MONTHLY INVESTMENT REPORT. February Key Budget & Regulation 28 Changes.

Transcription

1 MONTHLY INVESTMENT REPORT February 2018 Key Budget & Regulation 28 Changes.

2 GOLD US$/OZ Brent Crude (USD) Index Level ZAR per USD MONEY MARKET RATES available through FFG CCM MoneyFund Nominal(nacm) R R % * *Terms and conditions apply 12 MONTH MOVEMENTS JSE All Share Index (weekly) Currency ZAR/USD Gold (USD) Brent Crude Oil (USD)

3 FUTURUM FINANCIAL GROUP (PTY) LTD INVESTMENT HOUSE VIEW South Africa Three themes dominated the headlines in February: the recall of President Jacob Zuma and the swearing into office of Cyril Ramaphosa, the long-awaited 2018/19 Budget, and the Cabinet reshuffle. Interestingly, all proved to be positive, both for the markets and the rand, which strengthened to about R11.60/US dollar. The budget was perceived as good enough to stave off further credit rating downgrades, whereas the appointments of Nhlanhla Nene and Pravin Gordhan as Ministers of Finance and Public Enterprises, respectively, are seen as pivotal to economic revival. However, the strong rand may be temporary as the ANC could find implementing reforms harder than anticipated. Ramaphosa s market-friendly reform agenda may also find opposition from within the ANC. On the economic front, inflation moderated to 4.4% in January from 4.7% in December on the back of lower fuel prices, raising hopes of an interest rate cut in March. The unemployment rate improved to 26.7% in the fourth quarter on seasonal factors, after levelling off at 27.7% for most of 2017, its highest level since On the corporate front, property shares remained under pressure on the back of a sell-off in Resilient group company shares. Resilient is being investigated by the JSE for share price manipulation, inflated valuations and other contraventions and has seen its market cap halve since early January. Steinhoff s share price fell further after a Dutch court ordered the retailer to amend its 2016 accounts, while ex-ceo Markus Jooste has been reported to the Hawks for suspected offences under the Prevention and Combating of Corrupt Practices Act. Capitec shares also fell as a result of shortseller Viceroy Research accusing the company of reckless lending and inadequate bad-debt provisions. And finally, the PIC stepped in with a R5 billion loan to Eskom, which enabled the utility to borrow a further R20 billion from a consortium of local banks. What s happening around the world? UK - Despite the Bank of England keeping interest rates on hold at 0.5% and leaving the level of quantitative easing unchanged at 435 billion in February, it indicated that earlier and larger interest rate rises are likely in the months ahead. This is to dampen the effects of a stronger global economy on UK inflation, which rose to 3% in January, a six-year peak. Sterling rallied sharply on the news. The British economy is expected to grow 1.8% this year and next year Zimbawe - Zimbabwe has announced that white farmers still in business despite the country s controversial land reforms will be able to obtain 99-year leases, signalling a new government approach to the key agricultural sector. China - The solid start to the year for China s economy remains intact amid distortions accompanying the Lunar New Year holiday in February. The manufacturing sector in China continued to expand in January with the Caixin Manufacturing PMI coming in at Inflation fell from December s 1.8% to 1.5% in January, a six-month low, while producer inflation slipped from 4.9% to 4.3% in January. January s dip is expected to be temporary as it largely reflects the effects of the Lunar New Year. Consumer inflation is expected to average 2.2% in TH INDUSTRIAL REVOLUTION CORNER BITCOIN IN CHINA has become a curious year for regulation of bitcoin in China. Announcements of a withdrawal from the bitcoin mining market were coupled with a declaration that even over-the-counter and foreign exchanges would face a crackdown. At the same time, the Internet mobile giant Cheetah released a cryptocurrency wallet for its 600 million users, while bitcoin became the top prize at the annual meeting of fellow mobile company Meitu. Even car dealers are accepting bitcoins, and the former director at the Institute of Financial Sciences of China s Ministry of Finance publicly stated that it was impossible to ban bitcoin outright. SELF DRIVING CARS - California has approved broad new rules allowing driverless cars that do not require a human operator to sit behind the wheel. Until now, a human had to be present to take over in the event of emergency, a requirement that pushed some Silicon Valley companies to start testing outside their home state. Fifty companies, including Alphabet, Uber, Apple, GM, Ford and Toyota are testing self-driving cars in California. If manufacturers can show that their technology is safe and resilient to cyber-attacks, residents could be taking rides in driverless vehicles without a steering wheel, brake or accelerator pedal within a few months. MARKET OVERVIEW Stock markets started February in an upbeat fashion after a bout of well-received earnings reports, particularly from the financial and technology sectors. However, they soon turned downwards as global bond yields extended their climb on the back of expectations of an end to ultra-easy monetary policies. The dramatic sell-off started in the US, where higher wage numbers triggered fears of inflation and faster interest rate increases than anticipated. The wage numbers showed an acceleration in average hourly earnings growth from 2.7% to2.9%, a seasonal distortion. The US 10-year yields rose as high as 2.8% from 2.65% previously, a spike that sparked forced-selling by a host of highly leveraged funds, which ramped up volatility and drove yet more selling. The peak-to-trough drop in the S&P500 reached 9.7%, the worst sell-off since This quickly contaminated other markets. However, just as dramatically, stock markets recovered most of the losses. The sell-off was partly blamed on the implosion of multi-billion-dollar VIXstructured products that bet on volatility staying low. The VIX volatility index, Wall Street s fear gauge, briefly shot to its highest level since the 2015 Chinese currency devaluation. Despite the recovery, US 10-year Treasury yields continue to hover just shy of four-year highs and are likely to head higher if new economic data reveals that the injection of tax cuts to an already growing US economy is fanning inflationary pressures. The downturn occurred just as Jerome Powell took the helm at the US Federal Reserve. The US dollar remained weak through the month, helping to lift emerging markets and commodities from their slump. However, it strengthened somewhat at month end after the new US Fed chair delivered an upbeat assessment of the economy, vowing to forge ahead with gradual increases in interest rates. The US Fed is widely expected to lift rates again in March and many now expect three more increases, rather than two, following that. Oil prices moved above US$70 a barrel after OPEC and the International Energy Agency signalled that they expect demand this year to exceed current levels despite rising US output. Irrespective of the stock market recovery, the truth is that central banks around the world are slowly easing off on quantitative easing after more than a decade of ultralow interest rates and colossal asset-purchase programs. The US Federal Reserve is expected to increase interest rates at least three times this year, the ECB may end its massive bond-buying program in September, and investors expect it to begin raising interest rates in The Bank of England also increased interest rates in November 2017, citing mounting inflationary pressures.

