The Weekly Focus. A Market and Economic Update 19 March 2018

Transcription

1 The Weekly Focus A Market and Economic Update 19 March 2018

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 4 Economic Update...6 Rates...8 STANLIB Money Market Fund... 8 STANLIB Enhanced Yield Fund... 8 STANLIB Income Fund... 8 STANLIB Extra Income Fund... 8 STANLIB Flexible Income Fund... 8 STANLIB Multi-Manager Absolute Income Fund... 8

3 Newsflash The bull market can continue to move ahead as earnings continue to grow Market Comment Stock markets globally and locally appear to be in a bit of a funk at this time, meaning they re bouncing around, but not making any headway. We had the sharp correction, then a bit of a recovery and now this funk situation. The S&P 500 Index lost -1.2% last week. The tech-laden Nasdaq Index in the US did hit a record high recently, but that was the only one. We re seeing the US dollar fighting back after a big downtrend over the past year against the euro and most other currencies. On balance this seems to be more negative for markets, certainly for metal prices. At this stage the dollar s down-trend remains intact against the euro, but how much further or longer will its fight-back last? No-one knows. The US Fed is expected to increase interest rates for the 6 th time since 2015 later this week, by another 0.25%. So that s +1.5% in total so far of interest rate hikes, taking the official rate to 1.75%. That is still very low relative to history. Will the Fed signal two or three more hikes in 2018? The market will be watching closely. One issue that does linger in the mind with a concerned question mark is that news recently on the global economy has been so positive, together with low interest rates and inflation in most regions - and the global bull market has been in progress for so long, over 9 years - that one wonders whether a peak has been reached, i.e. how can the news get any better from here? Shares anticipate the future. Can the future get any better than the recent very positive news? Obviously this refers more to the global situation than here in SA, where hopefully things can get a lot better, at least economically. Shares tend to follow earnings more than anything else, even though interest rates certainly play a role too. Earnings are forecast to continue to grow in most regions and to grow quite strongly in the US. So the bull market can continue to move ahead as earnings continue to grow. Last week in our local market there were cross-currents affecting share prices, in particular the Index rebalancing (the ALSI, ALSI 40 and all the other indices). Various shares dropped out of the ALSI 40 Index, for example, like Resilient, to be replaced by some of the resurgent retail shares like Truworths. Naspers may also have been sold off as fund managers change their benchmark from the All Share Index or Shareholder weighted Index to the Capi Shareholder weighted index that limits any share to 10% of the index, instead of 16-21% in some of the former indices. Hopefully by this week the rebalancing is over. Also our market has been noteworthy for the number of scuds hitting certain shares, such as EOH last week, which tumbled -30.7% on news that its earnings would be down around -25% - and this from a company with a great historic earnings growth pattern. And.this is our prime technology share, at a time when many of the big tech shares in the US are growing earnings strongly and hitting record highs. In fact, with the S&P 500 Index now up +2.9% in 2018, the IT sector of this index is way ahead at +9%, followed by Consumer Discretionary +6.8%, then Financials +3.8% and Health Care +3.5%. Six out of eleven sectors are negative, the worst being Energy -6.8%. Tigerbrands has been hammered by the listeriosis crisis. Aspen has struggled too, falling another -4.4% last week on repeated rumours of accounting issues or an imminent nasty report. The company continues to deny these rumours.

