The Weekly Focus. A Market and Economic Update 5 March 2018

Transcription

1 The Weekly Focus A Market and Economic Update 5 March 2018

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 5 Economic Update...6 Rates STANLIB Money Market Fund STANLIB Enhanced Yield Fund STANLIB Income Fund STANLIB Extra Income Fund STANLIB Flexible Income Fund STANLIB Multi-Manager Absolute Income Fund... 10

3 Newsflash The All Bond Index has come off its peak level, but has still returned +5.2% in 2018 Market Comment LOCAL MARKETS The JSE All Share Index is trading -6.3% from its record high of 61,684, back at October levels. The Index is -3.3% so far in 2018, or -2.9% including dividends. The All Bond Index has come off its peak level (declining in value as the 10-year yield has risen to 8.20% from 8.02%), but has still returned +5.2% in JSE Listed Property is -18.4% from its recent peak (-17.9% in 2018 including dividends), similar to levels of over 3 years ago. The Resilient stable (Resilient, NepiRock, Fortress and Greenbay) were 40% of the index at the peak (now about 28% of the index). Resilient is -57% in 2018 (excluding its recent dividend), while NepiRock is down -46% (still with its dividend). We are expecting an announcement soon about the investigation into the group. While the ALSI 40 Index is -3.2% in 2018 to-date, the JSE Mid-Cap Index is -0.9% and the JSE Small-Cap Index is +0.5%. Naspers is currently -9% in 2018 (+55% over the past 12 months), back at October levels. Naspers is 22.9% of the ALSI 40 Index and 18.9% of the All Share Index. It is 23.6% of the JSE Financial & Industrial Index. OFFSHORE MARKETS If you look at the graph below of the MSCI World Index, you can see that it took a big knock from its record high in late January (-9% in dollars), then recovered a bit until Trump s shot across the bows on imposing a 25% import tariff on steel and 10% on aluminium. Source: I-Net Bridge That has triggered another pullback, putting the index -7% from its record high, but still +13.2% above where it was twelve months ago, in dollars (excluding dividends). This is typical of most corrections. The initial recovery, which seemed strong (and sucks in buyers who think the correction is over), is then followed by another decline back towards the previous low point, raising the nerves and fears once again. So normally one gets a double bottom structure on the graph before the market picks up again.

4 Bear in mind that this was the first real correction in about 18 months. Sometimes corrections take a few months to unwind before the market resumes its uptrend. The correction is probably creating a buying opportunity. At this stage, the index is back where it was in mid-december. The US dollar has weakened since mid-december by as much as -4.2% against the euro (was 1.18 then versus 1.23 to the euro now). It has weakened by -3.3% against the pound since mid- December. In mid-december the rand was trading at to the dollar, versus the today, so is up less than 1% now. In dollar terms, the MSCI Europe Index is down -9.4% from its late January high, trading back at September levels. In euro terms the index is down -9.1% from its peak, trading where it was over a year ago, in January/February last year, looking decidedly droopy. If you exclude the UK from the MSCI Europe Index, it is trading -8.6% in euros from its recent peak, back at March 2017 levels. It is showing a broadly sideways trend since last March in euro terms. The euro has gained +14.7% versus the dollar in the past twelve months since March 2017, from $1.074 to the current $ The FTSE 100 Index on the London Stock Market is down -9.1% in pound terms from its recent high and has fallen back to December 2016 levels, so is at a 15 month low in pound terms. About 70% of the index is related to non-british businesses like BHP Billiton, Anglos, British American Tobacco etc. The MSCI Japan Index is holding up better. It is still +15.3% above the level of a year ago, in dollar terms and is just -7.3% below its recent high, at January 2018 levels. The Japanese yen has strengthened quite a bit lately. It is typically regarded as a safehaven currency during times of turmoil because apparently the Japanese government s debt is all local debt. The Japanese yen is up +8% over the past year versus the US dollar - and is now trading at a 17-month high at to the dollar. The MSCI Emerging Markets Index is down -7.4% from its recent high, in dollar terms, back at early January levels, i.e. just two months ago (+25% over the past twelve months). The MSCI US Index is up +13% over the past 12 months and is -6.2% from its recent record high, also back at levels of just two months ago. So its better performance is no doubt driven by the strong Information Technology shares that are so big in the US (small in Europe). The US stock market has outperformed the MSCI World (Excluding the US) by around +6% since September last year. The US IT sector (within the S&P 500 Index) is once again the leading sector in 2018 (was in 2017), with a return so far in 2018 of +5%, whereas the S&P 500 Index is up just +0.3%. Next is Consumer Discretionary +4%, Financials +1.6% and Health Care +0.9%. But seven sectors are in negative territory, led by Real Estate -9.9%, Energy -8%, Utilities - 7.8%, Consumer Staples -6.2%, Telecomms -5.2%, Materials -2.9% and Industrials -1%. US and global listed property/real estate has continued to struggle and is trading in dollar terms back where it was about 5 years ago, having broadly trended sideways over that time period. It is down over -5% so far in 2018, trading where it was a year ago. At least it is paying a dividend yield of over 4%, which is still good in today s interest rate environment.

