The Weekly Focus. A Market and Economic Update 24 July 2017

Transcription

1 The Weekly Focus A Market and Economic Update 24 July 2017

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 4 Economic Update...5 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 With the dollar so weak, the stronger rand is hurting the JSE Market Comment The offshore indices have continued their progress in US dollar terms, helped by the constantly weaker dollar, as shares held in other currencies translate back into more dollars. So far the MSCI Emerging Markets Index is +4.9% in July and the MSCI World Index is +2.2%...in the midst of the slower northern hemisphere summer season. Technology shares have continued their outperformance, with Tencent in Hong Kong over the HKD300 mark today for the first time, up over +35% so far in IT shares in the US are up +18.8% versus the +10.4% for the S&P 500 Index, while Financials in the index are up just +6.7% and Energy/oil related shares are down -13.5%. The IMF updated its economic growth forecasts for the world and for the first time in some years, they did not downgrade world growth for either this year or next year. The weakness of the US dollar, so strong in previous years, is the most dramatic market movement so far this year. In early January the dollar traded at $1.035 to the euro compared to the $1.167 level today (-9.7%). It is now about equal to its weakest level seen in the past 2.5 years against the euro. With the US S&P 500 Index up +10.4% so far in 2017 (excluding dividends), but the dollar down -10.7% against the euro, the S&P 500 Index is in fact slightly down in euro terms, indicating just how crucial currencies can be in portfolio returns. One would think the elastic is getting somewhat stretched and that most of the dollar s decline could be over for now - at least in the short-term; but with Trump s administration lurching from issue to issue and no sign of any progress on Obamacare, let alone tax reduction, who knows? The IMF lowered its forecast for US growth for this year and next year and raised its forecast for European growth.so maybe the euro can go higher, perhaps after a pause. On the local front, with the JSE ALSI up over +6% from its low last month and back near the highs of the past 3 years, one may also feel that the elastic is stretched short-term and anticipate a period of weakness in the near future. If the pattern of the past 3 years continues, then that is what will happen (see chart below). However, could the interest rate cut, unexpected by many, change that? History indicates that the JSE ALSI does quite well after the first rate cut, judging by past cycles. RMB Morgan Stanley noted that based on the average performance from the last four rate cutting cycles in SA, the ALSI was +6.2% one month after the first cut and +14% three months after. The best sector was Apparel Retail, +32% after three months, while interestingly Healthcare was +25%. One could possibly argue that politics is complicating the current environment more so than before. Also with the dollar so weak, the stronger rand is hurting the JSE, although the rand is down -4.2% against the euro so far this year and down -0.5% against the pound (+5.8% against the dollar). We believe that it is inevitable that the JSE will eventually break upwards out of its long sideways consolidation. When, no-one knows, but it is just possible that we re close. If it were up to Naspers alone, it might just happen. The share is following Tencent s move this morning to record highs. Naspers is trading +1.4% early this morning at 2,850 rand per share, a new record high (+41% so far in 2017).

4 Other Commentators US Market Analyst, Elaine Garzarelli Garza notes that, despite Trump s woes, there are lots of positives, such as continued corporate deals (43 last week alone), strong second quarter earnings, mild inflation and Brent oil up to $49 from a recent low of $43 in June. Recession risk remains low and global monetary policy is supportive. The 7.9% decline in the dollar index this year is good for S&P earnings, given that some 40% of earnings are from offshore. It is also good for net exports and oil, copper, gold, platinum and iron ore prices. Garza s quants model reading is at 71%, down slightly from 73% the previous week, as sentiment gets a bit more euphoric. She calculates that the S&P 500 Index is now 6.3% undervalued, based on 2018 earnings. Garza says the US leading economic indicator rose in June for the 10 th consecutive month, above its prior peak too. Historically, when this indicator moves above its prior peak, the next recession starts, on average, six years later. BCA Research BCA thinks the US Fed is behind the curve in raising interest rates; so is the Bank of Canada, the Reserve Bank of Australia, the Reserve Bank of NZ and the Swedish Riksbank. In contrast, the Bank of Japan, the European Central Bank and the Swiss National Bank have little need to tighten monetary policy. So far BCA has been wrong on the dollar because they called for a stronger dollar, while it has so far gone in the opposite direction. However, they think it may weaken to $1.18 to the euro short-term and then strengthen all the way back to parity with the euro next year as the Fed is forced to accelerate the pace of rate hikes. BCA is, however, staying long global equities. Paul Hansen Director: Retail Investing

