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

Transcription

1 The Weekly Focus A Market and Economic Update 23 July 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 SA Reserve Bank lowered its forecast growth for our economy from 1.7% to 1.2% for this year. Market Comment The JSE ALSI is slightly up over the past week, with a total return so far in 2018 of -3.1%. SA Listed Property remains near its low for the year, with a return of -21.2% so far in 2018, while the All Bond Index has returned +5.2%. Interestingly, if you exclude the Resilient stable of companies (mostly Resilient, Nepi Rockcastle and Fortress B), the Property Index is down just -3.2% so far in 2018, clearly indicating that much of the index hasn t actually done that badly this year, especially considering it had a good year in STANLIB s Property team is forecasting a double-digit total return for the next 12 months for the index, including dividend growth of 7-8%, bolstered by the offshore-oriented companies. They say the index is now on a forward dividend yield of as much as 9%, better than the current 10-year government bond yield of 8.7%. The Bond team is forecasting the bond yield to decline to 8.25% in a year, allowing for some capital appreciation in bonds and potentially boosting returns for local property shares. The Property team s assessment is that Resilient, Fortress B and Nepi Rockcastle are undervalued after their big declines earlier this year. So if both the Bond team and Property team are correct, then the STANLIB Bond Fund and the STANLIB Property Income Fund represent good buying opportunities at this stage, obviously with some risk, which is always the case. Otherwise, STANLIB s Chief Economist Kevin Lings and Head of Equities Herman van Velze both mentioned in their commentary last week that our SA economy remains at a low point and companies are as yet not seeing any pick-up in demand. Also the SA Reserve Bank lowered its forecast growth for our economy from 1.7% to 1.2% for this year, which is a material decrease. So company earnings of shares focused on the SA economy will mostly continue to be weak for the foreseeable future. There is as yet no sign of any pickup. Typically shares start moving up (or down) about 3 to 6 months before any positive (or negative) move in the economy and company earnings. At this stage, shares are clearly not expecting much change in the near future. Somewhere along the line, hope will spring One can see the poor performances of the mostly SA-Inc. shares as reflected in the 2018 performances to-date of the JSE Mid-Cap Index and JSE Small-Cap Index. The JSE Mid-Cap Index has returned -10.3% so far in 2018, including dividends, while the JSE Small-Cap Index has returned -5.6%. Both indices are trading at the same level as 3.5 years ago. Investors see value in many of these shares, but may need to be very patient to realise decent returns from them. The ALSI 40 Index of the top 40 shares has a fairly strong offshore bias to it. So far its total return in 2018 is -2.2%, benefiting to some extent from the -8.5% decline in the rand and better earnings growth of most offshore companies, reflecting the much better economic growth offshore. Emerging markets in general have not done well this year, at least so far. Turkey is down % in dollar terms, Brazil -15.3% and SA -13.3%. There have been 8 consecutive weeks of outflows from emerging market equities (almost -$20bn), while emerging market bond flows just turned positive for the first time in 3 months.

