Contents Newsflash Market Comment How about Bonds and SA Listed Property? Other Commentators Economic Update...

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1 13 October 2014

2 Contents Contents... 2 Newsflash... 3 Market Comment... 3 How about Bonds and SA Listed Property?... 4 Other Commentators... 4 Economic Update... 6 Weekly Market Analysis... 7 STANLIB Money Market Fund... 8 STANLIB Enhanced Yield Fund... 8 STANLIB Income Fund... 8 STANLIB Flexible Income Fund... 9 STANLIB Multi-Manager Absolute Income Fund... 9

3 Newsflash Pessimism on world markets is rising quickly and plenty of bad news is being bandied about in the media, usually a good sign that the bottom is not far away. Market Comment Having said that there was a 60% possibility the market correction was bottoming a week ago, one acknowledges that the 40% possibility that it had NOT bottomed then is certainly winning, as the JSE All Share Index continued its correction with gusto on Friday, although today looks better. This has been a serious clean-out/correction and it is global, with very few shares spared. The US S&P 500 Index is down around 5.3%, while the MSCI World Index is down a heftier 7.8% in dollar terms, back at its November 2013 level. The weaker non-us currencies, relative to the dollar, have aggravated the fall in this index. The MSCI Emerging Markets Index is down 10% in dollars, while the JSE ALSI in dollar terms is down 13.5% from the recent high. At time of writing on Monday morning before the pickup, the All Share Index in rands is -10.4% or 5,426 points below its record high of 52,323, while the previously powerful Industrial Index is -9% and the strong Financial Index is -9.4%. As mentioned, very few shares are escaping, with the biggest share Billiton (9.9% of the ALSI) down some 23% from its record high in rand terms, back at 2008 prices, while Anglo American, now only the 6 th biggest share at 5%, was on Friday down about 20% from its recent high and down a massive 55% from its record high in 2008, trading now at 2006 prices! Both Anglo and Billiton are bouncing today as the day progresses. Even Woolies is down 19%, trading at November 2012 prices, i.e. almost two years ago! Clearly some of the big rand hedges are hurting, apart from Billiton and Anglos. Richemont is down 22%, back at 17-months ago levels, while Sasol is down 15% and the mighty SA Breweries is down 15%. One of the previously great shares that actually went up during the 2008/9 crash, Shoprite, is down a whopping 36% from its record high in late 2012, trading at the same price as around three years ago - down 19% so far in The share is, however, still trading at 19 times earnings of the past 12 months (the PE ratio) and on a dividend yield of 2.6%, is still below the 3.1% dividend yield of the JSE All Share Index, which by the way is almost its highest dividend yield in 5 years (the ALSI dividend yield), partly because companies are paying more of their profits in dividends. One of the more extraordinary moves today is the 4.4% jump in the share price of Capitec, to yet another record high, 28% above its low of two months ago during the African Bank issue. The JSE s ALSI PE ratio is now around 16 (trading at 16 times earnings of the past 12 months), still higher than the 14.6 times average of the past 20 years, although arguably still affected on the high side by some of the big rand hedges, like Naspers and SAB. If the US stock market correction extends to 7% from the current 5.3%, then the JSE correction could extend to, say 12.5% or so. Pessimism on world markets is rising quickly and plenty of bad news is being bandied about in the media (very little good news). It could reach a peak quite soon, which usually represents an excellent buying opportunity; exactly when, no-one knows. It could even be there now. However, if one wishes to up-weight one s equity allocation, gradually buying into this downturn should prove rewarding.

