The Weekly Focus. A Market and Economic Update 11 June 2018

Transcription

1 The Weekly Focus A Market and Economic Update 11 June 2018

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 4 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 rand is at its weakest level against the dollar, pound and euro since December Market Comment Source: I-Net Bridge After holding quite firm for a few weeks amidst some emerging market turmoil in Argentina, Turkey, Brazil and Mexico, the dam wall eventually gave and the rand followed some of the other emerging market currencies down (see chart above) as it lost 39.5c or -3.1% to the dollar last week, to a 7 month low The shape of the chart above indicates a fair probability of more weakness to come, although no-one knows for sure. The chart shows how the rand weakened sharply from in September last year to in November, before gaining very sharply to in late February this year. At this stage it is trading at a level similar to the February to September level in The rand is also at its weakest level against both the pound and euro since December. Of course there is the good and the bad for investors. Bond yields shot up from 8.5% to over 9% late last week (now 8.92%), causing bond prices to fall. In turn this hurt financial shares and general retailers. The JSE Financials Index is -10.8% from its high on 25 January, back at December levels. General Retailers are -18% from their highs in March, having declined steadily for the past 7 weeks, to be -5.6% year-todate. The good news is rand hedges have firmed a bit, including bombed-out gold and platinum shares, as well as Anglos, BHP, Glencore, Mondi, British American Tobacco and AB Inbev, while offshore markets in rand terms are looking good. The MSCI World Index is +1.6% in 2018 in dollar terms, at a 3-month high, which equals +7% in rand terms. So the STANLIB Global Equity Feeder Fund is +8% in rands in 2018 (see chart below) looking decidedly good on the chart. The fund is now only 11c or 3.6% below its record high seen last November and is +18% from the same date twelve months ago. The S&P 500 Index is now +4.1% in 2018 in dollars, up from +2.5% since last week. The IT sector continues to lead with a return of +12% year-to-date, followed by Consumer Discretionary at +11.4% (up strongly from +7.9% last week), with Energy third at +6.2%. Health Care is at +2.7% and Financials +0.5% (up from -1.5% last week) and Materials have turned positive too at +0.3%, from -2.4% last week. Consumer staples (like tobacco) improved from -12.7% last week to -10.7%, still the worst of all the sectors.

4 Source: I-Net Bridge Similarly, the STANLIB European Equity Feeder Fund is at its highest level in 6 months and is +6.2% so far in 2018 in rands, also looking good on the chart. The MSCI Emerging Markets Index is -0.7% in dollar terms so far in 2018, which is not bad considering that many currencies including the rand are down. Fortunately the biggest part of the index is the MSCI China Index at 31% and the Chinese currency is firmer. The dollar itself hit a 2018 high last week of $1.15 to the euro and is now at $1.181 to the euro. Hopefully it has seen its high and will weaken a bit, because this helps risk-taking and is generally better for markets. The dollar has gained 2c versus the euro so far in Later this week the European Central Bank meets to discuss its quantitative easing program amongst other things. Some expect them to bring forward an end to the QE program, which should be positive for the euro. Markets are expecting the US Fed to hike again this week, by 0.25%. Meanwhile the weaker rand helped the JSE All Share Index gain a bit last week, to be - 1.2% so far in 2018 (total return, including dividends), while the All Bond Index took a knock as bond yields rose and is now just +2.5% in 2018, while SA Listed Property is -17.1% in 2018, still right near its lows. Although our economic growth was extremely disappointing in the first quarter, perhaps that was the low point, meaning things should improve from here on and certainly the weaker rand can help the mining side. Other Commentators US Market Analyst, Elaine Garzarelli The quants model rose last week to a bullish 76.5% from 73.5% because of an upgrading of the Bloomberg Financial Conditions Index to bullish from neutral. This index measures the health of the financial industry. Solid financial conditions in the US money, bond and equity markets supports shares. The index resumed its uptrend after some volatility. Fair value for the S&P 500 Index is at 2,808, +1.2% above current levels. This is based on an earnings estimate of 156 for 2018 and an 18 times fair PE ratio. The number of job openings rose to 6.7 million in April, an extraordinary number and the second consecutive month that a new record high was established. Economic data has been strong recently, including rising consumer confidence, low unemployment and strong company earnings. Consumer net worth rose by +7% year-on-year in the first quarter. It has almost doubled in this expansion. There have been some recent signs of rising prices such as Starbucks coffee prices and Coca-Cola s, however inflation remains modest around the world with China +3.2%, India +2.9%, the Eurozone +1.3%, Australia +0.7% and the US +1.8%.