5 Other Commentators US Market Analyst, Elaine Garzarelli Garza s quants model is at 73.5% (out of a maximum of 100%). She remains bullish and recommends buying on dips. Stock market investors are in the process of discounting higher interest rates - and remain cautious due to uncertainty about inflation, Fed rate hikes, the growing federal budget deficit and the recently announced trade tariffs. Since investors do not like uncertainty, we are seeing volatility. Garza expects shares to be strong until the recession starts, which historically has been after the Fed has completed its tightening cycle. Positive for shares is that monetary policies around the world remain accommodative - and the large number of deals continue, with $240bn just last week. Fourth quarter S&P 500 earnings are coming in better than expected with about 75% of companies beating expectations. Earnings in the fourth quarter are on pace to grow +22% year-on-year, which is potent. Fair value for the S&P 500 Index is now 2,736, which is +1.7% above current levels. The US economy remains strong. Inflation is moving upward, but slowly. Garza still sees headwinds for inflation, such as record shale oil output and Amazon launching into over the counter health products. US consumers remain confident. Garza thinks the likelihood of a recession is still some years out. BCA Research Easier fiscal policy, such as lower taxes and more government spending, will cause US inflation to rise - and force the Fed to raise rates more aggressively than the market is discounting. Either outcome is likely to lead to a real appreciation in the dollar. Trade protectionism is also on the rise, which should also boost the dollar. US manufacturing accounts for 12% of US GDP, compared with 18% in the Euro area, 21% in Japan and 30% in China. BCA thinks growth may be slowing in China and other countries, which would support a stronger dollar. BCA doesn t expect Trump s tariffs on steel and aluminium to spark a trade war, but it will cause retaliation. All-in-all BCA thinks the dollar could be due for a rebound, perhaps to 1.15 from the current 1.23 (BCA has been wrong so far on the dollar). Emerging Market currencies may also struggle on the back of slower Chinese growth and higher financing costs for dollar-denominated loans. A rebound in the dollar would pose a headwind for global equities, as would creeping protectionism. However, with company earnings continuing to surprise on the upside, this is unlikely to derail the global bull market in shares. But we should prepare for a lot more volatility. Paul Hansen Director: Retail Investing

6 Economic Update 1. SA recorded a shock trade deficit in January 2018 of -R27.66 billion. Largest monthly trade deficit ever. Exports declined sharply, while imports rose dramatically. Trade balance typically weakens each January due to seasonal factors. 2. SA ABSA PMI gained substantial ground in February 2018 moving up above the neutral 50-point mark for the first time since May US house prices continued to rise in December 2017 and are up a very impressive 50% since their low after the global financial market crisis. House prices are almost back to a record high. 4. US consumer confidence rose sharply in February, helped by tax cuts, further gains in employment and higher house prices. Highest level of consumer confidence since Nigeria s GDP growth for 2017 in line with expectations. Oil Sector has dropped off more than expected but non-oil sector is finally starting to pick up the slack. 1. In January 2018, South Africa s trade balance recorded a shock trade deficit of R27.66 billion. This is the largest trade deficit the country has ever recorded, and compares with a revised trade surplus of R15.31 billion in December The market was expecting a trade deficit of around -R1.7 billion for the month, although the trade data is extremely difficult to forecast accurately on a month-by-month basis, especially since the data is not seasonally adjusted and prone to revisions. South Africa has recorded a trade surplus in eleven out of the past twelve months, which is an impressive turnaround relatively to prior years. However, South Africa typically records a sizeable trade deficit each January due to seasonal factors. Furthermore, inventory levels are relatively low and as the South African economy gains some momentum imports are expected to rise, putting the trade account under pressure. For 2017 as a whole South Africa s trade surplus totalled an incredible R79.93 billion, compared with a mere R1.0 billion in It seems fair to argue that the surge in South Africa s surplus helped to support the Rand towards the end of During January 2018 exports declined by a massive -R23.5 billion (-22.6%m/m), while imports rose by a substantial R19.5 billion (+21.9%m/m). As mentioned above, it is not uncommon for South Africa s foreign trade balance to deteriorate sharply in January due to the seasonal factors. The decline in exports included a -R6.7 billion fall-off in precious metals, a R5.9 billion drop in coal exports, and a -R5.0 billion fall-off in vehicle exports. In contrast, the rise in imports included a R4.6 billion jump in vehicle parts, a R2.2 billion increase in machinery equipment and a R3.4 billion increase in oil imports. Despite the latest surge in imports, the average annual growth in imports over the past twelve months is a mere 2.1%, although over the past five months growth has risen by an annual average of 8.9%. The latest rise in imports, albeit off a low base, will provide some relief to the fiscal authorities in terms of generating additional tax revenue (import duties). In contrast, over the past year, exports have achieved an annual growth rate of 7.0%, with an average of 9.8% over the past five months. This improved export performance partly reflects the benefit of higher commodity prices, a pick-up in export volumes of some bulk commodities, a more stable supply of electricity and less labour market unrest. SA s export performance looks even better in Dollars, but has not been supported by a broad-based expansion of manufactured exports. It is fair to argue that the South African economy has benefited at least to some extent from the buoyancy in the world economy through an increase in exports. Also South Africa s current account deficit remains well under-control at less than 3% of GDP. This should feature as a positive in South Africa s upcoming credit rating review by Moodys on 23 March However, as the South African economy gains momentum in 2018/2019, imports are likely to rise, weakening the country s balance of payments to some extent.

