Sinayo Securities LTD(PTY) Week Ahead. Issue September 30 September. In this Issue. This Weeks Highlights

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1 Sinayo Securities LTD(PTY) 2 Maude Street, 14th Floor, The Forum Building, Sandton 2196 Week Ahead Issue September 30 September In this Issue Weekly Wrap up 1 Local Company Events.. 2 In the news Local Companies... 2 Offshore Company Events. 5 World Economic Events 6 Interest Piece Factor Investing 10 The distinctions that we often have in the investing landscape are somewhat artificial. For instance, we spend a lot of time arguing about active vs. passive. I would argue that you really don t care if it s active or passive. What you care about is your risk-adjusted return. Shundrawn Thomas This Weeks Highlights BOJ Kuroda speech (Monday) US Fed Kaplan speaks (Monday) Japanese leading Index (Monday) BOJ Monetary Policy Meeting Minutes (Tuesday) US Consumer Confidence Index (Tuesday) German Retail Sales (Tuesday) RBA s speech (Wednesday) Fed Mester speech (Wednesday) Japan Retail data (Thursday) SA private sector credit (Thursday) SA Money Supply (Thursday) SA PPI (Thursday) Japanese jobless rate (Friday) Chinese PMI Mfg (Friday) UK GDP (Friday) EC Unemployment rate (Friday) *12 Fed Speakers Week ahead September 26,

2 Week Ahead 15 Weekly Market Wrap Up Below is a brief synopsis of what happened in the markets in case you missed out on some key stories and events that moved the market. Monday kicked off with the start of central bank week with anticipation of the decisions that would be coming out of the US Federal Reserve and the Bank of Japan in relation to monetary policy. On the Local front markets were anticipating the move that the SARB would make regarding interest rates. A stronger Rand helped banks and retailers which were up 2% on Monday. US markets closed in positive territory driven by energy sector stocks. Asian markets also traded higher during the day. On Wednesday the Bank of Japan decided to leave rates unchanged, rather opting to target its yield curve. Following a two day meeting the FOMC left the federal funds rate between 0.25% and 0.50%. The Fed did caution markets that if the US market continues to show strength it would hike before the end of the year. US markets closed higher following the Fed s decision. Brent oil rose after the Energy Information Administration reported a drop in US inventories. The JSE traded lower due to a stronger Rand. On Tuesday the JSE closed at a two month low driven mainly by a stronger dollar which saw a decline in the dual listed companies. The banking and retail sectors did not fair too well given the strength in the Rand. European markets closed flat as investors decided to remain on the sidelines prior to the outcomes of the monetary policy meetings coming out of the Fed and the BOJ. The US markets were mixed following the release of housing data which came out below consensus. The JSE was up on Thursday following several days of losses with markets anticipating the rate decision from the FOMC. Gold was up by 4% and the rest of the indices also closed in positive territory. European stocks closed higher taking ques from the Fed s decision. US stocks also closed higher. The JSE closed firmer despite a volatile day for markets. European stocks closed lower as markets following the release of manufacturing data. US stocks also closed lower on Friday due to sharp declines in the oil price. Week ahead September 26,

