer confidence or interest rates. The robust increase in consumer spending during the period from the beginning of 2010 to the end of 2012 was mainly as a result of a strong rise in real household disposable income. In particular, disposable income grew by 3.7%, real, in 2010 and by 4.6%, real, in This was due to a combination of relatively high salary increases (in excess of 8% a year in both 2010 and 2011, supported by double-digit wage growth in the public sector), relatively low inflation (inflation averaged 4.3% in 2010 and 5.0% in 2012), some improvement in employment (public sector) and strong growth in social payments. The vibrant growth consumer spending continued into 2012 with the help of an unsustainable surge in the use of expensive unsecured credit. Since then all of these areas of income and growth have stalled. Instead, consumer income and spending are under significant pressure, and without an increase in employment, are likely to remain subdued. In fact, the recent spate of job cuts in the mining sector and elsewhere, coupled with a rise in the cost of living (inflation), significantly increases the change that consumer income will start to decline. This would, most likely, pull the overall consumer sector into recession. During the past year to Q the formal sector of the economy had shed a total of jobs. Fortunately, household debt has continued to moderate when measured as a percentage of household disposable income. In Q the ratio of household debt to disposable income fell to 77.8%, down from 78.7% in the first quarter of the year. This is the lowest ratio of debt to income in the household sector since the second quarter of At the same time the cost of servicing household debt, measured as a percentage of disposable income (which is a typical affordability ratio), remained unchanged at 9.4%; in-line with the average since 1994.

7 2. In Q SA fixed investment spending rose by a very disappointing 1.0%q/q, annualised, down from a modest 1.8%q/q in Q The current slump in investment activity has been largely driven by a fall-off in the rate of growth of private sector investment. In contrast, investment activity by general government has maintained solid growth in the past 18 months, albeit off a relatively low base. Unfortunately, this has not been supported by the large public corporations despite all their promises and raised expectations. In fact fixed investment spending by public corporations is now flirting with recession at a time when the country is facing significant infrastructure backlogs. The rate of growth in capital spending by general government rose by a solid 5.3%q/q in Q2 2015, after growing by 5.1%q/q in Q and by 10.3% during 2014 as a whole. This included increased spending by central and local government departments on projects related to energy, water, transport and education. In addition, capital spending by provincial government departments has been focused on the refurbishment of various road networks. Sadly, fixed capital expenditure by public corporations increased by a mere 0.1%q/q in Q2 2015, after declining by -0.6%q/q in Q Furthermore, in 2014 as a whole, capital expenditure by public corporations rose by a subdued 1.6%y/y. According the Reserve Bank, real capital outlays by Eskom and the Umgeni Water Board increased firmly in the quarter, neutralising a contraction in capital spending by public corporations in the transport, manufacturing and mining subsectors. The Reserve Bank also highlighted that Eskom stepped up real gross fixed capital formation on construction works and on machinery and equipment related to its Medupi and Kusile power stations as well as on the revamping of the transmission grid and selected substations. This would suggest that capital spending buy other large public corporations has been deeply disappointing and well below expectations. The rate of growth in real fixed capital formation by private business has fallen-off very noticeably in the past 18 months, growing by only 0.1%q/q in Q after recording growth of a mere 1.6%q/q in Q and a decline of 3.4% in 2014 as a whole. This slump in private sector investment activity has been especially evident in the mining and manufacturing sectors, although most other sectors have also cut-back on their expansion plans. Back in 2013, private sector investment activity had been somewhat buoyed by an increase in capital spending on wind farms and solar plants as part of the Renewable Energy Independent Power Producer Procurement Programme (especially in the Eastern and Northern Cape). Most of these projects, however, were completed in the second half of 2013 or early It seems clear that although many of South Africa s large corporates have fairly robust balance sheets that are not especially highly leveraged; they lack the confidence to significantly expand capacity. This partly reflects concerns about South Africa s electricity supply, but also a lack of certainty regarding government s economic policy, including land ownership, mining rights, availability of skills and government s commitment to implementing the NDP and lifting the economic growth rate. Overall, the rate of increase in South Africa s fixed investment activity remains well below target. Currently, South Africa spends 20.4% of its national income on capital expenditure. That is far too little given the country s extensive infrastructure backlog and high level of unemployment. Ideally, South Africa should be spending a minimum of 25% to 30% of GDP on investment activity (the NDP set a target of 30%), and maintaining it at that level for more than a decade. Internationally, there is a reasonably clear relationship between increased investment spending and sustained higher GDP growth, with the level of investment ultimately determining the level of employment. This suggests that much more needs to be done to encourage a more robust investment environment for all participants, including foreign investors.