7 2. The seasonally adjusted ABSA Purchasing Managers Index (PMI) rose to 50.8 index points in February from 49.9 index points in January 2018, above the neutral 50-point mark for the first time since May The latest PMI reading indicates that the average for the first two months of 2018 is slightly above 50 which is a promising outcome for the manufacturing sector. Looking at the sub-components of the index for February, New Sales Orders increased for the second month in a row to 52.7 from 50.4 in January suggesting that export orders remained solid with some improvement in local demand. Business activity moved up to 54.1 from 52.0 which bodes well for actual production growth in the first quarter of the year. Purchasing Commitments surged to 54.5 from 45.6 which is the best level since early The index tracking expected business conditions in six months time recorded another substantial increase to 79 points in February which is the highest level since 2001 and 30 points above the November 2017 level. The purchasing prices Index declined further in February and is now more than 20 points below the level reached in November 2017 mainly as a result of the (on average) stronger rand exchange rate and the lower Brent crude oil price. Unfortunately, the employment index remained subdued nudging lower to 45.3 points from 45.6 despite the apparent recovery in output which would need to be sustained for the employment index to increase in the future. Overall, the sharp improvement in the PMI to above one is extremely encouraging with the sustained rise in optimism likely supported by the continued positive global growth prospects along with the more positive outlook for the local economy. However, the longstanding structural challenges that have weighed heavily on growth will require bold and timely reforms to lift confidence and create conducive growth environments for manufacturing as well as other sectors of the economy. 3. In December 2017, US house prices, as measured by the Case Shiller Composite 20 Index, rose by a solid 0.6%m/m (seasonally adjusted), and have risen in 66 out of the last 70 months. Over the past year, house prices are up a very respectable 6.3%y/y and are up 50.2% since the low in early Overall, prices are a very modest 0.4% below their all-time high, which was recorded in April 2006, and should be back into record territory within the next month or two. As mentioned a couple of months ago, in some cities house prices are already well above pre-crisis highs (for example Boston, Dallas, Portland, Charlotte, Seattle and Denver), while in other cities prices remain relatively subdued (for example Las Vegas, Tampa, Phoenix and Miami). Amongst the twenty largest US cities surveyed, nine have average house prices back at record levels. A broad range of data continues to suggest that while house prices have improved noticeably since the global financial market crisis, the pace of new housing development remains extremely modest compared with the frenzy of US housing activity prior to the global financial market crisis. This more subdued pace of housing activity is reflected in the level of home ownership. In the thirty years from 1965 to 1995 US home ownership rates (percentage of households that owned their own home) averaged a relatively stable 64%. It then increased fairly rapidly to a peak of almost 70% just prior to the global financial market crisis. This improvement, while political very appealing, proved to be unsustainable (since it was not based on sound measures of affordability) and US ownership levels now appear to have stabilised back down at around 64% with a slight upward bias evident in more recent data. It is also fair to argue that housing has systematically become less affordable in recent years, reflecting a combination of factors including somewhat higher interest rates, a rise in house price and only a modest increase in household incomes. Unsurprisingly, the growth in mortgage debt remains subdued, reflecting the tightening of lending standards in the aftermath of the global financial market crisis.