3 Local Company Events This week there are eleven companies that are releasing their results this week. Company Name Company Ticker Date Date Type Type Period Pallinghurst Resources Ltd PALLRES BH 2016/09/22 Estimated Earnings Results Q Trencor Ltd TRE SJ 2016/09/23 Estimated Earnings Results S Capitec Bank Holdings Ltd CPI SJ 2016/09/27 Confirmed Earnings Results S Zeder Investments Ltd ZED SJ 2016/10/05 Estimated Earnings Results S PSG Konsult Ltd KST SJ 2016/10/06 Confirmed Earnings Results S Calgro M3 Holdings Ltd CGR SJ 2016/10/10 Estimated Earnings Results S Holdsport Ltd HSP SJ 2016/10/11 Estimated Earnings Results S PSG Group Ltd PSG SJ 2016/10/12 Estimated Earnings Results S Pick n Pay Stores Ltd PIK SJ 2016/10/18 Confirmed Earnings Results S DataTec Ltd DTC SJ 2016/10/19 Confirmed Earnings Results S Famous Brands Ltd FBR SJ 2016/10/20 Estimated Earnings Results S In the news local company events In case you missed a few announcement and events or need a brief recap, below are some of the announcement and events that have taken place in the past few weeks in relation to some of the companies that are releasing their earnings results this coming week from the 26 th of September to the 30 th of September. PSG Group Ltd Founded nearly twenty one years ago PSG has been able to build a successful empire. Finweek noted that an investment of R1000 when the company was first listed in November 1995 would have been worth nearly R3.9 million at the end of May 2016, assuming that dividends were reinvested. Over the past year the company has announced that it had R2.9bn in cash available to make further investments. In April it acquired 25% of Capespan thorough its agribusiness investment holding firm Zeder. The share price of Zedar improved after it reached agreements with PSG to waiver management fees, which would free up cash flows for the company to pursue profitable investments. The share price also strengthened due to a recovery in the Pioneer share price which is 61% of PSG s underlying value. Another contributing factor was a management announcement that the company was looking at waste and water management projects. Week ahead September 26,

4 Capitec Bank Holdings Ltd In an economic environment of tepid growth, and higher defaulting loans where banking margins are being placed under pressure, Capitec seems to be bucking the trend. According to Finweek Capitec has been able to acquire 22% of the primary baking market share. Through its low cost strategy Capitec is able to attract around banking clients per month. The bank also makes use of unsecured lending. It should be interesting to see how it has performed relative to the bigger banks. Famous Brands Famous Brands announced the purchase of the entire issued share capital of GBK Restaurants Limited. The acquisition cost is estimated at R2.1 Billion, this is at an exchange rate hedged at R The effective date of the acquisition is on the 7 th of October. GBK's earnings before interest, tax, depreciation and amortization was approximately GBP 9.6 million, and its net asset value was GBP 14.4 million, as at the year ended 30 June 2016 of which 100% is attributable to Famous Brands. It will be interesting to see how the share price of Famous brand will move, in the coming months after the acquisition. The company s share price is up 17.08% year to date. Offshore Company Events There are no company events this week Week ahead September 26,

5 World Economic Events The table below shows the weekly calendar of economic events taking place the whole of this week. This week the twelve speeches coming out of the Federal Reserve will be closely observed by the market. Date Time Country Event Period Survey Prior Monday 26 September 09/26/ :00 JN Leading Index CI Jul F /26/ :00 JN Coincident Index Jul F /26/ :30 JN BOJ Kuroda makes a speech in Osaka 09/26/ :00 GE IFO Business Climate Sep /26/ :00 GE IFO Current Assessment Sep /26/ :00 GE IFO Expectations Sep /26/ :30 UK BBA Loans for House Purchase Aug /26/ :00 UK CBI Total Dist. Reported Sales Sep /26/ :50 UK Bank of England Bond-Buying Operation Results 09/26/ :00 EC ECB's Draghi Speaks at European Parliament in Brussels 09/26/ :00 US New Home Sales Aug 594k 654k 09/26/ :00 US New Home Sales MoM Aug -9.20% 12.40% 09/26/ :30 US Dallas Fed Manf. Activity Sep /26/ :00 FR Total Jobseekers Aug k 09/26/ :00 FR Jobseekers Net Change Aug /26/ :00 AS ECB's Nowotny at Panel Discussion on Banking 09/26/ :30 US Fed's Kaplan Speaks in San Antonio Moderated Q&A Tuesday 27 September 09/27/ :30 AU ANZ Roy Morgan Weekly Consumer Confidence Index 25-Sep /27/ :50 JN PPI Services YoY Aug % 09/27/ :50 JN BOJ Minutes of July Meeting 09/27/ :30 CH Industrial Profits YoY Aug /27/ :00 CH Bloomberg Sept. China Economic Survey 09/27/ :00 EC M3 Money Supply YoY Aug % 09/27/ :30 HK Exports YoY Aug % 09/27/ :30 HK Imports YoY Aug % 09/27/ :30 HK Trade Balance Aug b 09/27/ :30 SA Non-Farm Payrolls QoQ 2Q % 09/27/ :40 UK BOE Indexed Long-Term Repo Operation Results 09/27/ :00 UK CBI Retailing Reported Sales Sep /27/ :00 US S&P CoreLogic CS US HPI MoM SA Jul % 09/27/ :00 US S&P CoreLogic CS 20-City NSA Index Jul /27/ :00 US S&P CoreLogic CS 20-City MoM SA Jul -0.10% -0.07% 09/27/ :00 US S&P CoreLogic CS 20-City YoY NSA Jul 4.90% 5.13% Week ahead September 26,

