The Weekly Focus. A Market and Economic Update 23 April 2018

Transcription

1 The Weekly Focus A Market and Economic Update 23 April 2018

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 5 Economic Update...6 Rates...9 STANLIB Money Market Fund... 9 STANLIB Enhanced Yield Fund... 9 STANLIB Income Fund... 9 STANLIB Extra Income Fund... 9 STANLIB Flexible Income Fund... 9 STANLIB Multi-Manager Absolute Income Fund... 9

3 Newsflash Despite the big fall in listed property so far in 2018, the income or dividends remain unchanged/steady, still showing growth of around 6% or so Market Comment Local Market Comment We have been expecting the rand to give back some of its recent Ramaphoria gains (elastic stretched) and that seems to be happening today, as it is now at to the dollar at 10am this Monday morning, its weakest level in over 3 months (since mid-january). This will help boost the rand hedges on the JSE and offshore investments - in rand terms. Even the SA Listed Property Index has about 40% offshore. Overall it should be positive for the ALSI 40 and ALSI indices. It may hurt the SA Inc. shares a bit, like financials and possibly retailers that have benefited a lot since December. It might also hurt the bond market, because a weaker currency raises the prices of imported goods like oil, which typically leads to higher inflation, which is not good for bonds. To-date in 2018, the All Bond Index remains the best local asset class with a return of +8.2%, followed by Cash, then the JSE ALSI with -2.4% (rose by +1.8% last week) and the SA Listed Property Index with -12.7% (from -14.9% last week.so gained over +2% last week). Last week we saw the JSE Healthcare Index jump +8% as the three big hospital groups move positively, with Mediclinic in particular up +15.2%, then Netcare +11.4% on its decision to exit the UK. Clicks rose to a new record high +11.2%, PicknPay rose by +11.8% and Hammerson +12.8%. British American Tobacco tumbled -11.9% on the back of slightly disappointing Philip Morris results; the share fell -17%. There seems to be a lot of concern about the e-cigarette situation, regarding a lack of brand loyalty amongst users compared with the very strong brand loyalty of cigarette smokers. This has left a share like British American Tobacco, which features strongly in most SA portfolios, trading at about twelve times forward earnings and on a dividend yield of 5.3%. The share is down a whopping -24% so far in The weaker rand will assist the mining and other resource shares like Sasol and Mondi. The JSE Resources Index rose by +4.7% last week on the back of a 2018 high in the dollar oil price and on stronger metal prices, including copper, aluminium and iron ore. The Resources Index is now positive in 2018 at +1.6%. Typically a rising US bond yield, now at a 4-year high of 2.97% (a 4-year low in price), is positive for metal prices and mining shares because it signals a stronger economy and higher inflation. RMB Morgan Stanley notes that investors globally allocated $3bn to commodity-focused hedge funds in the first quarter of 2018, the most in 20 months. Last year they sold -$680m out of commodity hedge funds. Last week Anglo American s share price rose to a 4 year high. It is up +15.8% so far in 2018 and +59% over the past 12 months. By comparison, BHP Billiton is up +4.4% so far in 2018 and +31.2% over the past 12 months. Anglo has staged a remarkable comeback from its low in early 2016 of 50 rand a share to 305 rand today. Investec Securities has an interesting Mining Clock (see below), where they assess where the cycle is for mining shares. At this stage the clock is at 7pm in the cycle, which is still in buying territory (4pm to 8pm is buying territory).