5 BCA Research Neither the weakness in some emerging market economies nor the political turmoil in Europe are likely to significantly affect the US economy. BCA s energy strategists believe that risks for oil prices remain biased to the upside, although they are less bullish in view of OPEC s possible increase in production in the near future. But BCA thinks Brent oil could hit $90 early next year ($76 now). The US service sector accounts for 62% of US economic activity and 86% of private sector employment. Both the service sector and the manufacturing sector are looking healthy. While the manufacturing sector has a big trade deficit (imports exceed exports) the service sector has a decent trade surplus, including from foreigners travelling in the US. BCA is concerned that Iran could pose some risks for markets if/when the sanctions take place. Meanwhile, on the emerging market front, the underlying factor driving various emerging market currencies and commodity prices is the global business cycle. This common denominator explains why all emerging market exchange rates - including those of noncommodity producers - are positively correlated with resources prices. The global business cycle has softened a bit because of slowdowns in Europe and in Japan, despite ongoing strength in the US; also possibly a bit in China too. The big question is whether countries like Germany and Japan will see their economies pick up into the second half of 2018, because this would help stabilise emerging market currencies. Paul Hansen Director: Retail Investing

6 Economic Update 1. SA GDP recorded a shock decline of -2.2%q/q in Q Broad-based weakness that has pulled our annual growth forecast for 2018 lower. 2. SA manufacturing recorded a disappointing start to Q2 2018, declining by 0.6%m/m. Production continues to stagnate on a trend basis, with a weakening bias in the shortterm, massively under-performing global manufacturing. 3. Public service wage hikes R30bn above budget expected to be paid at the end of June should encourage retail sales growth in Q2 contributing positively to GDP growth. 4. The Nigerian Trade Balance improves meaningfully driven by oil exports. 5. Sub-Saharan Africa PMIs continue to show private sector activity improvements. 1. In the first quarter of 2018, SA GDP declined by a shock -2.2%q/q, annualised (seasonally adjusted). This compares with an increase of 3.1%q/q in the final quarter of The latest GDP performance was well below market expectations, which was for a decline of -0.5%q/q. During 2017 as a whole, SA GDP rose by a modest 1.3%, averaging growth of only 1.1% over the past three years. This is massively below the rate of growth rate required to lift SA employment meaningfully. As a result of the latest GDP outcome the economics team has revised its 2018 GDP forecast lower to 1.3% compared with our initial estimate of 1.5%. The latest forecast still assumes that there will be a sizeable uplift in the pace of economic growth during H The worse than expected GDP performance during Q was fairly broad-based including sharp declines in agricultural output (-24.2%q/q), mining (-9.9%), manufacturing (-6.4%), trade (-3.1%) and construction (-1.9%). Equally concerning is the fact that while some sectors of the economy recorded positive growth, the extent of this performance was extremely disappointing, with the government sectors recording the strongest growth at +1.8%q/q. Although we had expected the Q GDP growth to be weak, we had not expected it to be as weak as -2.2%, with the best performing sector the government! While it can be argued that the sharp decline in agriculture in Q is relative to the high base of activity established in 2017 and that mining output is notoriously volatile, this does not help to explain the weakness in almost every other sector of the economy. Furthermore, the sharp improvement in consumer confidence recorded in Q has not been accompanied by a meaningful increase in employment, suggesting the boost in confidence might not be sustained. Instead, in recent months the consumer has experienced a sharp increase in taxes (including the 1 percentage rise in the VAT rate) as well as significantly higher fuel prices. This would argue that real household incomes and the associated consumer spending could struggle to gain meaningful traction in More positively, recent political changes have had a broadly positive impact on sentiment, helped by a good State of The Nation address in February as well as a reasonably disciplined National Budget. There has also been a material change in the government s approach to managing key State Owned Enterprises (SOE) such as Eskom and Denel. This, together with other positive developments, such as the decision by Moody s in March 2018 to keep South Africa s credit rating on investment grade and President Ramaphosa s new dawn and pledge to turn the tide of corruption has created greater optimism. However, it will take time for these developments to boost economic growth and household income levels on a more sustainable basis. Furthermore, a number of key policy issues remain unresolved and continue to weigh negatively on investor sentiment including the mining charter and land redistribution. In recent years, the South African economy has been struggling with a fundamental lack of private sector capital expenditure, including maintenance capex.

