The Weekly Focus. A Market and Economic Update 6 February 2017

Transcription

1 The Weekly Focus A Market and Economic Update 6 February 2017

2 Contents Newsflash...3 Market Comment... 3 Other Commentators... 5 Economic Update...6 Weekly Market Analysis...9 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 stronger rand is hurting the JSE of late Market Comment The stronger rand is hurting the JSE of late, with the latest 2017 performances showing the JSE ALSI still ahead at +2.5% (but down from +4.8% in late January), followed by the All Bond Index with +1.4%, the JSE Listed Property s +0.7% and Cash at +0.65%. The rand ended 2016 at 13.68, so is up +2.86% at now, clearly dampening the performances of the big rand hedges, as happened last year. The JSE Resources Index took a knock last week after a big run from 28 th December to 24 th January, when it gained +13%. Since then it has pulled back by -4%, partly affected by the rand strength and partly by a small increase in interest rates in China engineered by the central bank on Friday. This caused a pullback in the prices of iron ore and copper. However, the JSE Resources Index is still +8.2% in 2017, while the Financial & Industrial Index is +2.1%. Why is the rand so strong? The rand is being carried along in the stronger emerging market space, as well as the commodity space. Even the Mexican peso has lately bounced by around +5%. Although the iron ore and copper prices dipped on Friday, they remain quite buoyant (high relative to recent history), while gold and platinum group metals have perked up of late, in line with the weaker US dollar. The platinum dollar price is up +12% since 16 th December, while the palladium price is up +13% in 2017, after a good year in 2016 (+21.8%). Rhodium has also recovered from very depressed levels in late 2016, up +9.4% so far in Partly because of stronger currencies, assisted by a weaker dollar of late, the MSCI Emerging Markets Index is +6.6% in 2017 in dollar terms, more than double the +3.1% of the MSCI World Index (mostly developed markets). Credit Suisse notes that the January print of PMI (purchasing managers index) surveys - a leading indicator for economies - suggests a pickup in the short-term (3 month) momentum of economic activity across most emerging markets, led by South Africa (50.9, +5%), Poland and Taiwan. Positive economic surprises have maintained their record high, with a sharp recovery in surprises from Latin America and Eastern Europe, the Middle East and Africa. RMB Morgan Stanley says valuations on the MSCI South Africa Index look quite reasonable, with the index trading at 14.8 times forward consensus earnings one year out, while the JSE Swix Index (shareholder weighted index, preferred by many local fund managers because it is based on local shareholding weightings) is trading at a slightly higher 15 times forward earnings. Further RMB Morgan Stanley notes that more than half of the SA industry groups in the MSCI SA Index are trading at a discount to their emerging market peers and also a discount to their 5-year history. This gives a very different picture from the current PE ratio of the All Share Index. Looking at that, one gets an impression that the market is very expensive (currently 23.2), although obviously a share like Naspers is a big contributor to this (PE of 81). Naspers is 14.5% of the All Share Index, while Richemont is 7.7% (PE of 31.9) and BHP Billiton is 7.5%, also on a high PE because the much better earnings from last year have not yet been announced.

4 Anglo American is trading at 32 times earnings of the past 12 months, also because its 2016 earnings have yet to be included in the numbers and they should be a lot better. On the developed markets, last week we mentioned that European stock markets seem to be offering a good buying opportunity, even despite the big disappointments of the past year or two. US market analyst, Steve Sjuggerud, of Stansberry Research, believes so too. Below is a chart he shows of how the US stock market has thumped the European stock markets since 2009: In the preceding 20 years, the two tracked each other (see below): For example, the last time the US outperformed by nearly 50 percentage points over eight years was in What happened next? A massive multi-year bull market in European shares. Steve says if you d waited for the uptrend before buying (as is the case now), then you would have bought European shares in mid and by late 2007 you would have made +172%, whereas US shares returned +74% during that period. A similar opportunity appeared in late Then European shares jumped +64% in eighteen months. Sjuggerud says today s opportunity is more extreme than either of those cases. Europe is starting from a lower base, so the upside could be greater.