6 09/27/ :00 US S&P CoreLogic CS US HPI NSA Index Jul /27/ :00 US S&P CoreLogic CS US HPI YoY NSA Jul % 09/27/ :45 US Markit US Services PMI Sep P /27/ :45 US Markit US Composite PMI Sep P /27/ :50 UK Bank of England Bond-Buying Operation Results 09/27/ :00 US Consumer Confidence Index Sep /27/ :00 US Richmond Fed Manufact. Index Sep /27/ Oct 09/27/ Oct GE Retail Sales MoM Aug % GE Retail Sales YoY Aug % Wednesday 28 September 09/28/ :20 AU RBA's Edey Speech in Melbourne 09/28/ :45 CH Westpac-MNI Consumer Sentiment Sep /28/ :00 JN Small Business Confidence Sep /28/ :00 GE GfK Consumer Confidence Oct /28/ :30 ES ECB's Hansson speaks on outlook for euro area, Estonia in /28/ :45 FR Consumer Confidence Sep /28/ :00 US MBA Mortgage Applications 23-Sep % 09/28/ :30 US Durable Goods Orders Aug P -1.00% 4.40% 09/28/ :30 US Durables Ex Transportation Aug P -0.40% 1.30% 09/28/ :30 US Cap Goods Orders Nondef Ex Air Aug P -0.10% 1.50% 09/28/ :30 US Cap Goods Ship Nondef Ex Air Aug P % 09/28/ :30 GE Draghi Attends Meeting of German Parliament's EU Committee 09/28/ :50 UK Bank of England Bond-Buying Operation Results 09/28/ :10 US Fed's Bullard Makes Introductory Remarks on Community Banking 09/28/ :30 US Fed's Evans Speaks on Community Banking in St. Louis 09/28/ :35 US Fed's Mester Speaks on Economic Outlook and Policy 09/28/ Oct 09/28/ Oct UK Nationwide House Px NSA YoY Sep % UK Nationwide House PX MoM Sep % Thursday 29 September 09/29/ :15 US Fed's George Speaks to Minority Bankers in Kansas City 09/29/ :50 JN Retail Trade YoY Aug -0.70% -0.20% 09/29/ :50 JN Retail Sales MoM Aug -0.50% 1.40% 09/29/ :50 JN Dept. Store, Supermarket Sales Aug % 09/29/ :50 JN Japan Buying Foreign Bonds 23-Sep b 09/29/ :50 JN Japan Buying Foreign Stocks 23-Sep b 09/29/ :50 JN Foreign Buying Japan Bonds 23-Sep b 09/29/ :50 JN Foreign Buying Japan Stocks 23-Sep b 09/29/ :00 CH Swift Global Payments CNY Aug % 09/29/ :30 AU Job vacancies Aug % 09/29/ :00 SA Money Supply M3 YoY Aug % 09/29/ :00 SA Private Sector Credit YoY Aug % 09/29/ :35 JN Kuroda Speaks at Security Association Conference Week ahead September 26,