7 Lastly, given the relatively positive global economic backdrop, the South African economy should be growing at around 2.0% to 2.5% currently instead of the -2.2% recorded in Q Closing the gap between South Africa s current growth rate and the 2.5% on a sustained basis is going to require a significantly larger effort than is currently evident, including the co-ordination of policy efforts across key government departments. Unfortunately, 2% or 2.5% GDP growth will still not be anywhere near sufficient to stop the upward drift in the unemployment rate and rise in social tensions. Instead, the target GDP growth rate needs to be around 4% to 5% on a sustained basis, generating at least new jobs each year. 2. In April 2018, SA manufacturing production fell by a very disappointing -0.6%m/m, after growing by 0.6%m/m in March 2018 (monthly data is seasonally adjusted). The market was expecting production to rise by a modest 0.3%m/m. Over the past three months (February 2018 to April 2018) production was down -3.0%q/q. This suggests that the weakness in manufacturing experienced in the first quarter of the year has continued into the start of the second quarter. More positively, over the past year manufacturing has risen by 1.1%y/y, but has averaged an annual growth rate of only 0.3% over past 12 months. Essentially, production continues to stagnate, with output remaining far below the level of activity that prevailed prior to the onset of the global financial market crisis in In addition, and unsurprisingly, South African manufacturing has massively under-performed global manufacturing in the past ten years, especially manufacturing activity in emerging markets. Remarkably, while the manufacturing sector (in total) has grown by only 1.1% 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. 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 0.7% and under-performed further in 2017, recording a decline of -0.5%y/y. Unfortunately, this weakness appears to have continued in early 2018 despite the relatively buoyant global economic backdrop. Lifting South African manufacturing activity on a sustained basis is not an easy task; and certainly more complex than simply arguing for a weaker Rand in order to make South African products more competitive internationally. Competitive manufacturing requires a combination of factors including supportive infrastructure, appropriate regulation, a stable and productive workforce, innovate and dynamic management, an appropriate balance between the use of technology and labour intensity, and access to financing. Unfortunately, in recent years South Africa has struggled to achieve the right combination of factors that would allow the manufacturing sector to flourish and grow in-line with global trends; with one of two exceptions at a sub-industry level. 3. The General Secretary of the Public Service Coordinating Bargaining Council (PSCBC) announced that the agreement providing for the salary adjustments and improvements on conditions of service in the public service for the period 2018/2019; 2019/2020 and 2020/2021 enjoyed the majority support of 65.74% of the of trade unions admitted to the PSCBC. The salary adjustment for the period 1 April 2018 to 31 March 2019, effective from 1 April 2018, for employees on salary levels 1 12 will be as follows: level 1 to 7 7%; level 8 to % and level 11 to 12 6%. The parties have been resolute in negotiating the amicable settlement, irrespective of the various challenges and although everyone may not be happy with everything in the resolution, overall it attempts to address the needs of the 1, 3 million public servants impacted by the agreement.