4 Just one cautionary: we are into the 6 th year of the bull market (possibly the 8 th innings of a 9 innings bull market, to compare it to a baseball game), so one needs to bear that in mind. One would therefore be more cautious than if we were only in the 2 nd or 3 rd innings of the bull market. One or two market-letter writers have pointed out the statistics relating to the 3 rd year of a US Presidential cycle, which started for President Obama on 1 st October. The 3 rd year has since the 1930 s so far has never produced a negative stock market total return in the US (including dividends) and in fact has produced returns way higher than years one, two and four. Hopefully that statistic continues to play out. Usually most of the returns occur between October and April. Of course, one cannot rely on this happening (3 rd year doing so well), but it is an interesting factor that does encourage the bulls among us; and why not? Credit Suisse s latest Global Equity Strategy, written by Andrew Garthwaite, notes that US director buying of their company shares has recently been strong, which is positive and net speculative positions on the S&P 500 Index in the US are close to a three year low, which is also a good sign for equities being close to the bottom. Meanwhile ongoing excess liquidity remains good for equities. How about Bonds and SA Listed Property? As is fairly customary during a stock market correction, bonds improve as yields decline and prices rise. Investors sell out of the riskier equities and buy bonds. This time investors are emboldened to buy bonds on the back of news of weak growth in many regions, along with lower inflation, a typically good combination for bonds. Offshore bond yields have fallen quite sharply, with the US 10-year yield down from 2.49% at end September to 2.28% today, driving prices and values higher. This is the lowest yield/highest price since the taper tantrum in June Offshore property shares have turned upwards by 2.5% after their sharp 6.8% correction and are now down about 4.7%. Our All Bond Index here in SA is up 1.5% in October (yields down) and is up 7.3% so far in This is positive for SA Listed Property, which is still showing a total return in 2014 of around 13.5%. Other Commentators US MARKET ANALYST ELAINE GARZARELLI Recent US Fed (central bank) minutes reassured that policy is data-dependent and there is no immediate intention to tighten. Members of the Fed were concerned about the effect that weak global growth and the stronger dollar could have on slowing the US economy. Garza s quants system reading declined to 62.5% from 66% last week, due to the downgrade to neutral of the ECRI leading indicator. This indicator shows potential changes in the economic cycle. Corrections of 4 to 7% are normal during bull markets. Garza s system still indicates a fair value for the S&P 500 Index some 24% higher than current levels. Her sentiment indicator (bullishness of US investment advisors) declined to 45.5%, but is only neutral, not yet bullish for the market (contrarian indicator). She likes the US economy, with only housing restrained due to slow household formation, but expects it to stabilise over the next year.

5 BCA RESEARCH Conventional wisdom has it that a strong dollar undermines US equities and vice versa. BCA, however, expects a period ahead when both the US dollar and US equities appreciate, albeit with substantial volatility. The dollar is still extremely overbought though, so it could have a period of sideways movement or even some contraction relative to the euro etc. US equities should outperform global equities over the next 6 months or so. BCA still expects US equities to outperform US bonds and cash. Paul Hansen Director: Retail Investing

6 Economic Update Locally, manufacturing production growth decreased by a more moderate1.2% y/y in August after falling by a revised 8.1% in July. M/m, seasonally adjusted, production grew by 2.2% in August based on an increase in production of16.2% m/m (+3.3pp) of basic iron and steel and a 16.6% (+1.4pp) rise in the production of motor vehicles, parts and accessories. However, six of the ten manufacturing sub-divisions tracked by Stats SA indicated contractions in production in August, the most notable declines being food and beverages (-5.3% m/m, -1.3pp); wood, paper, publishing and printing (-5.5%, -0.5pp) and petroleum, chemical, rubber and plastics (-0.8%, -0.2pp). Looking ahead, the moderation in manufacturing production growth in August is welcome, although there is still risk that the sub-sectors continue to contract both y/y and m/m for the remainder of the year which would mean that manufacturing activity will have to register a large growth of at least 8.0% m/m in September for this sector to contribute positively to Q3 GDP. Given the still relatively modest trends in the PMI business activity indicator in September (index level of 53.0), this is probably an unlikely ending and the key productive sectors of mining and manufacturing are likely to contribute negatively to Q3 GDP growth. Offshore, the IMF revised down South Africa s growth forecast for 2014 to 1.4% from 1.7% in April This is exactly in-line with our own forecast. The Reserve Bank s forecast is for South Africa s GDP to grow by 1.5%, while the National Treasury has a forecast of 1.8%. For 2015, the IMF revised South Africa s growth outlook down to 2.3% from 2.7% in April This is slightly below our own forecast of 2.4%, and the Reserve Bank s forecast of 2.8%. The IMF have revised down most country s growth estimates for 2014 and 2015, especially the Euro-area, Japan, Russia, Brazil, and the Middle East. In contrast the growth outlook for India, Canada, Mexico, and the United States have been revised up somewhat. The IMF is still fairly optimistic about the growth outlook for Sub-Saharan Africa despite the spread of Ebola. Kevin Lings is currently at the IMF Annual General Meetings in Washington and an additional update on the outcomes of the IMF and IIF annual meetings in Washington will be the main theme next week. In the emerging markets, in a recent communication by the Reserve Bank of Zimbabwe an announcement was made that the country was importing US$ 45 million worth of coins. The main purpose of the operation is to smooth transactions in the country as it faces shortages of coins in some areas. According to the document some consumers were given sweets and vouchers instead of change because of the shortage. What aggravated that matter was that the Bank of Botswana announced that it was phasing out its current coins for new coins which resulted in businesses no longer accepting Pula coins. The previous attempt of importing coins failed as the freight costs of the exercise was more than the value of the coins. In that US$45 million dollars, US$ 25 million will be Rand denominated coins and the outstanding US$20 million will be special coins to be pegged to the US Dollar coins but will be minted in South Africa. The Reserve Bank re-iterated that this is not a way to re-introduce the Zim Dollar. The impact on inflation is expected to be minimal and short-lived as the value of the coins is less than 1% of GDP and the country is facing deflationary pressures from a slowing economy. Delivery of the first batch of coins is expected in November. Headline inflation in Kenya eased to 6.6% for the month of September and is the first time the inflation rate dropped in 5 months. This is down from the 8.36% registered in the previous month and is the lowest inflation has been since April 2014 with most food categories registering a price decrease on a monthly basis. The sharp reversal in the inflation rate is as a result of the base effects from the increase in the taxes introduced in September 2013 wearing off. The upward trend in the inflation rate is expected to continue though. This gives the Central Bank of Kenya some breathing space in terms of keeping monetary policy stable at current levels and we expect rates to be kept on hold for the rest of the year. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