7 09/29/ :00 GE CPI Saxony MoM Sep % 09/29/ :00 GE CPI Saxony YoY Sep % 09/29/ :00 SA Bloomberg Sept. South Africa Economic Survey 09/29/ :55 GE Unemployment Change (000's) Sep -- -7k 09/29/ :55 GE Unemployment Claims Rate SA Sep % 09/29/ :00 GE CPI Brandenburg MoM Sep % 09/29/ :00 GE CPI Brandenburg YoY Sep % 09/29/ :00 GE CPI Hesse MoM Sep % 09/29/ :00 GE CPI Hesse YoY Sep % 09/29/ :00 GE CPI Bavaria MoM Sep % 09/29/ :00 GE CPI Bavaria YoY Sep % 09/29/ :00 FI Bank of Finland Governor Liikanen Briefing on Monetary Policy 09/29/ :30 UK Net Consumer Credit Aug b 09/29/ :30 UK Net Lending Sec. on Dwellings Aug b 09/29/ :30 UK Mortgage Approvals Aug k 09/29/ :30 UK Money Supply M4 MoM Aug % 09/29/ :30 UK M4 Money Supply YoY Aug % 09/29/ :30 UK M4 Ex IOFCs 3M Annualised Aug % 09/29/ :30 GE CPI North Rhine Westphalia MoM Sep % 09/29/ :30 GE CPI North Rhine Westphalia YoY Sep % 09/29/ :00 EC Economic Confidence Sep /29/ :00 EC Business Climate Indicator Sep /29/ :00 EC Industrial Confidence Sep /29/ :00 EC Services Confidence Sep /29/ :00 EC Consumer Confidence Sep F /29/ :00 US Fed's Harker Speaks in Dublin, Ireland 09/29/ :30 SA PPI MoM Aug % 09/29/ :30 SA PPI YoY Aug % 09/29/ :00 GE CPI MoM Sep P % 09/29/ :00 GE CPI YoY Sep P % 09/29/ :00 GE CPI EU Harmonized MoM Sep P % 09/29/ :00 GE CPI EU Harmonized YoY Sep P % 09/29/ :30 US Advance Goods Trade Balance Aug -$62.4b -$59.3b 09/29/ :30 US Wholesale Inventories MoM Aug P 0.00% 0.00% 09/29/ :30 US GDP Annualized QoQ 2Q T 1.40% 1.10% 09/29/ :30 US Personal Consumption 2Q T % 09/29/ :30 US GDP Price Index 2Q T 2.30% 2.30% 09/29/ :30 US Core PCE QoQ 2Q T % 09/29/ :30 US Initial Jobless Claims 24-Sep /29/ :30 US Continuing Claims 17-Sep /29/ :50 US Fed's Lockhart Speaks to the Future of Florida Forum 09/29/ :45 US Bloomberg Consumer Comfort 25-Sep /29/ :00 US Fed's Powell Speaks on Community Banking in St. Louis 09/29/ :00 US Pending Home Sales MoM Aug -0.30% 1.30% 09/29/ :00 US Pending Home Sales NSA YoY Aug % Week ahead September 26,