5 Economic Update 1. SA retail sales better than expected in May 2017, and the previous two month's data revised higher. Good news for SA GDP growth in Q SA consumer inflation eased to 5.1%y/y in June, slightly below market expectations. Inflation expected to fall further in the months ahead, and the Reserve Bank is expected to cut rates 3. SA Reserve Bank decided to cut rates by 25bps largely as a result of their weaker growth outlook and lower inflation forecast. Further rate cut expected 4. Central Bank of Kenya keeps rates on hold 5. Disinflationary trend could end sooner than expected in Nigeria 6. Economic data and events highlights for the week ahead 24 to 28 July Stats SA released the retail sales data for May 2017 last week. According to this latest survey, retail sales rose by a much improved 0.9%m/m during the month, after rising by a revised 0.7%m/m in April, in real terms (seasonally adjusted). The month-on-month sales performance was better than market expectations, which was for an increase of only 0.2%m/m; although the sample survey forecast for retail activity remains relatively small. The improved growth in recent months follows a shock decline of -1.1% in January 2017 and a drop of -2.4%m/m in December Encouragingly, in the past three months from March to May retail sales rose by a very substantial 1.6%q/q, which should help to boost the Q GDP growth estimate. On an annual basis, retail spending rose by 1.7%y/y (real) in May 2017, While this is slightly down from an annual growth rate of 2.0%y/y in April, it reflects an improvement in the rate of growth in retail activity relative to the first quarter of The latest annual growth rate was also better than market expectations for a drop of -0.3%y/y. More importantly, the 12-month moving average of the annual growth rate remains positive at +0.7%, suggesting the retail sector is still managing to avoid a recession, albeit by a small margin. During 2015, South African consumers were helped by relatively low inflation (4.6%) compared with an average wage increase of 7.7%. Unfortunately, this systematically changed in 2016 as inflation moved noticeably higher, and the Reserve Bank continued to hike rates. In addition, the banks became much more circumspect in the granting of credit. The net result is that at the start of 2017 the consumer has less discretionary income available for general retail activity. At the same time consumer confidence has fallen and is well below the long-term average. Our overall perspective on retail spending and the strength of the South African consumer remains essentially unchanged relative to the start of the year, although the risks are still weighted to the downside. Firstly, while the increase in salaries and social grants this year should remain above inflation, a range of factors have combined to dampen overall retail spending. These include weak confidence, higher taxes, and the delayed impact of recent interest rate hikes Secondly, it is clear that consumer confidence is likely to remain subdued in the months ahead given the increase in political and economic uncertainty, including the credit rating downgrades. This will, in particular, have a negative impact on the decision to purchase large ticket items such as houses, cars, furniture, appliances and jewellery. Thirdly, and more positively, consumer inflation has slowed in recent months and is expected to moderate further in the months ahead due. This could prompt the Reserve Bank to cut interest rates. While a cut in rates is unlikely to result in meaningfully higher consumer activity, it will help to ease some of the pressure the household sector is currently facing, while the lower inflation rate will boost real income growth.