8 Looking ahead, it is quite likely that government employees may receive their payment adjustments back-dated to April 2018 at the end of June This would give a welcome boost to retail sales for Q which would contribute to avoiding a recession in the next quarter GDP. 4. The trade balance in Nigeria improved by 20.9%, from the last quarter and an impressive 221% over Q This was clearly driven by improvements in the oil sector which have helped boost Nigeria s dominant export. Imports picked up for the first time in 3 quarters and grew to N2, 518 billion. This was 19.22% higher compared to the previous quarter, Q There was some currency effect as the Naira depreciated by as much as 20% against the Dollar on most tradable windows. Foreign exchange has been more readily available which has facilitated the increase in imports. This is likely to continue for the rest of the year which could put pressure on the trade surplus going forward even though it is expected to remain in surplus. Most of the imports came from Europe accounting for 46%, whilst Asia was second with 39% and Africa only accounted for 4%. It should be noted however that most of the imports, when broken down in country terms, were from China at 21.1%. Exports rose faster than imports. The improvement in exports should hardly be a surprise as 76.3% of exports are oil. Oil production increased by 18% between Q and Q1 2018, whilst oil prices increased by 40% in the same period. Exports amounted to N4, 693 Billion, which is 20% higher than the previous quarter. Manufactured goods exports increased by a massive 684% over last quarter but this was off a very low base and the weaker Naira has benefitted the sector. Manufacturing went back into positive territory after being in recession for Agriculture recorded the second highest increase at 63.8% over Q showing that the focus on agriculture from government is starting to pay off. This, along with capital inflows, Eurobond issuances and remittances, helped foreign exchange reserves climb to $47.4 billion from $30 billion a year earlier. Europe again accounted for 49% of exports whilst Asia was second at 28%. Nigeria exports only 10% of its goods to Africa. The increased trade balance should help support the overall current account and therefore help keep the currency stable. This will help the overall inflation outlook although election spending should put some upward pressure on prices in the second half of the year. Developments on the oil sector have helped the economy in Nigeria since so much depends on it. Even though it s 9% of the whole economy it makes up over 70% of foreign exchange earnings and over 80% of government revenue. Therefore significant improvements in the oil sector have a positive effect on the economy. However it still masks the weaknesses prevalent in the non-oil sector which has been stagnant for the last 9 quarters. Things are looking positive for the country however a lot more still needs to be done in terms of policy to stimulate the non-oil sector. 5. The May PMI figures from Sub-Saharan Africa suggest further improvements in the region. The latest statistics show improvements going into the second quarter for the nations on aggregate. An index figure above 50 denotes expansion whilst and a figure below 50 would imply contraction. The stable currency and ability to access foreign exchange has increased business activity in the Nigeria economy. Both sub-sectors of output and new orders hit all-time highs. Job creation continued to improve which bodes well for the services sector, the biggest contributor to Nigeria s GDP. Current business activity tends to track the oil price however the improved oil production seems to have helped overall activity. Fiscally, Nigeria has seen some major improvements on the back of higher oil prices which boosted revenue. Expenditure is expected to rise quite sharply which should boost economic activity in the second half however there is a risk that the effect could be once off. The first quarter GDP print disappointed and did not perform as well as the PMI would have suggested.

9 This illustrates that outside of the oil-sector the Nigerian economy still remains weak. Although the latest PMI figures suggest a strong second quarter GDP figure we are cautiously optimistic. With that being said we still expect an improved second half in 2018 which should boost 2018 performance overall. After having a spectacular 2017 Ghana s economic expansion has continued into The latest PMI figure was recorded at 55.8 from 54.5 in April. The PMI figure has now consistently stayed above 50 since February 2016 which indicates that last year s impressive growth momentum has continued into this year. Wages continued to increase which will bodes well for the biggest sector in the economy which is services. What is concerning is that most of these improvements are not translating into tax revenues which highlights the need to urgently address revenue mobilization. This is especially important considering that interest costs to revenue in the country are at nearly 40%. Although we expect growth to be solid this year it will be coming off a high base and will likely be lower than last year. The Kenya s PMI figures have now been in expansion for the last 6 months suggesting an improvement in activity for 2018 so far. Kenya s private sector is still recovering from a tough 2017 which was plagued by a severe drought and an election impasse which brought economic activity to a halt. Since then things have improved with decent rains and business activity recovering from the elections slump. Panelists have recorded improved demand especially in international markets, which should boost exports. Input prices therefore rose from demand and so did wages. Transporting prices have also risen on the back of higher oil prices and there is evidence that these costs are being passed through to clients. Inflation is still well within the target and seems manageable for now. The interest rate caps still harm economic activity. The Central Bank of Kenya estimates that the caps lowered GDP growth by 0.4 percentage points in 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: 6.47% Effective: 6.67% 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 8 June 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: 7.79% 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 8 June 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: 8.33% STANLIB Extra Income Fund Effective Yield: 7.84% STANLIB Flexible Income Fund Effective Yield: 6.13% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 7.10% 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 8 June 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. The historical yield over the last 12 months is reported for the STANLIB Multi-Manager Absolute Income Fund.

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