5 Right now European shares are cheap, hated and at the start of an uptrend (or so it seems), the factors Sjuggerud likes to have in place before buying. Amazingly, the European economy grew faster in 2016 than the US economy (+1.7% versus +1.6%). This year the European economy could grow by 2%, says Kevin Lings. Other Commentators US Market Analyst, Elaine Garzarelli Garza thinks it unlikely that the Fed will risk raising interest rates too fast because the economy is dependent on consumption, which in turn is supported by a rising stock market. Household net worth is high, so if the Fed tightens too fast and causes shares to decline significantly, consumption would be negatively affected. However, higher inflation along with better growth prospects will support equities. Garza s quants model reading remains at a bullish 75%. The number of bullish financial advisors rose to 61.8% last week, which is high (a contrarian negative because it implies that these advisors have invested their clients spare cash). US economic growth continues to improve, global growth has strengthened and inflation expectations are rising. Consumer spending is solid in the US and should be a driver of growth over the next two years, supported by rising employment, disposable income and household wealth. BCA Research Us growth will remain firm over the next 12 months, but then will begin to slow from its above-trend pace as the economy runs out of spare capacity. Fiscal stimulus, by the time it is eventually enacted, may simply end up pushing up wages, interest rates and the dollar, rather than boosting company profits. There is compelling evidence that the risks of a recession rise as an economy approaches full employment and begins to overheat, although usually with interest rates a lot higher than where they are now. Equity investors should favour Europe and Japan, two places where central banks are in no hurry to raise rates, profit margins still have room to expand and valuations are reasonably favourable. Paul Hansen Director: Retail Investing

6 Economic Update 1. SA recorded another large trade surplus in December 2016 of R12.04 billion. This was due to a large and seasonal decline in imports of almost R20 billion. This clearly supported the Rand. 2. SA vehicle sales recorded an increase of 3.7% y/y in January 2017, starting the year on an encouraging note. 3. Euro-area GDP grew by a reasonably robust 0.5%q/q in Q For 2016 as a whole Euro-area GDP growth topped US growth for first time in many years and inflation is almost back at 2%. 4. US added an encouraging jobs in Jan 2017, but wage growth slowed. We still expect the Fed to hike rates at a modest pace in The focus, however, has switched to Trump's policy agenda. 1. In December 2016, South Africa s trade balance recorded a further surplus of R12.04 billion. This compares with a trade deficit of R1.7 billion in November The market was expecting a trade surplus of around R6.3 billion for the month, although the trade data is extremely difficult to forecast accurately on a month-by-month basis, especially since the data is not seasonally adjusted and prone to revisions. South Africa has recorded a trade surplus in five of the last eight months. During December exports fell by R6.0 billion, while imports crashed by R19.75 billion. The sharp decline in imports reflect a combination of seasonal factors as well as sluggish domestic economic activity, especially the dearth of fixed investment spending by the private sector. During 2016 as a whole South Africa recorded a trade deficit of only R2.9 billion, compared with a deficit of R52.2 billion during all of This improving trend is expected to continue into 2017, with South Africa recording more regular trade surpluses. As mentioned above, the value of imports fell by -19.6%m/m (-R19.75bn) in December This decline was broad-based and included a R6.0 billion (24%m/m) decrease in machinery imports, a R3.1 billion (53%m/m) drop in imports of vehicle parts, a R2.1 billion fall in imports of chemical products and a R1.5 billion slump in base metal imports. Over the past year, South Africa s imports have risen by only 0.6%y/y in Rands. The sluggish growth in imports is closely linked to the country s overall economic performance. Unsurprisingly, South Africa s tax collection of import duties is well behind budget. Given that economic growth is expected to remain relatively subdued over the coming year, import demand should also remain relatively subdued in The value of exports fell by -6.1%m/m (-R6.0bn) in December This decline included a massive R4.7 billion (35%m/m) drop in the value of vehicle exports. More positively, in dollars terms, South African exports were up almost 22%y/y. This is the best export performance South Africa has achieved since 2011, and partly reflects the benefit of significantly higher commodity prices. In conclusion, South Africa s trade balance has generally improved over the past year, at least on a trend basis, helped by a combination of slowing import growth and a pick-up in exports. Higher international commodity prices have provided welcome relief to South Africa s balance of payments in Unfortunately, the slowdown in import growth largely reflects the weakness in the South African economy, rather than an improvement in import substitution. This overall trend is expected to continue during 2017, which should help to further narrow South Africa s current account deficit, reducing the pressure on the Rand exchange rate.