6 Overall, while retail sales are expected to remain weak in the months ahead, we think the sector will continue to avoid slipping into an outright recession as inflation slows. Under these circumstances, it is critical that SA avoids any further job losses, otherwise the risk of an outright consumer recession will intensify. 2. In June 2017, South Africa s headline CPI inflation rate increased by 0.2%m/m. As a consequence the annual rate of inflation eased to 5.1%y/y from 5.4%y/y in May. In general, SA inflation has trended lower in recent months and is well below the recent peak of 6.7%y/y recorded in December The annual increase in inflation was slightly above market expectations (STANLIB 5.1%y/y), with most of the monthly rise attributable to an increase in the rental cost of housing. Food prices recorded a welcome decline in the month of -0.1%m/m, pulled down by lower fish, fruit, cereal and vegetable prices. Despite the monthly decline in food prices, the annual rate of increase in food inflation remained unchanged at 7.0%y/y. Food inflation is still well below its recent peak of 12.0%y/y recorded in December At the start of 2017 we forecast that food inflation would fall back inside the target range before the end of the year. This remains our estimate, although the pace of moderation in food inflation has been somewhat disappointing as producers and retailers extract some operating leverage. Agricultural food inflation is firmly in deflation as a result of the much improved summer agricultural season and producer food inflation has also moderated meaningfully. Petrol inflation fell by -1.6%m/m in June, with the annual rate falling sharply to 2.0%y/y. This largely reflects the 25c/l decrease in the petrol price during the month on June Fortunately, the petrol price was cut by almost 70c/l in July, which will subtract 0.3 of a percentage point from next month s inflation rate. Consequently, it is possible the overall consumer inflation rate in July will dip to below 5%y/y. CPI excluding food and petrol is still well within the inflation target at 4.9%y/y, while core inflation (CPI excluding food, fuel and electricity) remained unchanged at a very respectable 4.8%y/y for the third consecutive month, and could reach the mid-point of the inflation target within the next few months. Services inflation was recorded relatively unchanged at 5.5%y/y, while administered price inflation stayed inside the inflation target, having also slowed appreciably in recent months. The inflation rate for pensioners was recorded inside the target at 5.2%y/y. For 2014 as a whole, SA CPI inflation averaged 6.1%, up slightly from an average of 5.8% in 2013 and 5.6% in For 2015, SA inflation averaged an impressive 4.6%, but moved significantly higher in 2016 due to the drought, with inflation averaging 6.3%. Despite the volatile exchange rate, a large increase in the fuel levy as well as excise duties in the 2017 national budget, SA consumer inflation has, in general, surprised on the downside in 2017, averaging 5.8% in the first six months of the year. Looking further-out this year, SA inflation is still expected trend lower and is forecast to average of 5.5% for 2017 as a whole, helped largely by a further moderation in food inflation as well as favourable base effects and the lower fuel price. It is worth noting that SA inflation could fall to below 5% next month and will most-likely test the mid-point of the inflation target in early 2018 before stabilising at around 5.5% in the second half of The South African Reserve Bank decided to cut the Repurchase (Repo) interest rate by 25bps to 6.75% at its MPC meeting last week. Most market analysts expected interest rates to remain unchanged today, but had expected the Bank to cut rates later this year. The Reserve Bank last adjusted interest rates in March 2016, when they increased rates by 25bps. According to the MPC statement, the decision to cut rates was not unanimous, with four members voting for a 25bps rate cut and two voting for rates to remain unchanged. Once-again, the SARB highlighted that the downside risks to economic growth have increased, while the outlook for inflation remains encouraging, but not without risk.

7 In terms of inflation the Reserve Bank highlighted the following: Since the previous meeting of the Monetary Policy Committee the inflation outlook has improved. Meat prices continued to accelerate, and at 13.0%, contributed to the downside stickiness of food price inflation. Eskom has approached Nersa for an increase of around 20%, but the current forecast assumes an increase of 8%. The annual average forecast for inflation has been revised 5.3% in 2017, 4.9% in 2018 and 5.2% in A lower turning point of 4.6% is expected for inflation in the first quarter of 2018 The main drivers of the improved forecast were the lower starting point; revised assumptions regarding international oil prices, domestic electricity tariffs and the real effective exchange rate; and a wider output gap Inflation expectations as reflected in the survey conducted by the Bureau for Economic Research show a marginal improvement Underlying global inflation trends remain benign, with inflation below target in most of the advanced economies, notwithstanding the positive growth prognosis and tightening labour markets In terms of the growth outlook the Bank highlighted the following: The domestic growth outlook remains a concern. With the exception of the primary sector, all sectors recorded negative growth. While positive growth is expected in the second quarter, the Bank s annual growth forecasts have been revised down further. The forecast for 2017 has been adjusted down from 1.0% to 0.5%, and the forecast for 2018 is down from 1.5% to 1.2%. Growth of 1.5% is expected in 2019, compared with 1.7% previously. Policy uncertainty, a recent example being in the mining sector, is likely to constrain investment. Employment growth has been minimal, and the prospects are unfavourable Although the monthly retail sales data suggest a more positive outcome for the second quarter, this improvement is likely to be offset in part by a decrease in new vehicle sales in the quarter. It is unclear where the drivers of accelerated growth will come from in the absence of credible structural policy initiatives that will reduce uncertainty and increase business and consumer confidence. In terms of the Rand exchange rate the bank highlighted the following: The rand s relative resilience had been underpinned by the generally positive sentiment towards emerging markets, as well as by sustained trade surpluses. The rand remains vulnerable to increased global risk aversion, domestic political shocks, and to the possibility of further ratings downgrades. It is clear that South Africa s inflation rate has surprised on the downside in recent months, while the domestic economy remains extremely weak and in recession. In that respect, it should be no surprise that the Reserve Bank decided to cut interest rates. However, a key factor that has concerned the Bank for some time is the fact that SA remains extremely vulnerable to changes in global investor sentiment, aggravated by the country s recent credit rating downgrades as well as the expectation that the US Federal Reserve will continue to normalise interest rates. That has resulted in the Reserve Bank being relatively hesitant to cut rates despite the weakening domestic economy. So why cut rates now? The answer appears to be the extent to which growth has actually weakened (the Reserve Bank had not expected SA to go into recession in Q1 2017) combined with the sharp downward revision to the inflation outlook, especially the Bank s view that inflation will go as low as 4.6% in Q and average below 5% for 2018 as a whole.

