The Weekly Focus. A Market and Economic Update 24 April 2017

Transcription

1 The Weekly Focus A Market and Economic Update 24 April 2017

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

3 Newsflash This high volatility in the rand is frustrating yet it also creates excellent opportunities Market Comment Graph below: total returns year-to-date in 2017 for the four SA asset classes. Source: I-Net Bridge Looking at the chart above of the total returns of the four local asset classes to-date in 2017, one can see that the All Bond Index (pink line) has perked up over the past couple of weeks to regain the top spot, with a return of +4.1% so far in The stronger rand, at a 3-week high today, is helping bonds as it acts as a deterrent to inflation. Also, emerging markets remain the flavour of the year so far. Foreign investors bought R1.6bn of our bonds last week, raising the 2017 total to R35.3bn. It would take both S&P and Moodys rating agencies to downgrade our local debt (90% of total SA government debt) to junk for the bonds to likely be sold off heavily by foreign pension funds and by the Citicorp World Government Bond Index. At this stage, S&P rates our local debt one notch above junk and Moodys two notches above junk, although some believe that this situation is likely by around March next year (both rating our bonds as junk). It all depends on how the politics plays out in the next year and how the politics affects the numbers (government deficit, parastatal financials) and the growth of the economy. This morning the Business Day reported that FNB is the first SA bank to revise down its economic growth forecast for 2017, predicting 0.7% growth, down from their previous 1.1% forecast, owing to the recent political changes and ratings downgrades. The International Monetary Fund last week forecast 2017 SA growth at 0.8%. Back to the graph above, the JSE ALSI is 2 nd to bonds at a +3.6% total return so far in 2017, down from over 6% recently, as ironically the strong rand has hurt the big rand hedge shares that dominate the indices like the ALSI and ALSI 40. Property has not yet responded positively to the recent move lower in the bond yield and move higher in the rand.

4 Cash is third at +2.2% and SA Listed Property is last now at -1.04%, down from a high of over +5% back in March. One can see on the graph how the rising bond yield after Zuma s changes (the blue line) sent the property index down sharply (the red line). So although the latest forecasts on our country are looking a bit gloomy, Citibank has painted a much rosier situation of the global picture, after the recent IMF/World Bank meetings in Washington DC. They say that the mood amongst participants was rather optimistic for the global economy. Global growth is picking up and the risk is more to the upside than the reverse. The US administration is focused on tax reform and Trump may announce more on taxes this coming Wednesday. The local stock market has lately been hurt not only by the stronger rand, but also by a global tumble in mining and resource shares, on the back of a fall in some of the commodity prices, including oil, iron ore and coal. The oil price is suffering from an almost 10% increase in US oil production since the low last year, as the fracking industry increases production, offsetting OPEC s attempts at reducing production. The iron ore price rose from $39 a ton in late 2015 to an elevated $95 in February this year, but has since tumbled to as low as $63, before recovering a bit to $68. Most analysts seem to be forecasting around $60 for the year and many were warning that the price had risen too far. With the global economy picking up, the demand for resources will also increase, so it doesn t seem to make sense to call the latest sharp correction the end to the rally in commodity prices. Also, the dollar has weakened against the euro and many other currencies over the past few days. It is trading at $1.087 this morning against the euro from $1.06 a week ago, thanks to the more positive outcome so far in the French elections, which could assist a recovery in commodity prices, which are almost all in dollars. Typically a weaker dollar boosts commodity prices. The JSE Mining Index has tumbled by -12% over the past 2 weeks back to where it was last April. The total return for this index is now negative in 2017 at -0.3%. However the rand was around to the dollar last April versus now, so in dollar terms the JSE Mining Index is up around +12% over the past year. These sharp rand movements we are witnessing are causing havoc on our mining shares and big rand hedges. The other way to look at it, of course, is volatility creates opportunities! The JSE Financial & Industrial Index is faring better, with a total return so far in 2017 of +5%, although it is still trading at similar levels to two years ago in April Some of the technical analysts or chartists are expressing scepticism about the rand s latest revival, saying it is most likely to be short-lived. If so, then this is potentially creating an opportunity to buy the rand hedges (also the ALSI and ALSI 40) and also invest offshore. A high percentage of US fund managers believe the US stock market to be overvalued, apparently the highest such percentage since before the TMT bubble burst in Most of these fund managers believe equities outside of the US still offer value. Our STANLIB European Equity Feeder Fund therefore is potentially offering a good opportunity in rand terms (see chart of fund s rand unit price below)