4 Of course the benefit for our market of the stronger dollar is a weaker rand helping the beleaguered rand hedges, including the mining shares and the likes of British American Tobacco (-17% in 2018), Richemont (-4%), ABInbev (-3%) and many others. The rand is at this morning. We are still waiting patiently for the independent report on the Resilient stable of listed property companies, being Fortress, NepiRock and Greenbay, as well as Resilient. In the absence of any further bad news, these shares now look very good value from a dividend yield point of view. The SA Listed Property Index has recovered slightly from its low point, but still remains firmly negative in 2018 (-14.8% total return). Otherwise last week we saw NepiRock gaining +9.5% after its big tumble and Capitec recovering +7.8% after its tumble. These are two quality companies that have responded well to the scuds that hit them recently, although both are still strongly negative in UK property company Hammerson is busy with the Intu take-over. Interestingly and surprisingly, Klepierre just announced today that they will pay a 42% premium to take over Hammerson. Hammerson is rejecting the bid. Hammerson s share price is up +25% this Monday morning in both Johannesburg and in London. The STANLIB Property Income Fund owns 1.5% of Hammerson, which is not in the SA Listed Property Index. STANLIB Fund Manager Keillen Ndlovu says we are seeing increased corporate action in the Shopping Mall space between major players, suggesting undervaluation in that space, despite the threat of online shopping. Other Commentators US Market Analyst, Elaine Garzarelli Her quants model reading declined from 73.5% to 71.5% last week and remains bullish. The decline was due to the downgrade of the sentiment indicator as the number of bullish US investment advisors rose to 53%, which is considered bearish in her quants model (too many bullish advisors implies not much spare cash around to buy shares). In the past the S&P 500 Index has peaked after the Fed was done tightening (raising interest rates), which was just prior to a recession starting. At this stage, the Fed is not near the end of tightenings and a recession is not in sight. With 4 th quarter 2017 earnings season almost over, 76% of S&P 500 companies beat analyst estimates. The Information Technology sector led the way with 86% of that sector beating estimates. Fair value for the S&P 500 Index is 2,808, which is 2% above current levels. The US economy has been growing for 105 months (nearly 9 years), the 3 rd longest expansion since If it lasts another 15 months, it would become the longest expansion on record. The economy is solid and current macroeconomic indicators show that the expansion will likely continue. The NFIB small business optimism index is soaring, reaching in February, near its 1983 record high of when GDP growth was 4.6%. Garza is forecasting 2.7% GDP growth for the US in 2018 and 3% in Wow. That would be after 10 years of growth! Consumer spending will likely be the main driving force of the economic expansion, fuelled by record household net worth and robust gains in employment and after-tax incomes. US CPI inflation for February was 2.2%, while core CPI remained at 1.8% for the 3 rd consecutive month. All this indicates little movement in prices.

5 Inflation should be held back partly by technology, i.e. robotics is helping firms, while apps such as Vivino help consumers find low wine prices and self-driving cars are on the road in Arizona. These are powered by electric engines which are cheaper to build and maintain. They will be less likely to have accidents, so they can be built out of lightweight lower-cost materials and will be cheaper to insure. Garza expects the Fed to hike rates four times in 2018, starting on Wednesday. Beyond 2018, she expects additional increases that raise the upper end of the target range for the Fed Funds rate to 3.5% by 2020, so double the 1.75% expected by Wednesday s close. BCA Research BCA s view is that the US economy is poised to grow well above potential in the first half of Consumer spending is well supported. Household wealth is at a record level, the labour market is strong and wage growth is accelerating, albeit modestly at this point in the cycle. Despite recent weather-related consumer spending softness, retail sales are still up a solid +4.1% from a year ago. Financial vulnerabilities from the household sector are well contained. Household borrowing is increasing modestly at an annual pace of 4%, well below the 12% annual rate seen in the 2004/5/6 period. Although consumer delinquency rates are rising, especially in credit cards and autos. BCA still recommends staying overweight equities relative to bonds, as the US economic expansion becomes a decade-long phenomenon. Small business owners currently have the most job openings in at least 18 years, although the quality of the labour is becoming a big concern. Many businesses are having trouble finding low-skilled workers and to a lesser extent middle-skilled workers. At some point, the labour market will overheat. BCA suspects that global growth may have peaked, but should remain comfortably above trend for the remainder of The Global Leading Economic Indicator has levelled out. BCA still recommends European and Japanese shares over US shares. We show a chart below of the rand to the US dollar. It looks like the rand is embarking on a period of weakness. Source: I-Net Bridge Paul Hansen Director: Retail Investing