8 We expect the Bank to cut rates by at least a further 25bps over the next 6 to 9 months, and possibly more if there is any further downward surprise to growth and inflation. Ultimately, though, the Bank will still have to balance the current lower growth/lower inflation data against the risks associated with South Africa s increased vulnerability to changes in foreign capital flows. The next few interest rate decisions by the MPC are not going to be easy and the rate outcome will probably remain a close call; but with a bias to the downside. 4. The Monetary Policy Committee (MPC) of the Central Bank of Kenya met last week to decide on the direction of interest rates. The MPC decided to keep rates on hold at 10%, a decision that was largely expected by markets. Inflation had come down sharply from the peak of 11.7% in May to 9.2% in June, driven a by a sharp drop in food prices. The high inflation rate was due exclusively to the food portion of the basket and is probably going to move further down. Kenya has started importing maize from Zambia, which will help to lower food inflation. Non-food-non-fuel inflation was below 5%, showing that there weren t any underlying prices pressures that were evident. Kenya has an election on 8 August 2017, and the result is expected to be tight. 5. The Nigeria Bureau of Statistics released inflation data in Nigeria for the month of June. The latest update revealed that inflation in Nigeria moderated to 16.1%y/y in June 2017 from 16.3% and 17.2% in May and April respectively. However this masks the underlying inflationary pressures. On a m/m basis the inflation rate rose quite meaningfully to 1.6% m/m from 1.9% m/m in the previous period. The large monthly increase is attributable to food prices, which rose by 19.9%y/y in June, up from 19.2%y/y in May. This is a worrying trend as food is only a small portion of imported goods and Nigeria has not suffered from any adverse weather conditions. Imported food inflation moderated to 14.2% from 15% in the prior month. An explanation could be that food producers are still passing on the higher costs of production to consumers and the weaker Naira could make exporting food more attractive for producers, which pushes up the local price. Core inflation (all Items less farm produce) slowed to 12.5%y/y from 13%y/y, which continues the decline in the core inflation rate that began in December This could be attributable to the stronger Naira on the parallel market as pressures eased on items such as Transport, Education and Clothing which are sensitive to currency movements. Communication again had the lowest price increases at 3.3%y/y from 3.7%y/y previously. The latest inflation data has encouraged us to increase our year end inflation forecast to 16.8% from 15.4%. Inflation show then return to the target band of 6% 9% within the next two years. The Central Bank of Nigeria meets this week and is likely to keep rates on hold weighing up the balances in a stagflationary environment. Nigeria is expected to come out of recession this year. 6. Below are the key economic data and events scheduled for this week. The highlights for the week ahead are likely to be: US Consumer Confidence, on Tuesday Short team confidence has eased somewhat, but remains relatively high by historical standards. SA Labour Force Survey Q data also on Tuesday - Unemployment Rate is expected to tick upward in Q2 in the low growth environment. US FOMC Meeting on Wednesday rates will in all likelihood remain unchanged. UK GDP (9:30 GMT) 2Q on Wednesday - expect growth to have slowed somewhat due to lack of confidence.

9 EUROZONE Business & Consumer Survey, Jul A further improvement is expected. Overall European confidence levels are relatively high. 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: 7.02% Effective: 7.25% 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 21 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: 7.99% 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 21 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: 8.67% STANLIB Extra Income Fund Effective Yield: 8.16% STANLIB Flexible Income Fund Effective Yield: 7.86% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 6.23% 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 21 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.

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 (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 (Pty) Limited Reg. No. 1969/003468/07