The Weekly Focus. A Market and Economic Update 26 February 2018

Transcription

1 The Weekly Focus A Market and Economic Update 26 February 2018

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 5 Economic Update...7 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... 11

3 Newsflash The rand has gained a very impressive +33% against the pound since the worst levels of over 24 to the pound in late 2015 Market Comment LOCAL MARKETS So far in 2018 the bond market continues to lead by a wide margin, with the SA All Bond Index now up an impressive +6.7%, followed by cash with +1%, then the JSE All Share Index with -1.6% as of Friday s close and finally SA Listed Property deep in the red with - 16%. Although the huge falls in the shares of Resilient, Fortress and NepiRock have severely hurt the sector because they were at one stage 40% of the index (now 20-25%), it does look as if it is creating a good opportunity in listed property. The historic dividend yield of 7.1% is the highest in almost 6 years and this ahead of potential interest rate cuts in SA and a 10-year bond yield that is the lowest in almost 3 years. Apparently foreigners bought R12.4bn of our bonds last week, the best week so far in So far the JSE Financials Index is leading the Resources and Industrial indices with a positive return in 2018 of +1.5%, while the other two remain in negative territory. Despite rand strength (+6.8% in 2018 versus the dollar), the JSE Mining Index is only down -1% in 2018, thanks to much improved earnings, dividends and debt positions for many of the mining companies, not least Anglo Platinum, Anglo American, BHP and Glencore. In fact Anglo American is up over +3% so far today and is almost back at its high for the year in rands of 300 rand.despite rand strength. Also the weaker dollar (at least so far) and stronger demand from the global economy are keeping commodity prices firm, notably iron ore, copper and oil. The Industrial Index has been hurt by the stronger rand because many of the big shares are rand hedges, like Richemont, British American Tobacco, Anheuser Busch InBev, Mondi and Mediclinic. The JSE Mid-Cap Index of share number 41 to 100 is starting to benefit from the stronger rand and improved confidence. This index is now positive in 2018 at +1.1%, while the ALSI 40 Index is still -2%. The JSE Small-Cap Index is also positive now at +0.3% in Both of these smaller indices had negative returns in 2017 and are more sensitive to the SA economy and interest rates. Cash poured into emerging markets last week to the tune of $5bn, somewhat higher than normal. With the change in politics and the hope for a better economy and company earnings, South Africa should be getting its fair share of that, being 7% of the MSCI Emerging Markets Index. Certainly we ve seen the big bank shares hitting new highs, as well as shares like RMB Holdings, AVI, Spar, Mr Price, Shoprite and Foschini. Below we show a chart of the rand versus the pound, showing the rand back at levels of over 4 years ago and also stronger than the lows of 2001/2. The rand has gained a very impressive +33% against the pound since the worst levels of over 24 to the pound in late 2015.