8 09/29/ :00 US Fed's Kashkari Speaks at Town Hall in South Dakota 09/29/ :00 US Yellen addresses minority banking conference via video link 09/29/2016 GE CPI Baden Wuerttemberg MoM Sep % 09/29/2016 GE CPI Baden Wuerttemberg YoY Sep % Friday 30 September 09/30/ :01 UK GfK Consumer Confidence Sep /30/ :01 UK Lloyds Business Barometer Sep /30/ :30 JN Jobless Rate Aug 3.00% 3.00% 09/30/ :30 JN Job-To-Applicant Ratio Aug /30/ :30 JN Overall Household Spending YoY Aug -2.50% -0.50% 09/30/ :30 JN Natl CPI YoY Aug -0.50% -0.40% 09/30/ :30 JN Natl CPI Ex Fresh Food YoY Aug -0.50% -0.50% 09/30/ :30 JN Natl CPI Ex Food, Energy YoY Aug 0.20% 0.30% 09/30/ :30 JN Tokyo CPI YoY Sep -0.50% -0.50% 09/30/ :30 JN Tokyo CPI Ex-Fresh Food YoY Sep -0.40% -0.40% 09/30/ :30 JN Tokyo CPI Ex Food, Energy YoY Sep 0.10% 0.10% 09/30/ :50 JN BOJ Summary of Opinions at Sept Meeting 09/30/ :50 JN Industrial Production MoM Aug P 1.30% -0.40% 09/30/ :50 JN Industrial Production YoY Aug P 3.50% -4.20% 09/30/ :00 AU HIA New Home Sales MoM Aug % 09/30/ :30 AU Private Sector Credit MoM Aug 0.50% 0.40% 09/30/ :30 AU Private Sector Credit YoY Aug 5.90% 6.00% 09/30/ :45 CH Caixin China PMI Mfg Sep /30/ :00 JN Vehicle Production YoY Aug % 09/30/ :00 JN Housing Starts YoY Aug 7.60% 8.90% 09/30/ :00 JN Annualized Housing Starts Aug 1.003m 1.005m 09/30/ :00 JN Construction Orders YoY Aug % 09/30/ :00 JN Natl CPI Ex Fresh Food, Energy YoY Aug 0.50% 0.50% 09/30/ :45 FR PPI MoM Aug % 09/30/ :45 FR PPI YoY Aug % 09/30/ :45 FR CPI EU Harmonized MoM Sep P % 09/30/ :45 FR CPI EU Harmonized YoY Sep P % 09/30/ :45 FR CPI MoM Sep P % 09/30/ :45 FR CPI YoY Sep P % 09/30/ :45 FR Consumer Spending MoM Aug % 09/30/ :45 FR Consumer Spending YoY Aug % 09/30/ :30 HK Retail Sales Value YoY Aug % 09/30/ :30 HK Retail Sales Volume YoY Aug % 09/30/ :30 UK GDP QoQ 2Q F % 09/30/ :30 UK GDP YoY 2Q F % 09/30/ :30 UK Current Account Balance 2Q b 09/30/ :30 UK Index of Services MoM Jul % 09/30/ :30 UK Index of Services 3M/3M Jul % 09/30/ :30 UK Total Business Investment QoQ 2Q F % 09/30/ :30 UK Total Business Investment YoY 2Q F % Week ahead September 26,

9 09/30/ :00 EC Unemployment Rate Aug % 09/30/ :00 EC CPI Estimate YoY Sep /30/ :00 EC CPI Core YoY Sep A % 09/30/ :00 SA South Africa Budget Aug b 09/30/ :00 SA Trade Balance Rand Aug b 09/30/ :30 US Personal Income Aug 0.20% 0.40% 09/30/ :30 US Personal Spending Aug 0.20% 0.30% 09/30/ :30 US Real Personal Spending Aug 0.00% 0.30% 09/30/ :30 US PCE Deflator MoM Aug 0.10% 0.00% 09/30/ :30 US PCE Deflator YoY Aug % 09/30/ :30 US PCE Core MoM Aug 0.20% 0.10% 09/30/ :30 US PCE Core YoY Aug 1.70% 1.60% 09/30/ :45 US Chicago Purchasing Manager Sep /30/ :00 US U. of Mich. Sentiment Sep F /30/ :00 US U. of Mich. Current Conditions Sep F /30/ :00 US U. of Mich. Expectations Sep F /30/ :00 US U. of Mich. 1 Yr Inflation Sep F % 09/30/ :00 US U. of Mich Yr Inflation Sep F % 09/30/2016 CH BoP Current Account Balance 2Q F -- $59.4b Week ahead September 26,

10 Week Ahead 15 Issue 15 Factor Based Investing In the current low economic growth environment, and unconventional monetary policies as well as rising geopolitical risks the search for yield is becoming ever more prominent. If you combine this with the ever contentious debate of active vs passive investing you have an environment where investor appetites become more inclined towards low cost investment strategies delivering similar if not superior results to active strategies, better known as smart beta strategies. Background of Factor Based Investing Factor based investing is not a novel idea as it dates back several decades ago and it is backed by a plethora of empirical studies. Factors aim to explain what drives returns in a portfolio, and by definition they aim to look at specific attributes of an asset to better understand and perhaps predict the returns. The popularity of factor based investing has been growing as seen by the inflows into smart beta ETF s, shown in the graph below. Figure1: Cumulative imputed flows into single factor ETF s Source: BlackRock Factor based investing was borne out of the theory underlying the arbitrage pricing model which is attributed to Ross. The Arbitrage pricing model is often cited as an alternative to the CAPM model. The arbitrage pricing model states that there is a linear relationship between the expected returns of an asset and factor exposures, such as momentum, value, growth, quality etc. Week ahead September 26,