4 On the offshore front, the MSCI World Index is close to a 4-month high, in dollar terms (+3.2% in dollars in 2018, including dividends), mostly thanks to the pick-up in the US market. This equates to +11.8% in rand terms and is close to its record high from November. The STANLIB Global Equity Feeder Fund is almost at a new record high in rands. The S&P 500 Index reached a 3-month high last week, while the Nasdaq hit a record high and the Russell 2000 Index of smaller shares is just short of its previous record. Despite all of Trump s trade tariff issues, which are certainly a threat for economies and markets, US shares are being buoyed by the strong earnings growth coming through in the latest earnings reports. This week sees reports from some of the big tech companies. Trump s trade war has hurt a number of the metal prices, including one of the most important metals, namely copper, which has tumbled some -16.4% in the past 7 weeks. Investors worry that a full-blown China-US trade conflict could hurt global exports, investment and growth, although (see below) Garza doesn t expect it to hurt the US economy, at least as it is now. Gold, platinum and palladium have been hit too. All three fell to 2018 lows last week. We re still hoping and waiting for the dollar to begin another down-leg against the euro (by no means a certainty). That would help the metals risk-taking in general. Meanwhile, one of my favourite market gurus in the US, Steve Sjuggerud, believes the melt-up in the US stock market has begun, especially as it relates to Technology and Biotechnology shares, i.e. he thinks the final big move upwards, which could last another year or so, has begun. He sees a strong final up-move, led by tech and biotech shares. At this stage, the manager of the STANLIB Global Equity Fund, Neil Robson from Columbia Threadneedle, does not believe there is any bubble in tech shares. Revenues and profits, also free cash flows, are growing strongly and PE multiples are still fairly decent. But similar to the late 1990 s bull market, the IT shares seem to be pulling ahead of much of the market. So far in 2018, the Technology sector of the S&P 500 Index is +13.6% in dollars, whereas the S&P 500 Index is up +4.9%. There is one other sector, namely Consumer Discretionary that is also doing well in In fact, even better, because it s up +14%. Financials are down -1.1% so far this year, Health Care is +4.8% and Energy is +3.5%, while the other six sectors are negative this year. Sjuggerud was very anti bitcoin late last year, figuring that after its big run it was attracting way too much attention, was far too popular. However, he s changed his mind after bitcoin s big tumble from $2,000 down to around $7,000. He thinks it is time to start nibbling at bitcoin, but only with cash that one is prepared to lose. He sees big potential over the next few years for bitcoin to rise strongly. Other Commentators US Market Analyst, Elaine Garzarelli Garza sees fair value for the S&P 500 Index at 3,150 or +12% above current levels, so she remains bullish, with a quants model reading of 74.5% out of a maximum 100%. Companies are announcing significant deals, since liquidity is abundant in the system (company cash at $2.7 trillion and consumer net worth at $100 trillion). The US leading economic indicator rose by +6% year-on-year in June. This signals solid growth for the remainder of the year. The new tariffs enacted by the US and China should have little impact on economic growth. The economy is strong and although inflation is rising modestly, average hourly earnings have been restrained.

5 BCA Research Stay neutral in global equities and in corporate bonds and underweight in government bonds. In equities, favour developed markets over emerging markets and defensive sectors over cyclical sectors. Source: I-Net Bridge Paul Hansen Director: Retail Investing

6 Economic Update 1. SA retail sales much better than expected in May 2018, which should help SA avoid slipping into a technical recession. However, consumer activity is not as robust as what the confidence data suggests. 2. SA consumer inflation surprised the market on the downside in June at 4.6%y/y. Core inflation now only 4.2%y/y. Rates still likely to remain on hold, but the MPC discussion should be more comfortable. 3. SA Reserve Bank decided to leave its Repo rate unchanged at 6.5%, in-line with expectations. The SARB revised their GDP forecast substantially lower, but highlighted that the inflation risks are to the upside. 4. The IMF highlighted that world growth has become less even, more fragile and with increased risk to the downside. IMF kept SA growth forecasts unchanged. 5. STANLIB leading and coincident indicators for the US economy - update for July 2018 suggests US economic activity has strengthened in recent months, but the risks of a slowdown into 2019 have also increased. 1. Stats SA released the retail sales data for May 2018 today. According to this latest survey, retail sales rose by a much more robust 1.1%m/m in May 2018, after recording a decline of -1.1%m/m in April. The latest month-on-month sales performance was much better than market expectations, which was for spending to increase by 0.5%m/m. Equally, over the past year, retail sales rose by a relatively robust 1.9%y/y, although this was helped somewhat by favourable base effects. On a trend basis, retail activity has achieved an annual average growth rate of 3.9% over the past 12 months, which is well up from a mere 0.8%y/y in March 2017, but is likely to lose momentum during the remainder of 2018 as some of the more recent price pressure and tax increases take effect. (SA retail data remains relatively volatile month-on-month, highlighting the importance of analysing consumer activity on a trend basis). Critically, in the past three months (March May 2018) retail sales fell by a modest - 0.1%q/q, hurt by the decline in retail spending during both March and April. The latest retail data suggests that although consumer activity has remained relatively subdued in recent months, the sector is not necessarily slipping back into an outright recession which is important from a GDP growth perspective. Also it is likely that retail spending will respond positively to the recently concluded government salary adjustment, which took effect at either the end of June or during the middle and end of July. The salary increase for government employees will be back-dated to April 2018, resulting in a temporary boost to household income as well as retail spending. For 2017 as a whole, SA retail sales grew by 2.8% in real terms, with acceleration in the second half of the year as inflation fell. While the pick-up in retail spending during 2017 was fairly broad-based, the stand-out categories included clothing and footwear, cosmetics/pharmaceuticals, on-line retailing as well as furniture and appliances. Unfortunately, the retail sector has clearly lost some momentum more recently across most categories of spending, declining in four out of the past six months. There has also been no real acceleration in the use of consumer credit. Looking ahead to the next 12 months, some of the factors that supported retail activity in 2017 are likely to dissipate somewhat. These include inflation, which is forecast to exhibit an upward bias over the next year, an increase in taxes (including the VAT hike that were announced in the February 2018 National Budget), and no further cuts in interest rates.