4 Offshore Market Comment The S&P 500 Index rose by +0.4% last week and is now -0.1% in The Consumer Discretionary sector is in the lead with a return in 2018 of +4.3%, followed by IT with +3.5%. The IT sector took a hit last week on news from Taiwan Semiconductor, a big Apple supplier, that global sales of smartphones appear to be slowing somewhat. Apple fell -4% on Friday and is now -2% in 2018 (+16% over the past year). Facebook is - 6% so far in 2018, while Amazon is +30%. 42% of the S&P 500 Index companies will report earnings this week, so it s a very big week for US earnings. The market may get a boost from IT, Financials and Energy company earnings. The median S&P 500 company that issued 2018 tax guidance expects a tax rate of 22% versus 32% last year. So no question the tax cuts will help hugely. The Energy sector of the S&P 500 Index has now turned positive in 2018 with +1.5%. Financials are flat at 0%, with Consumer Staples the worst at -11.2%. On the crucial question of share market sentiment or psychology in the US, long-time market analyst Steve Sjuggerud quotes his favourite source, one Jason Faber, who does a survey of investors and advisors: Sentiment has dropped to a rare low level since the 2009 low. On a scale of 0 to 100, investor sentiment sits at just 5. This amazed Sjuggerud, who says he could never have imagined that we could be over nine years into a great bull market and shares could be this hated. This indicator has only been below 10 just 14 times in the past 20 years. The average gain just 3 months later was +8.5% - and shares were higher 13 out of 14 times three months after it hit an extreme like this. Sjuggerud also quotes the latest Bank of America/Merrill Lynch survey, which indicates that US Fund Managers have lowered their allocation to equities to the lowest in 18 months and have their lowest allocation to technology shares in over 5 years! As Sjuggerud says, he loves this pessimism. It is the kind of extreme sentiment that is setting up the next leg of his so-called Melt Up in US and global shares, the last big upleg of the bull market, which he thinks could last as long as 2 years. He also reiterates that his favourite global Melt Up share is Naspers and it is down -10% so far in 2018 in dollar terms. But I believe that s giving us a huge opportunity, because Naspers itself is an amazing story, says Sjuggerud. The company allow us to own Tencent at a 34% discount - and to own about $20bn of dozens of other ecosystem businesses for free.

5 Other Commentators US Market Analyst, Elaine Garzarelli Garza s quants model reading remains at a bullish 77.5%, where a reading below 30% is a bear market signal. Her Economic Cycle indicators are worth 20% of her quants model and included the indexes of leading indicators and industrial production. The index of leading indicators was up +6.4% year-on-year in March and continues on an uptrend. Industrial production was up +4.3% in March, also improving. Both remain far from their -1% danger level. Her Monetary indicators are worth 24% of the model and include the 3-month bill rate, 10- year interest rate momentum, the yield curve and the money supply. They are all bullish except for the interest rate momentum indicator. On a year-over-year basis the 10-year T- Bond yield is higher, a negative for shares. Her Valuation indicator is worth 25% of the model and is ranked neutral. Currently the S&P 500 index is undervalued by 5.2%, although it generally rises above fair value many times by 20-50% when the model is at a bullish level. Her Sentiment indicators are worth 31% of the model and are ranked at neutral-plus currently. Economic stats this week indicate a solid US economy. Total housing starts and permits have been rising steadily since Retail sales rose by +4.5% year-on-year in March, supported by tax refunds and one-time bonuses. Bloomberg s consumer comfort index rose to a 17-year high. The Beige Book indicated moderate inflation with no suggestion that wages are broadly accelerating. There is downward pressure on inflation as technology, globalisation and competition are offsetting any strength in commodity prices. BCA Research The global economy is slowing. However, growth should stabilise at an above-trend pace over the next few months, as government policy turns more stimulative and interest rates remain in accommodative territory. Most notably global PMIs (purchasing managers indices) and the German IFO (which measures the business climate) have dipped, plus Korean and Taiwanese exports have decelerated to +10% year-on-year, Japanese machinery orders have fallen (still +23% year-on-year though) and the Baltic Dry Index, which measures the cost of shipping dry bulk cargoes like coal and iron ore, has fallen by -36% from its December high. The good news is that investor sentiment has cooled from the exuberant levels of January. Also, monetary policy is still quite accommodative. The yield on the JP Morgan Global Bond Index has averaged 1.88% since the end of the Great Recession - and is lower today at 1.53%. If the next recession starts in 2020 or in about 24 months, then the equity bull market has another months left. BCA remains cyclically overweight global equities, but acknowledge that valuations are stretched and the near-term market environment could remain challenging until leading economic indicators improve. BCA says it cannot fault any long-term investor taking money off the table now though. Paul Hansen Director: Retail Investing