7 2. In January 2017, new vehicle sales (as reported by the Department of Trade and Industry and confirmed by NAAMSA) totalled , an increase of 3.7%y/y. In contrast, exports totalled units, and reflected a decline of 1 342, a fall off of 10.3%y/y. The decline in exports is mainly due to factory refurbishment work being undertaken at the BMW plant. Passenger vehicles sales increased to which is an improvement of cars or a gain of 4.7%y/y. The car rental industry made a strong contribution and accounted for 31.8% of new car sales in January Sales of new and light commercial vehicles, bakkies and mini buses totalled units during January 2017, reflecting an improvement of 187 units or a gain of 1.6%y/y. Sales of medium and heavy trucks came in at 493 units and units respectively, registering a slight decline of 15 units or 3.0% and a decline of 14 vehicles or a fall of 1.3%y/y. Overall, the headline figure for vehicle sales, along with the latest PMI indicator suggests a possible improvement in the medium term economic outlook. If the economy starts showing signs of improvement and interest rates remain stable as expected in 2017, the sector could hopefully see some improvement in the second half of However, household expenditure remains under pressure and the budget later this month is likely to contain some tax increases, which will further erode disposable income, so it would be prudent to anticipate a challenging first half of In the fourth quarter of 2016 Euro-area GDP rose by a reasonably robust 0.5% quarter-on-quarter. This was in-line with market expectations. The Euro-area GDP data is reported as a non-annualised growth rate, whereas the US and many other countries including South Africa focus on the annualised quarterly growth rate. On an annual basis, Euro-area economic activity was up 1.8%y/y, compared with growth of 1.8%y/y in Q3 2016, 1.6%y/y in Q and 1.7%y/y in Q The latest GDP data suggests that the Euro-area continues to recover at a solid but somewhat unexciting pace. Interestingly, for 2016 as a whole the Euro-area grew by 1.7%, beating US GDP growth of 1.6%. For 2017, Euro-area GDP growth is currently forecast up at around +1.8%y/y, compared with +2.2% in the US. Importantly, a range of forward looking indicators suggest that the Euro-area should continue to recover, but still at a relatively modest pace. This includes the leading indicator, economic sentiment indicators as well as the PMI index. There has also been a solid improvement in retail sales as well as vehicles sales and exports. Longer-term, a number of key structural issues are limiting Europe s progress including the need for social payment reforms, high government debt, lack of private sector investment, a range of social pressures including increased migration, and the impact of Brexit. Ultimately the union needs to be strengthened in order to prosper. Given the improved GDP growth performance and somewhat higher consumer inflation, the ECB is expected to announce further plans to taper QE in 2018, as well as signal that interest rate could start to be normalised in In the meantime the ECB is likely to maintain its highly accommodative monetary policy. 4. In January 2017, the US unemployment rate rose fractionally to 4.8% from 4.7% in December This was above market expectations for the rate to remain unchanged. The US unemployment rate moved steadily lower from a peak of 10% in late 2009, but has trended mostly sideways in the past year. Encouragingly, the labour market participation rate rose in January 2017 to 62.9%, but remains extremely low on a trend basis. Overall, the relatively low unemployment rate is still somewhat misleading given that the participation rate remains extremely low by historical standards. Non-farm payrolls rose by a very respectable jobs in January The market was expecting a gain of around The change in total nonfarm payroll employment data for the previous two months was revised down by jobs. Over the past 3 months, job gains have averaged per month.

8 The level of US employment is now 7.12 million above the peak prior to the global financial market crisis. During the financial market crisis the US lost a total of 8.7 million jobs. Consequently, the US has created more than 15 million jobs since the financial crisis ended. The private sector added a massive jobs in January 2017, after gaining a revised jobs in December The private sector has gained employment in each of the past 83 months at an average of jobs a month and is at a record high, comfortably surpassing the previous peak in January During 2010 as a whole, the US economy created jobs, or an average of jobs per month. In 2011, the job gains averaged a far more respectable a month, while in 2012 job gains averaged a month. In 2013 employment rose by an average of jobs a month, suggesting that although the labour market was still struggling to gain significant upward momentum, the rate of increase remained encouraging. In 2014 employment rose by a very impressive monthly average of jobs, but then slumped somewhat to an average gain of in 2015, hurt by the especially weak job reports in March and September During 2016 job gains averaged per month. In January, average hourly earnings for all employees on private nonfarm payrolls rose by only 3 cents to $26.00, following a 6 cent increase in December. Over the year, average hourly earnings have risen by 2.5%. In January, average hourly earnings of private-sector production and nonsupervisory employees increased by 4 cents to $ While wage growth is still low by historically standards, it is at least still trending modestly higher, providing support to consumer spending. Clearly, US wage is constrained by structural impediments. The latest employment report is, once again, encouraging despite the slightly disappointing wage growth data. Overall, the January 2017 labour report has not altered our general outlook for US economic growth, inflation and interest rates. From the Federal Reserve Bank s perspective the employment data will most likely further encourage them to hike rates at a modest pace in 2017, after increasing rates by 25bps in December We currently expected the Fed to hikes rates two or possibly three times in 2017, by 25bps each time, but the focus has switched to understanding the impact of Trump s policy agenda. Please follow our regular economic updates on Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

9 Weekly Market Analysis Currencies / Indices / Commodities Friday s Close 03/02/17 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

10 Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 7.12% Effective: 7.36% 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 03 February 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: 8.03% 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 03 February 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: 8.70% STANLIB Extra Income Fund Effective Yield: 8.29% STANLIB Flexible Income Fund Effective Yield: 7.98% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.92% 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 03 February 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 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 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.: 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 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