4 Source: I-Net Bridge OFFSHORE MARKETS Last year the biggest market in the Emerging Market space, the MSCI China Index (30% of the index), returned +54% in dollars and so far in 2018, despite the recent correction, it is already +8.3% in dollars. It is very interesting to note that Tencent is by far the biggest share in this index at 22%, similar to the size of Naspers in our ALSI 40 Index. Alibaba is 17% of the China Index and in total Information Technology shares comprise 43.5% of the MSCI China Index. Analysts are forecasting that Tencent will grow its earnings by 44% in 2018, putting it on a forwards PE or price-to-earnings ratio of 38 times (to end 2018). The MSCI China Index itself is trading at only 14 times earnings expected in 2018, assuming earnings growth of 17% in Otherwise, we have seen quite a good recovery, so far, from the recent correction in global equities. The MSCI World Index is down -4.5% from its late January record high, having gained about +5% from the correction low. Technology shares are leading in the US, with the Nasdaq Index +8.3% from its correction low and now just -2.2% below its late January correction low. Although Garzarelli (see below) calculates via her quantitative model that the US stock market is only very slightly overvalued, it is interesting or sobering to see that Warren Buffett s company Berkshire Hathaway is sitting on a cash pile of $116 billion, because he cannot find suitable investments, at what he considers to be a fair price. He says many companies are overpaying for purchases, using cheap money to do so. The recent sharp stock market correction was sparked by a fear of rising inflation and rising interest rates. US analyst Steve Sjuggerud notes that the biggest ETF or exchange traded fund in US investment grade bonds and also in US high yield or junk bonds (both ishares iboxx ETFs) together lost 19% of their combined assets during the market correction, yet both funds only fell less than -3% in price. At the end of November the two funds had combined assets of $60bn. Both lost more than $5bn since then on investors panicking and bailing out of the funds, indicating that fears of higher interest rates may have hit an extreme, a crescendo. This view is further supported by looking at the so-called Commitment of Traders or COT report that tells us what futures traders are doing with their money. Well, they are unanimously betting on higher US bond yields (lower prices). So Steve says this is currently a very crowded trade and it arouses the interest of contrarian investors in looking to do the opposite, i.e. buy bonds at current levels, hoping for lower bond yields (higher prices). So it was interesting to see on Bloomberg TV this morning that Morgan Stanley is recommending buying US bonds now too. The US 10-year yield reached 2.95% late last week and is now at 2.87%. If Steve is right about bond yields having peaked for now (or very close to peaking), that would be positive for equities.

5 Other Commentators US Market Analyst, Elaine Garzarelli Her quants model reading remains in bullish territory for US equities at 73.5% (a level below 30% is a bear market signal). The S&P 500 Index is now +2.6% in 2018 and she recommends buying on dips. She expects the long-term path of shares to be upwards with the backdrop of improving economic growth and unusually strong upward earnings revisions. Events that would cause concern and be negative for shares are a slowdown in global economic growth, earnings peaking and aggressive Fed tightenings. Typically shares do not get hurt in periods of higher interest rates as long as the yield curve does not invert (where short-term rates are higher than medium and long-term rates). Usually the stock market rally ends when the Fed engineers a recession by raising interest rates due to accelerating inflation. When the rates rise high enough to be higher than longterm rates, share prices decline. Using her quants model s forecast for an 18 times PE ratio, fair value for the S&P 500 Index is 2,736 (it is now 2,741). Historically, shares can rise 20-50% above fair value when her model is bullish. The number of bullish US investment advisors fell to 48.5% from 51.9% last week, but this would need to fall to 39% before Garza classifies this as bullish in her model, i.e. when advisors become sufficiently bearish. So this is a reverse indicator. January s CPI inflation number was 2.1%. Garza believes inflation will most probably remain low over the next 6-12 months, but she expects the Fed to hike on 21s March, as does the market. Economic growth is strong, unemployment is low and inflation is close to the Fed s objective. The economy will be buoyed by tax cuts, higher government spending, more infrastructure spending and strong S&P earnings. Garza suspects we are not at the end of this economic cycle. Judging from the US leading economic indicators, macro growth should be healthy and robust for the next 9 months. There is no sign that the leading indicators have peaked. Historically, the economy does not fall into recession until about one year AFTER the peak of the US leading economic indicators. Based on this, it is likely the economy will grow for at least 2 more years. So far in 2018, with the S&P 500 Index +2.2%, the Consumer Discretionary sector is leading with a return of +6.6%, followed by IT with +5.9%, then Financials with +3.2%. Real Estate has the worst return with -7%, then Energy with -5.5%, Consumer Staples with -5% and Utilities with -4.8%. So much depends on how one s portfolio is positioned. BCA Research While BCA remains positive on risk assets like equities, the US economy is in the late innings of the expansion - and markets have now entered a new, more volatile phase. BCA thinks the Fed under Powell will now raise interest rates 4 times in 2018, no longer 3 times. While most of the positive profit outlook for US companies is already reflected in share prices, the earnings backdrop will remain a positive tailwind for shares at least into early BCA has raised its target yield for the US 10-year bond from 3% to % because of the stronger economy, although the market is overdue for a consolidation period in the short-term.