4 Key Performance Indicators 1 Month 6 Months 1 Year 3 Year 5 Year SA Equity (All Share) -2.00% 4.50% 17.40% 6.10% 11.20% SA Listed Property -9.90% % -6.10% 0.70% 8.00% SA Bonds 3.90% 9.40% 14.30% 7.70% 7.30% SA Cash 0.50% 3.60% 7.50% 7.20% 6.60% MSCI World Index (R) -4.80% -1.30% 5.40% 8.60% 16.80% 20.00% Key Performance Indicators (graphically) 15.00% 10.00% 5.00% 0.00% 1 Month 6 Months 1 Year 3 Year 5 Year -5.00% % % SA Equity (All Share) SA Listed Property SA Bonds SA Cash MSCI World Index (R) Rate Indicators CPI Headline Inflation 4.40% Repo Rate 6.75% Prime Lending Rate 10.25%

5 (As supplied by Investec Asset Management) Budget 2018

6 Regulation 28 In presenting the budget, Finance Minister Malusi Gigaba announced that the offshore investment allowance for institutional investors would be increased from 25% to 30%. At the same time, the allowance for investments into the rest of Africa would also increase by 5% to 10%. These changes were immediately confirmed by the South African Reserve Bank (SARB). Effectively this means that asset managers and pension funds can now take a greater portion of their asset pool offshore. Regulation 28 The change to the offshore investment allowance also immediately causes a change to Regulation 28 of the Pension Funds Act. This sets the asset allocation limits for individual pension funds. From a regulatory perspective, Regulation 28 changes automatically as the offshore limits are linked to whatever the Reserve Bank publishes, unless the Financial Services Board (FSB) prescribes a different percentage, explains senior policy advisor at the Association for Savings and Investment South Africa (ASISA), Adri Messerschmidt. The FSB has however confirmed that the new offshore allowances will apply. The regulator s deputy registrar of pension funds, Olano Makhubela, issued a circular affirming that pension funds may now acquire foreign exposure up to the revised limit of 30% in respect of foreign portfolio investments, and an additional 10% in respect of foreign portfolio investments in Africa. This will be welcomed by many commentators who have felt that Regulation 28 is forcing investors to be overexposed to South African-specific risks. However, Messerschmidt points out that a change to the asset allocation limits does not mean that all funds will immediately increase their offshore exposure.