6 Economic Update 1. SA consumer inflation lower than expected in March at 3.8%y/y, helped by a decline in the petrol price, lower food inflation and the relative strength of the Rand. 2. SA retail sales better than expected in February, rising 4.9%y/y. On trend basis, retail sales have averaged growth of around 3.7% over the past year, supported by the recent sharp slowdown in inflation. 3. IMF kept their world GDP growth unchanged at 3.9% for both 2018 and 2019, but highlighted the downside risk associated with an increase in global trade protection. IMF revised South Africa's growth forecast substantially higher. 1. In March 2018, South Africa s headline CPI inflation increased by 0.4%m/m. As a consequence the annual rate of inflation fell to 3.8% from 4.0%y/y in February Core consumer inflation remained unchanged at 4.1%, having fallen more than expected in prior months. This is the lowest level of core consumer inflation since December In general, SA inflation rate remains well under-control and is expected to stay inside the inflation target over the coming year, but with a slight upward bias. For 2017 as a whole, South African inflation averaged 5.3%, down from 6.3% in 2016, but up from 4.6% in SA inflation has averaged a respectable 5.6% over the past five years, and 6.1% over the past 10 years. For 2018 we forecast that SA inflation will average around 4.7%, including the recent increase in the VAT rate, and average about 5.4% in Annual food inflation moved lower in March 2018 to 3.6%, down from 4.0%y/y in February, 4.6%y/y in January 2018 and 4.9%y/y in December As recently as February 2017 food inflation was up at 10.0%y/y. This fall-off in food inflation is still due to the vast improvement in the summer agricultural season in Although food inflation is expected to ease a little further in the coming months, most the benefits of the improved agricultural season are reflected in the current food inflation rate. In that regard, the recent uptick in agricultural inflation suggests that food inflation will tend to drift somewhat higher over the next 12-months. Petrol inflation fell by -2.5%m/m in March, with the annual rate easing to 2.9%y/y from almost 15%y/y in December This largely reflects the 36c/l decrease in the petrol price during the month. Unfortunately the petrol price increased by a substantial 72c/l in April, and is expected to rise noticeably further in May 2018 given the higher oil price. Other price movements in the month included the scheduled increase in the cost of alcoholic beverages and tobacco, a lower than expected increase in housing cost (quarterly survey), as well as very low vehicle and clothing inflation. The breakdown of the inflation data suggests that the stronger Rand has helped to reduce SA s inflationary pressure further. SA inflation has continued to surprise on the downside in recent months, but appears to have reached a low point in the current cycle. In other words, although inflation is expected to remain well under control over the coming year despite the upcoming increase in the VAT rate, it will tend to drift higher into the first half of 2019, before stabilising at around 5.5% for 2019 as a whole. 2. Stats SA released the retail sales data for February 2018 today. According to this latest survey, retail sales rose by a fairly substantial 1.8%m/m in February 2018, after recording a sharp decline of -1.4%m/m in January 2018 and a drop of -3.3%m/m in December These declines follow the November growth of 4.0%m/m, which largely related to the better than expected Black Friday sales. The latest month-onmonth sales performance was better than market expectations, which was for spending to increase by a mere 0.1%m/m.