8 Overall, while housing activity has not added much too overall US GDP growth in recent quarters, the improvement in housing activity and house prices since 2012 has also not led to creation of another housing bubble. Importantly, the on-going recovery in the US housing market is a key factor in helping to confirm the sustainability of the current US economic recovery. In other words, a meaningful pull-back in housing activity and house prices would create a worrying signal that perhaps the US economy is starting to lose momentum. We will continue to closely monitor a wide range of US growth-momentum data, especially given the expectation that the US Federal Reserve will continue to try and normalise US monetary policy. 4. In February 2018, the estimate of US consumer confidence, as measured by the Conference Board, surged more than expected to index points, up from in January The market was expecting the confidence index to rise to The cut-off date for the survey was 15 February The level of US consumer confidence is now the highest it has been since This is despite a recent increase in equity market volatility. The Present Situation Index rose sharply in February 2018 to 162.4, up from in January, while the crucial expectations index jumped to from in January. Overall, both the present and expectations indices are well above their respective long-term averages, and at their highest reading in more than 15 years, suggesting most consumers are fairly convinced that the economy will continue to expand in the months ahead. It is especially encouraging that the percentage of consumers expecting their income to grow remained relatively high by historical standards. The Director of The Conference Board Consumer Research Center noted: consumers assessments of current conditions were more favourable this month, with the labour force being the main driver. Despite the recent stock market volatility, consumers expressed greater optimism about short-term prospects for business and labour market conditions, as well as their financial prospects. Overall, consumers remain quite confident that the economy will continue expanding at a strong pace in the months ahead. Overall, US consumer confidence remains convincingly elevated, certainly relative to the lows in 2009 and remains above the level that prevailed before President Trump was elected. There is a fairly strong and positive relationship between consumer confidence and consumer spending. This would suggest that consumer activity should remain reasonably buoyant in the months ahead. 5. Nigeria s GDP grew by 1.92% y/y in the final quarter of 2017 which was higher than the third quarter figure of 1.4% y/y. The latest figure was slightly below market expectations of growth of 2.1% y/y. This means that Nigeria s economy grew by 0.8% for all 2017 which was in line with most estimates (Stanlib 0.8%). This is a welcome improvement when compared to the -1.6% recession in Although out of recession Nigeria s economic recovery still remains fragile. The oil sector grew by 8.4% y/y in the quarter which is sharply down from the growth rate of 25.9% y/y in the previous quarter. For 2017 as a whole the oil sector grew by 4.8% compared to the deep contraction of -14.5% recorded in Oil production was slightly lower than the third quarter average of 2.03 million barrels per day (mbdp) and stood at 1.91 mbpd. The sector contributed 8.7% towards overall GDP in 2017 however it is evident that the 2017 recovery was solely based on the recovery in the oil sector. A welcome development is that the non-oil sector grew by 1.5% y/y in the final quarter compared to the -0.8% contraction in the third quarter. For the year as a whole the non-oil sector grew by a disappointing 0.5% against a contraction of -0.2% in all of Disappointingly services contracted by -0.9% for all of This was Nigeria s most vibrant sector in the last few decades and was the main driver of the high growth that Nigeria experienced in the boom years. A recovery in this sector could push growth above the crucial 3% level.

9 Agriculture was again one of the drivers of growth improving to 4.23% y/y from 3.06% y/y (Agriculture makes up 25% of the Nigerian economy). The sector tends to be resilient as weather conditions in Nigeria tend to be relatively stable. Agricultural growth generally fluctuates between 3% and 4.5%. Manufacturing has picked up to 0.1% after contracting to -2.8% in the previous quarter. Amazingly the sector grew by double digits in 2014 and was in recession for 2015, 2016 and The availability of foreign exchange should provide a welcome improvement to this sector in The latest PMI data, which is almost at a record high, suggests a recovery in the sector. Construction ended off 2017 on a good note growing by 4.1% after spending the first three quarters of 2017 in stagnation. Government had signed off a capital expenditure bill amounting to NGN360 billion ($1 billion) which is starting to contribute towards growth. However cement manufacturing fell by -1.9% and was in recession for all of Volumes are expected to pick up in Trade is finally back in positive territory showing that the consumer is gaining some traction growing for the first time since the second quarter of The sector grew by 2.1% after contracting by -1.7% in the third quarter. This is consistent with the positive consumer confidence number recorded in the fourth quarter of 2017, the first time since Trade is one of the biggest sectors within Services and has the potential to drive overall economic activity in Nigeria. Disappointingly the Information Technology sector, which includes telecoms, contracted again in the fourth quarter by -1.5%. The sector contracted for the first time in the third quarter by -4.5%. The latest statistics from the Nigerian Communications Commission are encouraging and could show a return to growth for this year in the sector. This is especially considering that the sale of the mobile operator, 9Mobile, is almost concluded. Real Estate was one of the other disappointments contracting by -5.9% however this sector is expected to contribute meaningfully in the second half of 2018 as electoral campaign spending picks up. The election spending is also expected to push up public administration growth in the same period as it has been in contraction since The financial sector was essentially flat at 0.2%. Banks grew slightly however there was a deep contraction in the insurance sector to the tune of -15.7%. What is evident is that non-oil sector has to maintain the momentum for 2018 as the oil sector has started to lose some steam and will not contribute to growth as much as it did in We forecast growth of 1.5% however this could improve meaningfully should election spending be more than anticipated in the second half. A cut in the interest rate could also provide some stimulus in economic activity. Although out of recession, current growth levels in the Nigerian economy are not enough to improve income levels meaningfully or improve employment prospects. Wealth effects will be minimal as we expect GDP per capita growth to remain stagnant for the next 3 years. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