7 Weekly Market Analysis Currencies/ Indices/ Commodities Friday s Close 10/10/14 Weekly Move (%) YTD (%) Indices *MSCI World US Dollar *MSCI World Rand *MSCI Emerging Market US Dollar *MSCI Emerging Market Rand All Share Index US Dollar All Share Index Rand All Bond Index Listed Property J Currencies US Dollar/Rand Euro/Rand Sterling/Rand Euro/US Dollar Commodities Oil Brent Crude Spot Price ($/bl) Gold Price $/oz Platinum Price S/oz Source: I-Net Bridge * MSCI - Morgan Stanley Capital International

8 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: Effective: 5.99% per annum 6.16% per annum 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 12 October 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: 6.39% 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 October 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 investor s 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: 7.18% 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 October 2014.

9 STANLIB Extra Income Fund Effective Yield: 6.69% 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. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. The above quoted yield will vary from day to day and is a current yield as at 10 October STANLIB Flexible Income Fund Effective Yield: 7.01% 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 October STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.80% 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 October 2014.

10 Glossary of terminology Bonds A bond is an interest-bearing debt instrument, traditionally issued by governments as part of their budget funding sources, and now also issued by local authorities (municipalities), parastatals (Eskom) and companies. Bonds issued by the central government are often called gilts. Bond issuers pay interest (called the coupon ) to the bondholder every 6 months. The price/value of a bond has an inverse relationship to the prevailing interest rate, so if the interest rate goes up, the value goes down, and vice versa. Bonds/gilts generally have a lower risk than shares because the holder of a gilt has the security of knowing that the gilt will be repaid in full by government or semi-government authorities at a specific time in the future. An investment in this type of asset should be viewed with a 3 to 6 year horizon. Cash Collective Investments Compound Interest Dividend Yields Dividends Earnings per share An investment in cash usually refers to a savings or fixed-deposit account with a bank, or to a money market investment. Cash is generally regarded as the safest investment. Whilst it is theoretically possible to make a capital loss investing in cash, it is highly unlikely. An investment in this type of asset should be viewed with a 1 to 3 year horizon. Collective investments are investments in which investors funds are pooled and managed by professional managers. Investing in shares has traditionally yielded unrivalled returns, offering investors the opportunity to build real wealth. Yet, the large amounts of money required to purchase these shares is often out of reach of smaller investors. The pooling of investors funds makes collective investments the ideal option, providing cost effective access to the world s stock markets. This is why investing in collective investments has become so popular the world over and is considered a sound financial move by most investors. Compound interest refers to the interest earned on interest that was earned earlier and credited to the capital amount. For example, if you deposit R1 000 in a bank account at 10% and interest is calculated annually; your balance will be R1 100 at the end of the first year and R1 210 at the end of the second year. That extra R10, which was earned on the interest from the first year, is the result of compound interest ("interest on interest"). Interest can also be compounded on a monthly, quarterly, half-yearly or other basis. The dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. The higher the yield, the more money you will get back on your investment. When you buy equities offered by a company, you are effectively buying a portion of the company. Dividends are an investor s share of a company s profits, given to him or her as a part-owner of the company. Earnings per share is a measure of how much money the company has available for distribution to shareholders. A company s earnings per share is a good indication of its profitability and is generally considered to be the most important variable in determining a company s share price.