6 Tax cuts and higher government spending will extend the economic expansion to So BCA has shifted its recession call from late-2019 to It will be later, but deeper. Industrial production in the advanced economies is in overdrive as global capital spending growth accelerates. Paul Hansen Director: Retail Investing

7 Economic Update 1. SA National Budget 2018/2019. Government made the tough decision to increase VAT and endeavor to restore fiscal discipline. Now the focus has to shift to removing the constraints to growth. 2. SA consumer inflation fell further to 4.4% in January 2018, helped by a reduction in the petrol price. Core inflation down at 4.1%. This is another argument supporting a cut in interest rates by Reserve Bank. 3. The Southern African Customs Union (SACU) revenue pool expected to drop by 22.7% to R39.4 billion in the current budget year before increasing slightly to R56 billion in the following year. 1. The latest South African National Budget clearly reflects that government s fiscal parameters have deteriorated substantially in recent years, leading to successive credit rating downgrades; the Minister of Finance was able to present a budget that is significantly better than the Medium Term Budget Policy Statement (MTBPS) issued in October Back in October 2017, the MTBPS reflected shock deterioration in all of the government s key fiscal parameters, especially revenue collection, and government debt. This dramatically increased the chances that South Africa s credit rating could be cut to below investment grade by all of the rating agencies. Fortunately, the latest set of budget parameters, together with recent political developments, greatly reduces the chances of further credit downgrades in the short-term. Nevertheless, a significant amount of work needs to be done to lift business and consumer confidence, encourage private sector investment and sustainably raise economic growth. Government s latest growth projection of just over 2% in 2020 is hopelessly below the level South Africa requires for creating employment, lifting incomes meaningfully and reducing inequality. For the 2018/19 fiscal year the Minister announced that the budget balance should improve to -3.6% of GDP, down from -4.3% of GDP in 2017/2018. This is slightly better than the deficit the Minister projected in the October 2017 Medium Term Budget Policy Statement (MTBPS). The fiscal deficit is then expected to remain unchanged in 2019/2020 as a percentage of GDP, before falling to -3.5% of GDP in 2020/21. The government also intends to achieve a primary budget surplus (which is the budget deficit less interest costs) of 0.1% of GDP in the current fiscal year. This would be a very welcome achievement, after recording a primary budget deficit of -0.7% of GDP in the past fiscal year, and will go a long way towards convincing the public, investors and credit rating agencies that government is serious about its intention to achieve a more disciplined financial framework. The emphasis within government s economic policy will now have to focus very heavily on raising economic growth on a sustainable basis. Without acceleration in economic activity, the fiscal authorities will once-again struggle to improve tax collection and meet their budget objectives. It is also clear that given the current balance sheet constraints within central government as well as the SOE sector, economic policy will have to increasingly promote the role of the private sector in driving economic growth. We would hope this includes a greater reliance on privatepublic partnerships. In 2017/2018 tax revenue massively underperformed budget by an estimate R48.2 billion. While this is largely in-line with the revenue shortfall the minister highlighted in the October 2017 MTBPS, it represents a huge miscalculation by National Treasury and meant that government had to borrow substantially more than it had anticipated at the start of the fiscal year.