6 Economic Update 1. SA manufacturing declined more than expected in January 2018, but is still trending higher relative to the level of activity that prevailed a year-ago. 2. SA business confidence improved meaningfully in the first quarter of 2018, but remains below the long-term average. The improved confidence partly reflects recent political developments. 3. Nigeria closer to easing monetary policy as inflation comes in lower than expected. 1. In January 2018, SA manufacturing production fell by a disappointing 1.6%m/m, after increasing by a respectable 1.1%m/m in December 2017 (monthly data is seasonally adjusted). The market was expecting production to rise by a modest 0.3%m/m after a strong Q performance. Over the past year, manufacturing has risen by a welcome 2.5%y/y, and while the overall level of production remains far below the level of activity that prevailed prior to the onset of the global financial market crisis in 2008, the sector has experienced a noticeable acceleration in output on a trend basis over the past year. South African manufacturing has averaged an annual average growth of only -0.4% over the past 12 months, which is obviously extremely disappointing. But this performance was hurt by the weakness in the first half of This is reflected in the fact that the average annual growth rate has improved to 1.3% over the past six months. Domestically, the manufacturing sector is comprised of ten major sub-sectors. The largest being food and beverages (25% of overall manufacturing), followed by the chemical sector (24%), and iron and steel (19%). At the other end of scale, the clothing and textile sector comprises a mere 3% of total manufacturing, while the manufacture of electrical machinery is only 1.6%. Each of these ten major manufacturing sectors are comprised of a number of additional sub-sectors, which means that in total South Africa s manufacturing sector is divided into more than 40 distinct industries, each with its own performance characteristics. Remarkably, while the manufacturing sector (in total) has exhibited only 2.5% growth over the past year, there is a very wide dispersion in performance at a sub-industry level that fluctuates substantially from month-to-month. This dispersion is highlighted by the massive growth gap between the production of basic iron and steel (+12.0%y/y), food and beverages (+10.1%y/y), and glass products (+8.1%y/y) vs. publishing (-18.3%y/y), footwear (-3.1%y/y), and refined fuel (-3.9%y/y). In 2015 as a whole, South Africa s manufacturing sector averaged growth of 0%, which was the worst annual performance since the 2009 recession, and signalled that the sector experienced stagnation or a low intensity recession. This trend continued in 2016 with growth of 0.8% and under-performed further in the first half of However, as highlighted above, there was a noticeable improvement in output during the second half of 2017, especially in the final quarter of the year. At this stage we expect the recent improvement is SA manufacturing to continue at a modest pace in 2018, helped by relatively strong global growth in many of the major developed and emerging economies, a systematic uplift in business confidence due to a more stable domestic political environment, relatively consistent electricity production, on-going labour market stability when compared with prior years and some revival in Sub-Saharan Africa growth. 2. The RMB/BER Business Confidence index rose by a substantial 11 points from 34 in Q to 45 in Q The encouraging 11 index point gain, if sustained implies an improved economic growth performance for 2018 and 2019, certainly relative to the 1.3% GDP growth recorded in The level of business confidence remains below its historical average of around 50 index points and dramatically below the previous peak of 87.2 index points in late 2004; at which time the South African economy was growing at over 5% a year.

7 The 2018 first quarter business confidence survey covered more than senior executives, spread across the building, manufacturing, retail, wholesale and motor trade sectors. Sentiment improved across all sectors. In particular, the motor vehicle trade registered the largest improvement with an increase in confidence of 20 index points to 52. Manufacturing and retail trade both recorded increases of 13 points each. Sentiment among manufacturers improved to 37, and in the case of retailers to 42. Building confidence rose by 7 points to 41. In contrast, wholesale confidence climbed by a more modest 2 points to 53. The latest improvement in the BCI appears to reflect the recent political changes. However, it is important to note that the improvement in confidence during Q remains below the neutral-50 index point level, suggesting that overall the SA business sector still lacks the level of confidence typically associated with a broad-based pick-up in economic activity, most especially fixed investment spending. Under current circumstances it is critical that the building blocks needed for growth in business investment, for example supportive infrastructure, policy certainty, and adherence to the rule of law, are strengthened for the benefit of everyone. It goes without saying that the current uncertainty around land reform needs to be resolved as quickly as possible because if it is allowed to linger, the latest rise in the BCI could easily fizzle out. 3. The Nigeria Bureau of Statistics revealed that inflation came in lower than expected at 14.3% y/y for the month of February. This was lower than last month s figure of 15.1% y/y (market was expecting 14.6%). Month-on-month inflation was registered at 0.8% m/m for the fifth consecutive month which is still high but lower than the 2016 and 2017 averages of 1.4% m/m and 1.2% m/m respectively. Food inflation was sharply lower at 17.6% y/y from 18.9% y/y which is what mainly drove inflation downwards. Food inflation had been stubbornly high since the beginning of 2017 even though other items outside of food were in disinflation. Core inflation was recorded at 11.7% y/y, from 12.1% y/y in January. This is encouraging as it was essentially flat for the last 6 months. Fuel had the highest increase as there have been fuel shortages in the economy since December Transport inflation was high in general as running costs of transport equipment rose at a high pace. At this point it seems as if the moderation in inflation seems broad-based (with the exception of a few items). It is now more likely that inflation drops below the interest rate of 14% in the next print and could even dip below 12% by the middle of the year. However that could be the trough of the inflation path and it is likely that it will pick up in the second half of the year from election campaign spending. The stability in the Naira has helped stabilize overall inflation however the lag was longer than expected. With the real rate now at -0.3% it gives the Central Bank of Nigeria more comfort to cut interest rates. The first cut could be as soon as this month. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

8 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 7.19% Effective: 7.43% 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 16 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: 7.82% 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 16 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: 8.30% STANLIB Extra Income Fund Effective Yield: 7.98% STANLIB Flexible Income Fund Effective Yield: 6.68% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.51% 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 16 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.

9 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