8 3. The US Federal Open Market Committee decided to keep the federal funds target rate unchanged at 0.00% to 0.25%. Although this was ultimately in-line with expectations, analysts were extremely divided on what the Fed would do. Out of the 114 analysts surveyed by Bloomberg, 58 expected rates to remain unchanged, while 56 expected the Fed to hike rates. In discussing the decision, Janet Yellen stressed, in her press briefing, that they are concerned about the impact of global economic developments on the performance of the US economy. In addition, she highlighted that inflation remains lower than they would want and is well below the Committee's longer-run objective. According to Yellen, the low inflation partly reflects declines in energy prices and the impact of the strong Dollar on the cost of non-energy imports. The FOMC indicated that it will maintain the existing policy of reinvesting principal payments from the Federal Reserve s holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction. There has also been an adjustment to the committee s outlook for interest rates as well as inflation and growth. Back in June 2015, 15 out of the 17 FOMC committee members expect interest rates to start to rise this year. Today, this was adjusted down to 13 out of 17 FOMC committee members expect a rate hike before year-end. In fact one committee member argued for a rate cut before year-end, due to concerns about low inflation. Furthermore, the median committee member now expects only one rate hike this year and not two hikes. (There are two more FOMC meetings remaining this year, one in October and one in December). The committee also adjusted their inflation forecast down measurably. For example, in June 2015 the FOMC inflation forecast for 2015 was 0.7%, today it was revised down to 0.4%. The Fed s inflation forecast for 2016 and 2017 was not adjusted meaningfully. The GDP growth outlook was adjusted only modestly for all time periods. Although the inflation rate is still uncomfortably low, the FOMC still expects inflation to rise gradually toward 2% over the medium term as the labour market improves further and the transitory effects of earlier declines in energy and import prices dissipate. From our perspective, recent economic data reflects a further general improvement in the US economy including retail sales, car sales, housing activity, and job growth. In fact, many US analysts have recently revised up their GDP growth estimate for 2015, especially after the Q GDP was adjusted significantly higher. In contrast, it cannot be denied that US inflation remains stubbornly low for a variety of reasons (including low commodity prices and a strong Dollar) and there is still no clear evidence of a meaningful pick-up in wage. Furthermore, it seems unlikely that this will change significantly in the next two or three months. All of this would argue that the Fed could delay their decision to raise rates until However, we have consistently argued that the longer the Fed maintains it zero interest rate policy the more it distorts global risk taking. Furthermore, if the Fed delays the first rate hike into 2016 there is a real risk that this policy decision itself starts to undermine economic confidence, as it would be an acknowledgement that the economic performance has been disappointing despite the massive policy stimulus. Overall, the latest FOMC statement from the Fed as well as Yellen s own comments at her press conference can be considered relatively dovish. Consequently, I suspect an increasing number of market participants will now start to anticipate that the Fed will delay their first rate hike until 2016 unless the next round of key economic data convinces them otherwise. (There is clearly going to be a massive focus on the next few US inflation reports). Overall, we still expect the US FOMC to announce a rate increase before the end of 2015 and our best bet remains that this will occur in December Nigeria s inflation rate stayed above the Central Bank s 6% - 9% target for the third straight month at 9.3%y/y in August 2015 from 9.2% in the previous 2 months. This was the figure expected by markets as the country is experiencing inflationary pressure from exchange rate weakness. Most of the pressure came from core inflation which moved up to 9% in August from 8.8% in July This was expected as currency controls forced importers into the parallel market where foreign exchange is more expensive.

9 The central bank faces a number of challenges which will make monetary policy decision tricky. It currently has to maintain a tight monetary policy, because of a weakening currency and an increasing inflation rate, amidst a slowing economy. Nigeria was also removed from the JP Morgan GBI-EM index for lack of liquidity and transparency in trading its currency from administrative measures put in place by the bank. The Central Bank is under pressure to devalue the local currency or even let it free-float such as Russia and Kazakhstan, the other oil exporting nations, have done. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

10 Weekly Market Analysis Currencies/ Indices/ Commodities Friday s Close 18/09/15 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 Oil Brent Crude Spot Price ($/bl) Gold Price $/oz Platinum Price S/oz Source: I-Net Bridge * MSCI - Morgan Stanley Capital International

11 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: Effective: 6.38% per annum 6.57% 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 19 September This seven- day rolling average yield may marginally differ from the actual daily distribution and should not be used for interest calculation purposes. We however, are most happy to supply you with the daily distribution rate on request, one day in arrears. The price of each participatory interest (unit) is aimed at a constant value. The total return to the investor is primarily made up of interest received but, may also include any gain or loss made on any particular instrument. In most cases this will merely have the effect of increasing or decreasing the daily yield, but in an extreme case it can have the effect of reducing the capital value of the portfolio. STANLIB Enhanced Yield Fund Effective Yield: 6.70% 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 18 September The net (after fees) yield on the portfolio will be published daily in the major newspapers together with the all-in NAV price (includes the accrual for dividends and interest). This yield is a snapshot yield that reflects the weighted average running yield of all the underlying holdings of the portfolio. Monthly distributions will consist of dividends and interest. Interest will also be exempt from tax to the extent that investor s are able to make use of the applicable interest exemption as currently allowed by the Income Tax Act. The portfolio s underlying investments will determine the split between dividends and interest. STANLIB Income Fund Effective Yield: 7.41% 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 18 September 2015.

12 STANLIB Extra Income Fund Effective Yield: 6.98% 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 18 September STANLIB Flexible Income Fund Effective Yield: 7.37% 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 18 September STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.59% 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 18 September 2015.

13 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.

14 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.

15 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.

16 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.: H18X15 17 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