11 Empirical evidence behind factor based investing If someone said it took only three to four investment choices to construct a portfolio that outperforms the overall broad market especially to novice investors that would sound too simple and unfounded. Taking a data set spanning over 20 years on the JSE Muller and Ward found strong supporting evidence of style factors that were able to deliver persistent returns that outperformed the market. Various combinations of styles were chosen to create portfolios falling in various quantiles represented on the key as Safa 11, Safa12 etc. Figure 2: Combined style factors Source: Muller and Ward Figure two above shows the results from the study done by Muller and Ward. The best portfolio had a combination style of momentum, return on capital, and cash-flow to price and earnings yield, which gave the highest yield of 32.3%.Without any prior fundamental research and any other form of research the study was able to show that the winning portfolio was able to achieve a return of 18.3% above what the JSE had returned over a period of 28 years spanning from 1984 to Week ahead September 26,

12 Outperforming factors this year (Quarter II of 2016) Style Factors in the US Quality factors were the best performing sector in quarter two of 2016 with stocks with a higher returns stability outperforming sales growth stability, earnings growth stability and the International Brokers Estimate System (IBES) 12 month growth stability. Growth factors showed a mixed performance with return on equity, earnings growth, and income to sales and sales growth underperforming those with high expectations for future growth. Value factors were the worst performing factors with the exception of higher dividend yielding stocks. Figure 3: Factor performance return relative to the market (3 months sector adjusted) IBES 12 Month Growth Stability -1.2 Quality Returns Stability 1 Sales Growth Stability 0.3 Earnings Growth Stability -0.8 Momentum MT Momentum ST Momentum IBES FY2 Estimate Revisions 0.6 IBES FY1 Estimate Revisions 0.6 IBES 12 Month Income/Sales Growth Earnings Growth 0.9 Return on Equity -1.1 EBITDA to Price -0.6 Sales to Price Cashflow Yield Value Earnings Yield -0.9 Dividend Yield 0.7 Book to Price Source: Style Research The performance of the style factors is in line with the long term historical performance of factors. In the current low economic growth and with inflation persistently below expectations within the major economic regions such as the US, Japan and Europe style factors that have historically performed well in this environment are value, followed by quality and size with momentum and volatility underperforming. Week ahead September 26,

13 % Standard Deviation Style Factors in the EAFE (Europe Australasia and the Far East) region According to Style Research value factors were the worst underperforming factors in quarter two of 2016 for the EAFE region with the exception of dividend yield, returning 0.1%. Growth factors outperformed with the exception of growth stocks with higher growth earnings underperforming all the other growth factors. The second category of factors that outperformed was the quality factors. In the EAFE region the underperformance in value factors indicated that investors were fleeing into safety assets following the uncertainty following the Brexit vote. Style Factors in the Emerging Market Region Within the emerging markets region returns in the factors were driven mainly by the sentiment in the markets between risk on and risk off. Take for example in April when the market was risk on valuation factors mainly performed well, and in May the sentiment was mixed with no particular style showing outperformance. In June markets were risk off which had less of an impact in emerging markets. The graph below shows the volatility of some of the factors on the JSE, the factor with the largest volatility so far is trade activity, followed by momentum then profit and dividend yield. Figure 4: Volatility of Style Factors in the JSE Top Dates( Monthly) Momentum Size Trade Activity Value DivYld EarnVariab Growth Leverage Liquidity Profit Source: Bloomberg Data The volatility across most of the factors as shown in the graph above has been fairly constant with the exception of trading activity, momentum and profit. Trading activity has shown the most volatility where is momentum and profit have shown slight volatility. The graph above implies that investors that would have picked any of the single style factors would have experienced minimum volatility. Week ahead September 26,

14 Conclusion This week there are twelve speakers coming out of the US Federal Reserve. On the local front figures on private sector credit as well as PPI figures are coming out. On the local front data for private sector credit and money supply will be out a well as data on PPI. Week ahead September 26,