5 Source: I-Net Bridge With the European economy growing quite nicely now and company earnings recovering - plus the euro and possibly pound appreciating a bit - this region looks quite attractive. In euro terms the fund s unit price is up +4.8% so far in 2017 and is in a strong uptrend since the Brexit fallout last June (+22.9% from the June lows, in euros). About 30% of the fund is invested in British shares, or at least shares listed on the London exchanges. Other Commentators US Market Analyst, Elaine Garzarelli While over 80% of US fund managers think the US stock market is overpriced, Garza s quants model shows that the S&P is only slightly higher (1.1%) than her model s fair value for the index of 2,322, so she clearly disagrees with these fund managers. Her quants model rose to a still-bullish 73% last week from 71% and she notes that the majority of the model s indicators are bullish, three are neutral and none are bearish. She doesn t expect the post-trump election rally to continue at the same pace, but she does expect a slower continuation of the current bull market. Since her model s reading remains bullish, she says shares can rise well above fair value, sometimes by as much as 20 to 50% above. Her contrarian indicator, the number of bullish investment advisors, has dropped back to 51.9% from 56.3%, although it would need to fall below 39% to become bullish again (showing a high percentage of pessimism). Garza is expecting another rate hike at the next Fed meeting on 14 th June. Incoming economic data continues to be positive, increasing confidence in the US Fed that the economy is on a solid footing. The Conference Board s leading economic indicators rose +0.4% in March (+4.3% y/y) to a new high and in the past after the Leading Economic Indicators hit a new high, the next recession has started on average six years later. Total industrial production (output of mines, utilities and manufacturing) growth is one of Garza s economic cycle indicators. It is ranked bullish and is up +1.5% y/y. It had been hurt over the past two years by slower inventory building and foreign trade, which is likely over.

6 Garza is looking for 1.7% GDP growth for the US in the first quarter of 2017, held down by a mild drag from inventories and a temporary pullback by consumers. She expects improved growth of 2.4% in the full 2017 year and 2.6% in BCA Research Slower U.S. growth in the first quarter of the year, weak inflation readings, uncertainty on tax reform, the prospect of a government shutdown relating to the debt ceiling, and rising political risks in Europe have all contributed to the Treasury rally, i.e. to US government bond yields declining/prices rising. Yields fell from 2.62% on 13 th March to under 2.2% last week, but are back at 2.3% this morning after the French election results. Looking out, BCA thinks US growth should accelerate, while growth abroad should stay reasonably firm. The market is pricing in only 34 basis points in rate hikes over the next 12 months, so BCA thinks this is too low and bond yields should rise. But BCA says China s growth outlook is a bit cloudy. Chinese government officials warned last week that recent measures undertaken to cool the housing sector should begin to bite within a month. The US Congress needs to agree on a bill to extend government funding beyond 28 th April when the debt ceiling is reached. BCA expects approval to be given. BCA still recommends a modestly overweight position in global equities, favouring Japan and the euro area over the US in local currency terms (i.e. not necessarily in US dollar terms). BCA still thinks the dollar may appreciate further once a rebound in US interest rate expectations occurs. Paul Hansen Director: Retail Investing

7 Economic Update 1. SA IMF's world growth outlook slightly more optimistic, but substantial risks remain. SA urgently needs to reform product and labour market in order to strengthen confidence, investment and growth 2. Macron and Le Pen are now in battle for the French Presidency in the final run-off on 7 May. 1. The IMF released their April 2017 World Economic Outlook (WEO) last week, revising up their 2017 estimate of world growth by 0.1 percentage point to 3.5%. Their forecast for 2018 was left unchanged at 3.6%. The latest projections compare with a growth estimate of 3.1% for 2016 and a long-term average growth rate of 3.5%. In other words, the IMF still expects the world economy to accelerate meaningfully over the next two years, helped by cyclical recovery in investment, manufacturing, and trade. This, according to the IMF, should be supported by reduced deflationary pressures, and buoyant financial markets. While the IMF s growth projections appear fairly optimistic considering the length of the world economic recovery since the global financial market crisis, the IMF did flag that the balance of risks to world growth are tilted to the downside. These risks include the dampening impact of persistent low productivity growth as well as sustained high income inequality, which are creating pressures for inward-looking policies, especially in the advanced economies. Unfortunately, an increase in global protectionism tends to stifle the growth in world trade, dampening world economic activity. This can be especially damaging for emerging and developing economies. In advanced economies, the pickup in growth over the next two years is primarily driven by the United States, where activity was held back in 2016 by inventory adjustment and weak investment spending. For 2017, the IMF has assumed that there will be some easing of fiscal policy and a sustained improvement in business confidence that followed the November elections. Over a longer horizon, however, the IMF argues that the outlook for the US economy is more subdued. Potential growth is estimated at only 1.8 percent, weighed down by an aging population and weaker TFP growth. The IMF s outlook has also improved for Europe and Japan based on a cyclical recovery in global manufacturing and trade that started in the second half of In the Euro-area, the economic recovery is expected to proceed at a broadly similar pace in 2017/18 as in This modest recovery is projected to be supported by a mildly expansionary fiscal stance, accommodative financial conditions, a weaker euro, and beneficial spill overs from a likely US fiscal stimulus. These positive could be partially offset by political uncertainty associated with various leadership elections, coupled with uncertainty about the European Union s future relationship with the United Kingdom, In Japan, a comprehensive revision of the national accounts led to an upward revision of historical growth rates and placed the 2016 growth estimate at 1.0 percent, significantly higher than initially projected. The growth momentum, fuelled by stronger-than-expected net exports in 2016, is expected to continue into 2017, with growth forecast at 1.2 percent. The pace of expansion is expected to weaken thereafter, with the assumed withdrawal of fiscal support and a recovery of imports offsetting the impact of stronger anticipated foreign demand and Tokyo Olympics related private investment. Over the medium term, a shrinking labour force will weigh on Japan s growth prospects, although its per capita income growth rates are projected to remain near the levels seen over the past several years. Growth in the United Kingdom is projected to be 2.0 percent in 2017, before declining to 1.5 percent in Recent upward revisions to the 2017 forecast reflect the stronger-thanexpected performance of the UK economy since the June Brexit vote. Nevertheless the impact of Brexit on the UK economy remains a concern.

