The Weekly Focus. A Market and Economic Update 13 August 2018

Transcription

1 The Weekly Focus A Market and Economic Update 13 August 2018

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 6 Economic Update...7 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 Amidst all the doom and gloom in SA (maximum pessimism), the JSE ALSI appears to be breaking its 6-month old downtrend, which could be very positive. Hang in there Market Comment Our currency and bonds have taken a hit over the past few days, especially the rand, on contagion surrounding Turkey s crisis of confidence, where the currency has fallen dramatically, -45% or so in 2018, on sanctions and threats from the US because Turkey has reneged on an agreement to free a US cleric who has been held there for the past 2 years on suspicion of terrorism activity. Further US sanction against Russia and of course the extended trade war with China haven t helped either, casting a pall over emerging markets in general, but especially vulnerable ones like Turkey, Russia and SA. Our current account deficit, where we send more money offshore than we receive here through our dealings with the rest of the world, coupled with a weak economy and concerns about land and mining issues. Plus the rand is one of the more tradable currencies, so is easy to sell short on the markets. Aggravating the issue further is the fact that August is to the northern hemisphere as December is to us, their biggest holiday month, time to head for the beach, to switch off. So markets are relatively thin which means moves are exaggerated. The chart below of the rand to the dollar does not yet show this morning s move to or so (was a lot worse earlier too). But the rand is currently trading where it was in mid- November last year, which was the weakest point of Source: I-Net Bridge Then to top it off, the dollar itself is sweeping other developed market currencies aside too, especially after it broke through resistance at $1.154 to the euro late last week and is now at $1.137 to the euro. On the chart (see below), it looks like the dollar could get a lot stronger, especially with Trump continuing the trade war. Of course, this will help the exports of China, Europe and other regions look cheaper, or partly counter any trade tariffs. It will hurt US exports. So it may be a blessing in disguise, helping other economies.

4 Source: I-Net Bridge The falling rand has, as is usual, hurt our bond market as foreign investors flee emerging market bonds, driving the yield back up to 9% this morning (price down). This in turn is hurting financials like banks and retailers. The Banks Index is -7.6% so far in August and -5.6% in 2018, while General Retailers are almost back at the year s low of 6,600 (-14.9% in 2018) - and back at 2012 levels. The weak rand is helping the big rand hedges, with British American Tobacco, Richemont, Anheuser Busch Inbev, Mondi, Anglos, BHP Billiton, Glencore, the gold shares and Sasol all better this morning, even Naspers, despite Tencent being down this morning in HK. The JSE Resources Index is in fact at a new high for the year, +14% so far in 2018 and at its highest level in 3.5 years. Sasol is at its highest level in 4 years, +26% so far in 2018, excluding dividends. BHP Billiton is back at its 2018 high, +22.7% in Mondi is now at an all-time record high, +21% so far in Even the bombed-out gold shares are flickering a bit from their extremely depressed levels, although the dollar gold price is at its low for the year, with the strong dollar hurting it. Interestingly, the ALSI was barely down on Friday, thanks to the rand hedges, and so far today is up +0.5% at 11am. What I m finding intriguing, as always, is that amidst all the doom and gloom about our country, its economy, the politics, the weak and troubled mining industry and the huge uncertainty created by the land issue, the JSE All Share Index appears to be breaking its downtrend that s been in place since the peak in global and local markets in late January (see chart below). Source: I-Net Bridge Sure, the big rand hedges are definitely helping and looking at the chart below, one can see that the break of trend is still early and tentative, by no means conclusive, meaning it could quite easily revert back into the downtrend.