10 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 6.85% 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 02 March This seven- day rolling average yield may marginally differ from the actual daily distribution and should not be used for interest calculation purposes. We however, are most happy to supply you with the daily distribution rate on request, one day in arrears. The price of each participatory interest (unit) is aimed at a constant value. The total return to the investor is primarily made up of interest received but, may also include any gain or loss made on any particular instrument. In most cases this will merely have the effect of increasing or decreasing the daily yield, but in an extreme case it can have the effect of reducing the capital value of the portfolio. STANLIB Enhanced Yield Fund Effective Yield: 7.78% STANLIB is required to quote a current yield for Income Portfolios. This is an effective yield. The above quoted yield will vary from day to day and is a current yield as at 02 March 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: 8.29% STANLIB Extra Income Fund Effective Yield: 8.04% STANLIB Flexible Income Fund Effective Yield: 6.79% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.50% Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. A schedule of fees and charges and maximum commissions is available on request from the company/scheme. CIS can engage in borrowing and scrip lending. Commission and incentives may be paid and if so, would be included in the overall costs. The above quoted yield will vary from day to day and is a current yield as at 02 March For the STANLIB Extra Income Fund, Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down.

11 Disclaimer The price of each unit of a domestic money market portfolio is aimed at a constant value. The total return to the investor is primarily made up of interest received but, may also include any gain or loss made on any particular instrument. In most cases this will merely have the effect of increasing or decreasing the daily yield, but in an extreme case it can have the effect of reducing the capital value of the portfolio. Collective Investment Schemes in Securities (CIS) are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. An investment in the participations of a CIS in securities is not the same as a deposit with a banking institution. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from STANLIB Collective Investments (RF) (Pty) Ltd (the Manager). Commission and incentives may be paid and if so, would be included in the overall costs. A fund of funds is a portfolio that invests in portfolios of collective investment schemes, which levy their own charges, which could result in a higher fee structure for these portfolios. Forward pricing is used. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. TER is the annualised percent of the average Net Asset Value of the portfolio incurred as charges, levies and fees. A higher TER ratio does not necessarily imply a poor return, nor does a low TER imply a good return. The current TER cannot be regarded as an indication of future TERs. Portfolios are valued on a daily basis at 15h00. Investments and repurchases will receive the price of the same day if received prior to 15h00. Liberty is a full member of the Association for Savings and Investments of South Africa. The Manager is a member of the Liberty Group of Companies. As neither STANLIB Wealth Management (Pty) Limited nor its representatives did a full needs analysis in respect of a particular investor, the investor understands that there may be limitations on the appropriateness of any information in this document with regard to the investor s unique objectives, financial situation and particular needs. The information and content of this document are intended to be for information purposes only and STANLIB does not guarantee the suitability or potential value of any information contained herein. STANLIB Wealth Management (Pty) Limited does not expressly or by implication propose that the products or services offered in this document are appropriate to the particular investment objectives or needs of any existing or prospective client. Potential investors are advised to seek independent advice from an authorized financial adviser in this regard. STANLIB Wealth Management (Pty) Limited is an authorised Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (Licence No. 26/10/590). Compliance No.: HX Melrose Boulevard, Melrose Arch, 2196 P O Box 202, Melrose Arch, 2076 T: (SA Only) T: +27 (0) E: contact@stanlib.com Website: STANLIB Wealth Management (Pty) Limited Reg. No. 1996/005412/07 Authorised FSP in terms of the FAIS Act, 2002 (Licence No. 26/10/590) STANLIB Collective Investments (RF) (Pty) Limited Reg. No. 1969/003468/07