8 A breakdown of this revenue shortfall shows that the under-collection has been very broadbased and includes a dramatic R21 billion shortfall in individual tax collection, a R14 billion under-collection of VAT and a R3.6 billion lapse in the collection of customs duties. In contrast, company tax collection was in-line with budget, while the fuel levy exceeded budget. The latest revenue shortfall means that government has missed their revenue targets for four consecutive years, forcing the authorities to look for additional sources of funding. Back in the 2017/2018 budget the emphasis was on increasing in the top marginal tax rate for individuals from 41% to 45%, whereas in the latest budget the decision was taken to increase the VAT rate from 14% to 15%. The authorities hope that by increasing VAT by 1 percentage points they can raise an addition R22.9 billion. This certainly seems ambitious in an economy that is projected to grow by a mere 1.5%. Other significant tax changes announced in the budget included a sizeable increase in the fuel levy as well as the road accident fund, a below inflation adjustment to the tax thresholds for individual taxes, an increase in estate duty, a hike in the normal range of excise duties, a moderation in the medical aid tax credits and the inclusion of a range of taxes relating to environment and health. Government estimates that the increase in VAT together with the other tax changes highlighted will yield an additional R36 billion in tax review. In 2018/2019 government expects to spend a total of R1.67 trillion, which is 7.3% more than it spent in 2017/2018. This is modestly higher than the projected inflation rate of 5.3%, allowing government to largely adhere to its expenditure ceiling. Importantly, spending on staff and salaries, which consumes 35% of all expenditure, is projected to grow at an average of 7.3% per annum over the next 3 years, highlighting government s commitment to contain the rate of increase in consumption spending. A key area of growth in government spending during 2018/2019 is education, especially post-school education and training. In total government has allocated an additional R57 billion of new spending to fee-free higher education and training over the next 3 years. This reflects government earlier promise to help students that are currently struggling to afford higher education, especially tertiary education. There is also a sizeable increase in social spending, with the number of social grants recipients projected to rise to over 18 million in To some extent, the latest increase in spending on social grants reflects an attempt by government to offset the negative impact of a higher VAT rate on poorer households. The government s healthcare budget will increase in expenditure over the next three years. Government has indicated that they are continuing to implement National Health Insurance (NHI) and decided to support this initiative by reducing the tax credits to medical schemes as a means of increasing funding for the future expansion of the NHI. Lastly, there is still not enough in the budget to directly promote job creation. South Africa s unemployment rate remains far too high by historical and international standards, and clearly contributes much of the social tension and anguish experienced in South Africa on a daily basis. Increasing employment in South Africa has to be the number one economic/political/social objective. While South Africa s public sector debt parameters are now projected to improve relative to the disastrous projection outlined in the MTBPS, the total debt as well as the cost of servicing that debt is clearly on the rise. For example, back in 2009, government s gross debt totaled only 26% of GDP and is projected at 53% in 2018/2019. If left unchecked, government debt will quickly become a major hindrance to achieving many vital policy objectives.

9 A key risk to South Africa s ongoing fiscal stability is the increase in state debt cost. While the interest cost on state debt remains manageable at just below 12% of total expenditure, it is now consistently the fastest growing component of government expenditure. In fact, nominal growth in interest and rent on land is expected to average well over 10 per cent over the next three years. Under these circumstances, a significant rise in bond yields, due to further credit rating downgrades, would put South Africa s fiscal position under increasing strain. Already the cost of debt exceeds the total budget allocation to public order and safety. Overall, the 2018 National Budget was presented in an environment of intense scrutiny and high expectations. The dramatic revenue under-collection and weak economic growth meant National Treasury had to make tough decisions. Either it had to decide to allow the budget deficit to increase significantly further in 2018/2019 and thereby risk an almost certain ratings downgrade to below investment grade by Moodys in March 2018, or it had to decide to do the unpopular thing and raise the VAT rate. Treasury obviously chose the tax hike option, which has allowed them to reflect a clear intention to restore fiscal discipline, giving South Africa a better than 50% chance of maintaining its investment credit rating by Moodys. However, the trade-off for this policy choice is that the recent tax hikes (VAT and others) will undoubtedly hurt the weak economic environment, potentially depressing the already subdued rate of economic expansion in key sectors of the economy. This means that government needs to urgently focus on removing the key factors constraining economic growth. These factors include policy uncertainty, high levels of corruption in both the private and public sectors, poorly performing SOEs, a lack of fiscal discipline and low levels of business confidence. Some of these constraints might be relatively easy to resolve, such as scrapping the proposed mining charter, while others would require a larger degree of policy innovation such as the extensive use of private-public partnerships fortunately the use of privatepublic partnerships, as well as the sale of non-strategic state assets, were highlighted as policy options in the budget. Clearly, some of the constraints outlined above will prove more difficult to resolve than others, but as the long as government demonstrates a firm and ongoing commitment to lifting economic growth while at the same time maintaining fiscal discipline, business confidence and investment will follow. 2. In January 2018, South Africa s headline CPI inflation increased by 0.3%m/m. As a consequence the annual rate of inflation fell to 4.4% from 4.7%y/y in December 2017 (In-line with market expectations). Impressively, core consumer inflation fell further to 4.1% from 4.2% in December 2017 and 4.4% in November This is the lowest level of core consumer inflation since December In general, despite some upward pressure on fuel prices coming from the budget, SA inflation remains well under-control and is expected to remain well inside the inflation target over the coming year. All of this supports the view that the Reserve Bank can cut interest rates over the coming months. Annual food inflation moved lower in January 2018 at 4.6% from 4.9%y/y in December As recently as February 2017 food inflation was up at 10.0%y/y. The moderation is food inflation is, obviously, still due to the vast improvement in the summer agricultural season in Despite the moderation in food inflation, the pace of slowdown in consumer food inflation has been somewhat disappointing, with prices rising fairly strongly on a monthly basis over the past four months. This disappointment partly reflects the upward pressure on meat inflation, which is still relatively high at 13.4%y/y, as well as the fact that producers and retailers have been trying to extract some operating leverage. The severe drought in the western and eastern cape is also starting to have an impact. Nevertheless, consumer food inflation should continue to ease a little further in the coming months. In that regard, the recent uptick in both agricultural and producer food inflation suggests that the moderation in food inflation is near an end.