5 But with a bit of luck, the break of trend will continue and the latest uptrend that started a month ago could break out and upwards. When you think about it, there was euphoria in late December/early January and that was reflected in high share and bond prices, also in the rand. Now we have deep pessimism and gloom and doom. Historically, this has offered buying opportunities, because it usually reflects a time when all the nervous nellies have sold, pushing prices down. Selling local equities and sending funds offshore has probably been rife of late, especially with the ongoing land issue. So maybe there is some light coming through that tunnel. The mining shares are quite strong offshore too because there is hope that China is upping its infrastructure spending to offset a slowing economy. Look, the stronger dollar is not a good sign for markets, because it implies less risk-taking. Investors prefer to buy safe US investments, such as Treasury Bills and Bonds, instead of searching for higher returns in other parts of the globe, such as in emerging markets. But still, for now, the graph is hopefully telling an unfolding positive story. The rise in bond yields over the past week has hurt bond prices/values. So far in 2018 the All Bond Index is +4.6%, but last week it was +5.6%. SA Listed Property is still near the bottom of its 2018 levels, down -21.4% in The All Share Index ended 2017 at 59,731 and is today at 58,018 (-2.8% before dividends). Including dividends, the index s total return is now close to zero. Last week Arcelor Mittal continued its recovery, rising by +17.5%, while EOH gained +15.6% and Fortress B +8.2%. Impala fell -9.6%, MTN -7.8% after results and Steinhoff -7.5%. MTN is down 23.8% so far in 2018, trading at its lowest price in 8 years, no doubt hurt by Trump s renewal of sanctions on Iran, making it difficult for MTN to get any cash out of its Iranian business. The share traded at 245 rand in 2015 and is now at 102 rand, down -58% from its high. Meanwhile, a big plus of the weaker rand (and stronger US stock market) is that STANLIB s offshore funds priced in rands have benefited sharply of late. Below is a chart of the STANLIB Global Equity Feeder Fund in rands, showing it shooting up to a new all-time record high, +16% so far in Columbia Threadneedle, the fund managers, have kept the allocation to shares listed in the US at a very high level (65.3% versus the benchmark MSCI All Country World Index s 53.9%) and also maintain an overweight in the IT sector at 26.4% versus the benchmark s 19.4%. The US stock market and the dollar have been the strongest pairing by far on the global scene so far in 2018, so fund manager Neil Robson has done a great job for the fund. The STANLIB Global Balanced Feeder Fund is also at a new record high, +14.2% so far in 2018, while the Global Balanced Cautious Fund is +11.9%, the Global Bond Feeder Fund is +10.4%, the European Equity Feeder Fund is +8.2% and the Global Property Feeder fund is +13.5%, back at the highs seen in Source: I-Net Bridge

6 Last week the S&P 500 Index came within a whisker of its late January record high, before dipping on Friday, leading to a decline for the week, its first in 6 weeks. The S&P 500 Index is +6.3% in 2018, led by Consumer Discretionary s +14.6% and the IT sector s +14.5%. Other Commentators US Market Analyst, Elaine Garzarelli Her quants model remains bullish at a reading of 83.5%, so she still recommends buying on dips. Earnings season in the US has been unusually strong. With 62% of S&P 500 companies having reported their quarterly results, 80% have beaten expectations. Fair value for the S&P 500 is 3,150, which is +11% above current levels, based on her forecast of +11% earnings growth in 2019 to 175 and a fair PE ratio of 18. US money remains easy with negative real short rates of -1% (Fed Funds rate of 1.9% minus CPI inflation of 2.9%). Companies are buying back their shares, corporate deals continue and the Bloomberg Financial Conditions Index is ranked bullish. This signals healthy conditions for the financial industry. On average past recessions began about 5 years after the Fed first raised interest rates, which was in December 2015 in this cycle, implying a recession in over 2 years time at end 2020 if the law of averages occurs. US inflation stats are slowly firming, although producer prices were flat in July. A modest increase in the cost of goods was offset by a decline in services. Garza looks for healthy economic growth to continue, led by consumer spending. BCA Research Valuation measures like PE ratios, dividend yields etc. and technical indicators are widely followed market gauges, but neither set of metrics dependably warns of impending bear markets. A simple indicator, using just three inputs - the yield curve (difference between the 10-year Treasury Bond and the 3-month Treasury bill rates), the index of leading economic indicators and the state of monetary policy - has correctly called all seven recessions of the last 50 years. By the state of monetary policy, BCA refers to it being restrictive or loose. Expansions don t die of old age. They die because the Fed murders them (by becoming too restrictive raising interest rates too high). BCA s recession indicator is timely as well as accurate. It turns red on average six months ahead of a recession, aligning closely with the S&P 500 s average cyclical peak. This indicator is currently giving the all-clear signal and BCA does not expect it will sound the alarm for at least another year. This is because the yield curve is flattening but is still positive (10-year yields are still higher than 3-month yields), year-on-year growth in the leading economic indicator is still booming and the Fed s interest rate policy looks to be at least a year away from becoming too restrictive. Although BCA is now neutral on global equities (downgraded a month or two ago from overweight), they do not foresee a further downgrade to underweight for at least another year, unless trade tensions take a turn for the worst, the S&P 500 rises parabolically, or the Fed moves its hiking timetable forward. Paul Hansen Director: Retail Investing