7 In the past three months from December to February retail sales fell by -1.1%q/q, hurt by the decline in both December and January. Over the past year, retail sales rose by an impressive 4.9%y/y, although this was helped by the low base of retail activity in the beginning of More importantly, on a trend basis, retail activity has achieved an annual average growth rate of 3.7% over the past 12 months, which is well up from a mere 0.9%y/y in February (SA retail data remain relatively volatile from month-on-month, highlighting the importance of analysing consumer activity on a trend basis). This improvement partly reflects the impact of sharply lower inflation, but also increased discounting by many of the large retailers, especially those confronted by the growth in on-line shopping. For 2017 as a whole, SA retail sales grew by 2.8% in real terms, with a noticeable acceleration in the second half of the year. While the recent pick-up in retail spending has been fairly broad-based, the stand-out categories include clothing and footwear, on-line retailing as well as furniture and appliances. As mentioned above, in recent months many retailers have offered bargains/specials, enticing the consumers with great deals. Furthermore, these sales have largely been purchased with cash, as reflected in the fact that the growth in consumer credit remains very modest and trending only moderately higher. As a recap, during 2015, South African consumers were helped by relatively low inflation (4.6%) compared with an average wage increase of 7.7%. This systematically changed in 2016 as inflation moved noticeably higher, and the Reserve Bank continued to hike rates. In addition, the banks became much more circumspect in the granting of credit. The net result was that at the start of 2017 the consumer had less discretionary income available for general retail activity. At the same time consumer confidence had fallen, and is still well below the long-term average. Crucially, in the past 12 months inflation has moved well inside the target range, surprising on the downside more recently. This coupled with the reduction in interest rates (25bps lower in both July 2017 and March 2018) and the discounting of retail goods has provided some support to the household sector that is now reflected in relatively buoyant retail spending data. Unfortunately, weighing against the consumer in 2018 will be the recent tax hikes, including a 1 percentage point increase in the VAT rate as well as the current upward bias in the fuel prices. The net result is that retail spending is expected to remain positive in 2018, but is very unlikely to gain momentum relative to the current trend growth rate unless there is a meaningful improvement in job creation. 3. The IMF released their April 2018 World Economic Outlook (WEO), and have kept their global growth expectations for both 2018 and 2019 unchanged at 3.9%. This is compared with their January 2018 estimate. The IMF focused heavily on the downside risks to world growth should there be a meaningful increase in global trade protection. In addition, the IMF highlighted that beyond 2019, global growth could fade as central banks tighten monetary policy, the US fiscal stimulus subsides and China s gradual slowdown continues. It is clear, from the IMF s perspective that increased global trade restrictions threaten to undermine confidence and derail global growth prematurely. While some governments are pursuing substantial economic reforms (for example China), other countries are launching trade disputes and looking to increase tariff barriers (for example United States). In other world, the two largest economies in the world are flirting with a trade war at a time of widespread economic expansion that has, ironically, been highly dependent on increased global trade. Interestingly, according to the IMF the current trade initiatives by the United States will do little to change the multilateral or overall US external current account deficit, which owes primarily to a level of aggregate US spending that continues to exceed total income. Furthermore, the recent US fiscal measures will actually widen the US current account deficit.

8 Some of the IMF s longer-term growth concerns relate to aging populations in advanced economies, including falling rates of labour market participation and low productivity growth. In contrast, emerging and developing economies present a more diverse performance outlook, however the IMF highlighted that those emerging markets that rely heavily on commodity exports will need to diversify their economies in order to boost future growth and resilience. In term of global debt, IMF pointed-out that global debt levels, both private and public, are very high and that this threatens potential repayment problems as interest rates rise. Lastly, it is very encouraging to see that the IMF has revised South Africa s GDP growth forecasts substantially higher for both 2018 and These upward revisions follow the IMF s downward adjustment to SA growth outlook in the beginning 2018 that reflected their concerns about domestic political developments ahead of the ANC s elective conference in December The IMF s GDP growth estimates for SA of 1.5% for 2018 and 1.7% for 2019 are now largely in-line with the current consensus forecast. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

9 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 6.71% Effective: 6.92% 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 20 April 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: 7.88% 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 20 April 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: 8.39% STANLIB Extra Income Fund Effective Yield: 7.95% STANLIB Flexible Income Fund Effective Yield: 6.31% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.46% 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 20 April 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.

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