10 Petrol inflation fell by -1.3% m/m in January, with the annual rate easing to 9.1%y/y from almost 15%y/y in December This largely reflects the 34c/l decrease in the petrol price during the month. CPI excluding food and petrol is still well within the inflation target at a mere 4.0%y/y, while core inflation (CPI excluding food, fuel and electricity) eased to a very respectable 4.1%y/y. Services inflation was also recorded lower at 5.1%y/y, while administered price inflation is back inside the target range at 5.6%y/y, mainly due to the lower petrol price. The inflation rate for pensioners has eased to 4.7%y/y. SA inflation is still expected to remain well under control over the coming year and is forecast to average 4.5% for 2018 as a whole, helped largely by the stronger exchange rate. It is also worth noting that SA inflation will most-likely move further below the mid-point of the inflation target in early 2018 before stabilising at around 4.5% to 5.0% in the second half of The allocation to the Southern African Customs Union (SACU) revenue pool is expected to drop by 22.7% to R39.4 billion in this budget year before increasing slightly to R56 billion for the next budget year. The budget works in a retrospective manner. Although tabled under the 2016/17 budget year the R39.4 billion amount is applicable to this year s budget and although it recovers somewhat, it is expected to remain subdued until the year 2020 when it recovers to an estimated R60 billion. The lower allocation to SACU revenues is likely to put further pressure on the member countries budgets. Namibia and Botswana derive around 30% of their revenues from the allocation with Swaziland at around 40%. Their expenditures are expected to increase which should widen budget deficits. These expenditures will be hard to bring down as they are mainly made of wages and other recurrent expenses which have increased quite markedly. This is likely to result in higher debt by countries in the union and subsequent downgrades by rating agencies to countries that have ratings assigned. Namibia was downgraded to one notch below investment grade (junk status) by Fitch and Moody s in Botswana still retains an A- minus rating by S&P and is the only investment grade sovereign on the continent. The budgets from member countries are yet to be tabled but are likely to show a deterioration going forward. As long as imports remain weak in the region, the custom duties collections will remain under pressure. This will continue to put pressure on collections in the SACU pool. This is reflective of the lacklustre performance of economies in in the Southern African region as demand has waned over the last year. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

11 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 6.85% Effective: 7.07% 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 23 February 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: 7.86% 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 23 February 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: 8.28% STANLIB Extra Income Fund Effective Yield: 8.09% STANLIB Flexible Income Fund Effective Yield: 6.69% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.68% 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 23 February 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.

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 (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