7 Countering these negatives is the fact that consumer confidence rebounded sharply in Q and remained surprising elevated in Q2 2018, household income should continue to rise by more than inflation (mainly because the average increase in wages remains above inflation, especially government), and interest rates are still expected to remain relatively low. The net result is that we anticipate the growth in retail spending to remain positive in 2018, but will probably struggle to gain significant momentum unless there is a sustained increase in employment. 2. In June 2018, South Africa s headline CPI inflation increased by a relatively modest 0.4%m/m, which was actually less than market expectations for an increase of 0.6%m/m (STANLIB 0.4%m/m). As a consequence the annual rate of inflation increased only modestly to 4.6% from 4.4%y/y in May The annual increase was also lower than market expectations for inflation to rise to 4.6%y/y (STANLIB 4.4%y/y). Core consumer inflation fell from 4.4% to 4.2%, highlighting that the underlying level of SA inflation remains very subdued. Most of the increase in inflation this month was due to the recent petrol price rise. 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 as well as petrol price adjustments, and average about 5.4% in Petrol inflation rose by a substantial 4.7%m/m in June, with the annual rate rising to 16.3%y/y. This largely reflects the 82c/l increase in the petrol price during the month. Unfortunately the petrol price increased by a substantial 23c/l in July but is not necessarily expected to rise any further in August. All of this means that SA petrol inflation will move higher again next month, but then hopefully start to moderate given the recent slight fall-off in the international oil price and a little more currency stability. CPI excluding food and petrol is well within the inflation target at 4.1%y/y, while core inflation (CPI excluding food, fuel and electricity) fell to 4.2%y/y from 4.4%y/y last month. Services inflation was recorded down at 4.9%y/y, while administered price inflation moved sharply to 8.3%y/y, mainly due to the higher petrol price. The inflation rate for pensioners also increased substantially to 4.8%y/y. It still seems fair to argue that SA inflation remains well under-control, as reflected by the slowdown in core inflation, but with a slight bias to the upside. This bias suggests that over the coming months, inflation will tend to drift closer to the topend of the inflation target, especially in early 2019, before stabilising at around 5.5% for 2019 as a whole. Importantly, the Reserve Bank recently highlighted the importance of inflation stabilising around the mid-point of the inflation target (4.5%) and not at the upper-end of the band (6%). In that regard, currency movements remain somewhat of a concern, as does the above inflation increase in public sector wages. Consequently, despite SA inflation surprising to the downside in June 2018, we expect the Reserve Bank to keep rates on hold tomorrow, but then also leave interest rates unchanged for a considerable period while they try to gauge the impact of any changes in global risk appetite as well as further hikes in US interest rates on capital flows to emerging economies. 3. The South African Reserve Bank decided to leave the Repo rate (Repurchase Rate) unchanged at 6.50% at its MPC meeting last week. This was in-line with market expectations. The Reserve Bank last adjusted interest rates in March 2018, when they cut rates by 25bps. According to the MPC, the interest decision was unanimous. In making the decision the SARB highlighted that the balance of risks to the domestic inflation outlook are now to the upside. It is interesting to see that the Reserve Bank revised down its 2018 GDP forecast to a mere 1.2% from 1.7% previously.