8 These concerns include reduced consumer purchasing power following the pound s depreciation and its gradual pass-through to prices and the impact of uncertainty on private investment. Though highly uncertain, medium-term growth prospects have also diminished in the aftermath of the Brexit vote because of the expected increase in barriers to trade and migration, as well as a potential downsizing of the financial services sector amid possible barriers to cross-border financial activity. Within emerging market and developing economies, economic activity is projected to pick up markedly, albeit off a relatively low base, helped by higher commodity prices. This applies especially to Russia and Brazil, which were both in recession in Growth in China and India is projected to remain strong. The Chinese economy is projected to grow at 6.6 percent in 2017, slowing to 6.2 percent in The IMF s upward revision to their 2017 forecast reflects the stronger-than-expected momentum in 2016 and the anticipation of continued policy support in the form of strong credit growth and reliance on public investment to achieve growth targets. The medium-term outlook, however, continues to be clouded by increasing resource misallocation and growing vulnerabilities associated with the reliance on near-term policy easing and credit-financed investment. Economic growth in Sub-Saharan Africa is still projected to improve in 2017 and 2018, albeit at a slower pace than what the IMF envisaged a year-ago. In particular, the Nigerian economy is projected to grow by 0.8 percent in 2017, after experiencing a recession in This forecast is largely based on a recovery in oil production, continued growth in agriculture, and higher public investment. The IMF s view on South Africa remains relatively positive, although they have some significant concerns. In particular, the IMF highlighted that SA s near-term recovery remains insufficient to keep pace with population growth. Furthermore, the IMF argues that if SA s growth prospects were to falter, additional measures, such as slower public sector wage increases and a moderate increase in consumption taxes, would be needed to stabilise the debt ratio. With monetary and fiscal policies constrained by the need to keep inflation and the rising public debt in check, reforms in product and labour markets that allow greater entry by new firms and reduce impediments to job creation are urgently needed to strengthen confidence, investment, and growth. According to the IMF, such reforms would lower the cost of crucial inputs for businesses and of services for workers, such as in electric power generation, telecommunications, and transportation. 2. The French voted in the first round of their election process yesterday, Sunday 23 April 2017, to choose their new president. The world watched closely to see just how far the "populist wave" has travelled in what is considered to be the tightest election in France for decades. The voter turnout recorded was above 78%. There were 11 candidates who ran in the first round of the election. The top five candidates in the first round of the 2017's were, in alphabetical order: Francois Fillon (Les Republicains), Benoit Hamon (Socialists), Marine Le Pen (Front National) and Emmanual Macron (Independent) and Jean-Luc Mélenchon (Unbowed France). The two top candidates who won the most votes were, Emmanuel Macron, En March (Centrist) who won 23.8% of the vote and Marine Le Pen, Front National (Far Right) who won 21.6% of the vote and they will now face each other in a second and final run-off, on 7 May 2017 for the Presidency. The first round of voting yesterday was most notable not only for Le Pen s strong finish, but because neither of the country s traditional ruling parties, the Socialists on the left or the on the right, finished in the running.

9 The two-week runoff campaign to the next round will in all likelihood be a battle for the soul of France that will decide not only the country's future, but that of the EU. Few political experts expect Le Pen to increase her support sufficiently past her base to win the 7 May election. Macron, on the other hand who has never held an elected position and, at 39, would be the youngest president in France s history, is currently ahead in the polls and is expected to beat Le Pen to the Presidency. In their concession speeches, both Hamon and Fillon urged their supporters to back Macron in the runoff election. However, few predicted Britain s Brexit or the U.S. election of and we therefore cannot become complacent on the outcome of this election. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

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