7 Economic Update 1. The Rand has weakened very sharply in recent days, largely reflecting increased concerns about Turkey and emerging markets more broadly. 2. SA manufacturing recorded very modest growth in June, but declined during Q as a whole. Effectively, the SA manufacturing sector is back in recession, albeit a very modest contraction 3. South Africa's turnaround score weaken further in July, dropping to 41% from a peak of 46% a few months ago. The score has been hurt by lacklustre growth, Eskom's financial difficulties, and further uncertainty regarding key policy issues. 1. Since the beginning of 2018 (and up until early Monday, 13 August 2018) the Rand has weakened by 14.0% against the US dollar, declining by 7.6% over the past week. This depreciation largely reflects concerns about Turkey. Unfortunately, Turkey is facing a wide range of political and economic problems including very poor governance, high levels of foreign debt (especially by the corporate sector), a large current account deficit (-5.5% of GDP), rising inflation (15%y/y), and the recent imposition of sanctions and trade restrictions by the United States. Since the beginning of 2018 the Turkish Lira has depreciated by a massive 44% against the Dollar, weakening by an astounding 25% in the past week. The weakness in Turkey is negatively impacting a range of other emerging economies, including Brazil, Russia, Argentina and South Africa. All of these economies are regarded as relatively vulnerable for a variety of reasons. There is also a growing concern about European banks that have provided foreign finance to companies in Turkey. This could further undermine confidence level in the Euro-area, thereby weakening the growth outlook. While the current extreme weakness in the Turkish Lira and other emerging market currencies (including the Rand) could retrace somewhat over the coming days, recent events have highlighted the underlying and increased risks associated with a number of emerging markets. 2. In June 2018, SA manufacturing production rose by a somewhat disappointing 0.3%m/m, after increasing by a revised 2.0%m/m in May 2018 (monthly data is seasonally adjusted). The market was expecting production to rise by 0.4%m/m. Over the past three months (April 2018 to June 2018) production was down -0.1%q/q. This follows a decline of - 2.1%q/q in the first quarter of the year, suggesting that the manufacturing sector is back in recession, albeit a modest contraction. Over the past year manufacturing activity has risen by a mere 0.7%y/y, and has averaged an annual growth rate of 0.7% over past 12 months. Essentially, on a trend basis, SA manufacturing 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. As we have highlighted in recent month, 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.

8 3. Given the importance of an economic turnaround in South Africa, we have compiled a list of 12 key indicators that we closely monitor and score on a monthly basis since the beginning of 2018 in order to consistently and systematically assess if South Africa is making meaningful progress in revitalising the broader economy. These 12 indicators, focus on a wide range of variables including political stability, policy clarity, business confidence, employment, capital expenditure, housing activity and consumer income. Despite initial optimism that the political changes, which occurred in December 2017, would quickly lead to signs of an economic revival, South Africa s economic performance has been disappointing in the first half of 2018 and risks slipping into recession. Unfortunately, although some of South Africa s high-frequency economic data improved somewhat in May 2018, this has not been sustained. Recently, the South African Reserve Bank opted to revise down their 2018 GDP forecast, from 1.7% to a mere 1.2%, while a number of private sector analysts are also revising their growth estimates lower to around 1%. More positively, it is encouraging that the President has managed to secure pledges of more than $35 billion in foreign direct investment from China, UAE and Saudi Arabia. Hopefully, this will be supported by the announcement of additional local investment at the October 2018 Investment Summit. It has become increasingly apparent that key components of the South African economy, especially household spending, will struggle to gain significant momentum unless there is a sustained increase in investment and employment. Unfortunately, uncertainty regarding a number of key policy issues continue to weigh negatively on investor and business sentiment including the increased likelihood that land redistribution without compensation will be more vigorously persuaded by the government, the lack of clarity regarding key aspects of the proposed mining charter, and the impact of government s initiative to introduce a new system of National Health Insurance including how this initiative will be funded. These is clearly a risk that economic policy retains a populist bias as the country moves closer to the National Election around the middle of 2019, and at the same time key SOEs could require additional financial support in order to avoid outright bankruptcy. Taking into account the impact of the various key economic developments over the past month, the average of all twelve indicators scored a disappointing 4.1 out of 10, or 41% in July This compares with a score of 42% in June, 44% in May, and 46% in April. The score of 41% is consistent with the expectation of very modest economic growth in 2018, and is disappointing relative to earlier expectations that the score would move steadily higher each month, rising convincingly to above 50% towards the end of Hopefully the current lack of economic progress will encourage the government to focus on better understanding what is required in order for the economy to achieve meaningfully higher economic growth and employment. 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: 6.47% 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 10 August This seven- day rolling average yield may marginally differ from the actual daily distribution and should not be used for interest calculation purposes. We however, are most happy to supply you with the daily distribution rate on request, one day in arrears. The price of each participatory interest (unit) is aimed at a constant value. The total return to the investor is primarily made up of interest received but, may also include any gain or loss made on any particular instrument. In most cases this will merely have the effect of increasing or decreasing the daily yield, but in an extreme case it can have the effect of reducing the capital value of the portfolio. STANLIB Enhanced Yield Fund Effective Yield: 7.82% STANLIB is required to quote a current yield for Income Portfolios. This is an effective yield. The above quoted yield will vary from day to day and is a current yield as at 10 August 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: 8.19% STANLIB Extra Income Fund Effective Yield: 7.65% STANLIB Flexible Income Fund Effective Yield: 6.04% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 7.30% 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 10 August 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.

10 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.: 6531ZB 17 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