8 In terms of inflation the Reserve Bank highlighted the following: Any sustained elevation of oil prices, escalating trade tensions as well as geopolitical developments continue to pose risks to the inflation outlook The impact of the value-added tax (VAT) increase on inflation appears to have been less than anticipated Demand pressures in the economy are not assessed to pose a risk to the inflation outlook. The weaker rand exchange rate and the higher oil price assumptions has pushed the Reserve Bank s inflation forecast higher Headline inflation is now expected to average 4.8% in 2018, before increasing to 5.6% in 2019 The MPC noted inflation is moving closer to the upper end of the range, with risks to the upside In terms of the growth outlook the Bank highlighted the following: Domestic growth outlook remains challenging. In the near term consumption expenditure is likely to be constrained by the VAT increase and other tax changes, weak employment growth as well as subdued growth in credit extension to households. The SARB s forecast now indicates a growth rate of 1.2% for 2018 compared with 1.7% previously. The forecast for 2019 is 1.9%, marginally higher than the previous forecast of 1.7%, while the forecast for 2020 is unchanged at 2.0%. In terms of the Rand exchange rate the Bank highlighted the following: It is likely that the local currency, along with other emerging market currencies, will remain volatile. A key external risk to the rand remains the possibility of tighter global financial conditions. It is clear that despite the better than expected inflation data in June, the Bank still assesses that the risks to the inflation forecast are to the upside. This partly reflects global factors including the oil price. Although inflation is still expected to remain largely under control over the coming year, it will tend to drift to the top-end of the inflation target in the first half of 2019, before stabilising at around 5.5% for 2019 as a whole. The Reserve Bank also recently highlighted the importance of inflation stabilising around the mid-point of the inflation target (4.5%) and not at the upper-end of the band (6%). Consequently, we expect the Reserve Bank to keep rates on hold for a considerable period while they try to gauge the impact of any changes in global risk appetite as well as further hikes in US interest rates on capital flows to emerging economies. 4. The IMF released their July 2018 World Economic Outlook (WEO), and have kept their global growth expectations for both 2018 and 2019 unchanged at 3.9%, but highlighted that the global expansion is less even, more fragile and under threat. The IMF focused on the risks associated with the increase in global trade protection that has been instigated by the United States highlighting, once-again, that increased global trade restrictions threaten to undermine confidence and derail global growth prematurely. The IMF also flagged the current slowdown in the Euro-area, Japan and the UK. According to the IMF, the rate of economic expansion appears to have peaked in some major economies and growth has become less synchronised. In contrast, US growth continues to grow faster than potential, helped by robust job creation and fiscal expansion. The IMF indicated, however, that US growth is expected to decelerate over the next few years as the impact of the current fiscal stimulus fades. The Federal Reserve is also on track to continue to increase interest rates over the next two years.

9 Among emerging markets, growth prospects are also becoming more uneven given rising oil prices, higher yields in the United States, escalating trade tensions, and market pressures on the currencies of some economies with weaker fundamentals, including South Africa. In particular, growth projections have been revised down for Argentina, Brazil, and India, while the outlook for some oil exporters has strengthened. China continues to grow in line with the IMF s earlier projections. Growth in sub-saharan Africa is expected to exceed that of population growth over the next couple of years, allowing per capita incomes to rise in many countries. However, despite some recovery in commodity prices, sub-saharan Africa growth will still fall short of the levels seen during the commodity boom of the 2000s. As expected, the IMF kept South Africa s GDP growth forecast unchanged for both 2018 and 2019 at 1.5% and 1.7%, having revised South Africa s growth estimate meaningfully higher in April The IMF s GDP growth estimates for South Africa are largely in-line with the current consensus forecast, but well below the level of growth needed to generate a meaningful increase in employment. Some of the IMF s longer-term growth concerns still relate to aging populations in advanced economies, including low 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 terms 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. 5. A broad range of US economic data remains impressive, and has strengthened meaningfully in recent months. This includes the weekly jobless claims (and employment data in general), the export performance, the ISM manufacturing index, business confidence, durable goods orders, and house prices. The economic upswing has now lasted 109 months, making it the second longest economic upswing in the history of the US economy. Furthermore, the Q GDP growth is forecast at a spectacular 4%q/q, with the 2018 annual growth rate projected at 2.9%. The highly respected Federal Reserve Bank of Chicago s National Activity Index is also suggesting that US economic growth is currently growing well above trend. (The Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure in the US). In May 2018 the index s three-month moving average (which is the key overall measure of economic activity in US) was recorded at and has remained positive in each of the past eight months. The recent acceleration in US economic activity is largely linked to Trump s fiscal stimulus including extensive tax cuts and increased government spending. However, the risks associated with a continued US economic expansion have increased. These include further increases in US interest rates (especially now that Trump has criticised US interest rate policy), the impact of a higher oil price, an upward bias in US inflation that is still not matched by salary increases, rising debt servicing costs within the public sector, and a blow-back from increased trade protection. Already there is some evidence to suggest that the US leading economic indicator will start to lose momentum over the next few months. This would signal that the economy is likely to start to lose momentum into 2019 unless private sector fixed investment spending accelerates more meaningfully. 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: 6.51% Effective: 6.70% 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 July 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: 7.81% 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 July 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: 7.73% STANLIB Flexible Income Fund Effective Yield: 6.05% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 7.40% 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 13 July 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.: 3HX 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