11 Equity Financial Markets Fixed Interest Funds Gross Domestic Product (GDP) Growth Funds Industrial Funds Investment Portfolio JSE Securities Exchange Price to earnings ratio Property Resources and Basic Industries Funds A share represents an institution/individual s ownership in a listed company and is the vehicle through which they are able to share in the profits made by that company. As the company grows, and the expectation of improved profits increases, the market price of the share will increase and this translates into a capital gain for the shareholder. Similarly, negative sentiment about the company will result in the share price falling. Shares/equities are usually considered to have the potential for the highest return of all the investment classes, but with a higher level of risk i.e. share investments have the most volatile returns over the short term. An investment in this type of asset should be viewed with a 7 to 10 year horizon. Financial markets are the institutional arrangements and conventions that exist for the issue and trading of financial instruments. Fixed interest funds invest in bonds, fixed-interest and money market instruments. Interest income is a feature of these funds and, in general, capital should remain stable. The Gross Domestic Product measures the total volume of goods and services produced in the economy. Therefore, the percentage change in the GDP from year to year reflects the country's annual economic growth rate. Growth funds seek maximum capital appreciation by investing in rapidly growing companies across all sectors of the JSE. Growth companies are those whose profits are in a strong upward trend, or are expected to grow strongly, and which normally trade at a higher-thanaverage price/earnings ratio. Industrial funds invest in selected industrial companies listed on the JSE, but excluding all companies listed in the resources and financial economic groups. An investment portfolio is a collection of securities owned by an individual or institution (such as a collective investment scheme). A funds portfolio may include a combination of financial instruments such as bonds, equities, money market securities, etc. The theory is that the investments should be spread over a range of options in order to diversify and spread risk. The primary role of the JSE Securities Exchange is to provide a market where securities can be freely traded under regulated procedures. Price to earnings ratio or p: e ratio is calculated by dividing the price per share by the earnings per share. This ratio provides a better indication of the value of a share, than the market price alone. For example, all things being equal, a R10 share with a P/E of 75 is much more expensive than a R100 share with a P/E of 20. Property has some attributes of shares and some attributes of bonds. Property yields are normally stable and predictable because they comprise many contractual leases. These leases generate rental income that is passed through to investors. Property share prices however fluctuate with supply and demand and are counter cyclical to the interest rate cycle. Property is an excellent inflation hedge as rentals escalate with inflation, ensuring distribution growth, and property values escalate with inflation ensuring net asset value growth. This ensures real returns over the long term. These funds seek capital appreciation by investing in the shares of companies whose main business operations involve the exploration, mining, distribution and processing of metals, minerals, energy, chemicals, forestry and other natural resources, or where at least 50 percent of their earnings are derived from such business activities, and excludes service providers to these companies.

12 Smaller Companies Funds Value Funds Growth Funds Smaller Companies Funds seek maximum capital appreciation by investing in both established smaller companies and emerging companies. At least 75 percent of the fund must be invested in small- to mid-cap shares which fall outside of the top 40 JSE-listed companies by market capitalisation. These funds aim to deliver medium- to long-term capital appreciation by investing in value shares with low price/earnings ratios and shares which trade at a discount to their net asset value. Growth funds seek maximum capital appreciation by investing in rapidly growing companies across all sectors of the JSE. Growth companies are those whose profits are in a strong upward trend, or are expected to grow strongly, and which normally trade at a higher-thanaverage price/earnings ratio. Sources: Unit Trust and Collective Investments (September 2007), The Financial Sector Charter Council, Personal Finance (30 November 2002), Introduction to Financial Markets, Personal Finance, Quarter , Investopedia ( and The South African Financial Planning Handbook 2004.

13 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 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 15h30. Investments and repurchases will receive the price of the same day if received prior to 15h30. 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 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 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 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.: 4130HX 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 Limited Reg. No. 1996/005412/06 Authorised FSP in terms of the FAIS Act, 2002 (Licence No. 26/10/590) STANLIB Collective Investments Limited Reg. No. 1969/003468/06