The Weekly Focus. A Market and Economic Update 22 August 2016

The Weekly Focus A Market and Economic Update 22 August 2016

Contents Newsflash... 3 Market Comment... 3 Other Commentators... 5 Economic Update... 6 Weekly Market Analysis... 9 Rates... 10 STANLIB Money Market Fund... 10 STANLIB Enhanced Yield Fund... 10 STANLIB Income Fund... 10 STANLIB Extra Income Fund... 10 STANLIB Flexible Income Fund... 10 STANLIB Multi-Manager Absolute Income Fund... 10

Newsflash Market Comment JSE ALSI Total Return Index (i.e. including dividends) has returned +34% in 2016 in pounds at an all-time record high. Many SA investors are disappointed with the +5.8% total return of the JSE All Share Index so far in 2016, but what they need to understand and appreciate is that the ALSI is in fact +20% in dollar terms so far this year (including dividends), so the global wealth, so to speak, of investors on the JSE has jumped sharply because of the rand s sharp gain. The JSE has been adjusting to the much better rand.absorbing the increase. In fact, can you believe that.in pound terms the JSE ALSI Total Return Index (i.e. including dividends) has returned +34% in 2016 at an all-time record high (see chart below)!! Sure, the big rand hedges are obviously holding back the index this year because of rand strength, but as we ve often mentioned, the JSE Mid-Cap Index, which is much more oriented to pure SA companies, is +30.7% in 2016 (total return). Source: I-Net BFA By comparison, in dollar terms the JSE ALSI (including dividends) is trading now where it was six years ago at end 2010. BUT if you take out the dividends, leaving just the index itself, the JSE ALSI is back at 2007 levels in dollar terms, nine years ago. So yes, currencies do play a major role in returns, especially when so many of your top companies have businesses offshore, affecting the ALSI 40 and ALSI Indices. Meanwhile we are seeing a touch of rand weakness, along with other emerging market currencies, after their powerful rallies over the past few months. The rand hit 17 to the dollar in January and strengthened to 13.18 in August, while we re now at 13.60, back at September 2015 levels. The elastic got very stretched on the strong side and needs to give a bit. This is affecting our bond market a tad, with yields up from 8.32% to 8.5%, but of course the bonds have also had a big run (yields down sharply and prices/values up nicely). There is clearly a bit of concern that the Fed may in fact hike next month.

The dollar rose on Monday after the Federal Reserve's vice chairman said the US economy was picking up. Stanley Fischer on Sunday said that the world's top economy was meeting all the Fed's targets and that growth would improve, hinting that borrowing costs could rise this year. The Fed Chair Janet Yellen will talk at Jackson, Wyoming on Friday and market analysts will be watching closely for any signs of a potential hike. Today many of the commodities are down on this concern. It could drive emerging market currencies further down, no question, in the correction currently underway. Meanwhile the often feared sell in May, go away, come back on St Leger Day saying has so far been kind to markets, despite a sharp fall in late June for Brexit. The MSCI World Index is up almost 4% in dollars since end May, although rand strength means in rand terms the return has been -11%. The JSE ALSI is down about -2% in rands, but +13% in dollars since end May. In fact in the last 10 days or so, a major event occurred that gives more life to this long bull market: all three major US indices, namely the Dow Jones Industrial Average of 30 shares price-weighted, the S&P 500 Index of 500 shares market-weighted and the tech-heavy Nasdaq Index (also marketweighted) all hit record highs on two particular days, the first time this has occurred since 1999, before the tech bubble burst in 2000. This is important considering that the US is the leading global stock market, with high correlations with many other markets, including our own. The US comprises 53% of the MSCI World All Country Index. Next is Japan at just 7.8%, then the UK at 6.3%. The MSCI Emerging Markets Index comprises 10.5% of the index. and our MSCI SA Index is 7% of this Emerging Markets Index. So the US has certainly set the standard and many markets including our own, on a balance of probabilities, are likely in time to follow suit - to new record highs, before this bull market is kaput. US market letter writer Steve Sjuggerud, thinks the bull market in the US may be entering the final innings, but that the final innings is frequently the most exciting of them all. He continues to recommend the Chinese stock market (as does BCA Research). It was interesting to see Naspers huge investment Tencent announce such good results last week, with revenues +52% year-on-year and profits +42%, both way ahead of forecasts. For those interested, there is a very interesting little clip on Tencent and its app WeChat from the New York Times. Please contact Vilosh Jagaroo, who sends out the Weekly Focus, if you would like the clip to be emailed to you. It gives some insight into WeChat. Apparently Tencent is +32% so far this year on the Hong Kong Stock Exchange. I note that the STANLIB Global Equity Fund holds Tencent in its top 10 holdings at 2% of fund, way overweight versus the 0.36% of the benchmark MSCI AC Index. Tencent s great return in 2016 explains why despite rand strength Naspers is trading close to its record high at 2300 rand per share on the JSE, although it s other businesses (i.e. Naspers excluding Tencent) are effectively priced at a negative number - if you take Tencent s current value and deduct it from the Naspers share price. The fund s top 3 holdings are Alphabet (4.2%), Amazon (3.3%) and Facebook (2.8%), all three way higher than the benchmark. Tencent is the also the 3 rd biggest share (4.4% of fund) in the STANLIB Global Emerging Market Equity Fund, which is an offshore fund in our Jersey offshore range (not available in rands) and is also managed by Columbia Threadneedle; plus Naspers is the 10 th biggest share in this same fund at 1.8% of fund. So Tencent and Naspers combined are 6.2% of the fund. Tencent alone is 3.5% of the MSCI Emerging Markets Index.

Other Commentators US Market Analyst, Elaine Garzarelli Garza notes that the Fed sees little impact on the US from Brexit. Garza s quants model reading rose to 75% last week and she remains bullish on US shares, with normal corrections of 4-7% anticipated along the way. There is a bit more bullishness out there, with the number of bullish financial advisors (her contrarian indicator) up at 56%, which she considers a bearish level (i.e. market could be due for a correction). This is the highest reading since April 2015. When the market was it its most pessimistic in early February this year, there were only 24.7% bulls. S&P 500 earnings should be buoyed by the lower dollar and higher oil prices. Garza calculates that the S&P 500 Index is 5.5% undervalued at present, based on her conservative earnings forecast for 2017. As technology is changing the way consumers shop, e-commerce retail sales have been strong and they keep getting stronger. Sales grew +15.6% year-on-year in the 2 nd quarter and the portion of retail sales conducted as e-commerce has increased every quarter since 2008. The University of Michigan s survey of times are good to buy a house has surged to its highest level in 16 years, thanks to mortgage rates at an all-time low of 3.35%, higher house and share prices, increased wages and employment, along with better finances. BCA Research BCA says commercial real estate and REITS have not yet peaked. Real estate remains in a goldilocks scenario with decent economic growth, subdued new supply and lingering uncertainty. Commercial real estate in the US and UK is at record highs, although obviously Brexit has lately hurt UK values. For investors seeking exposure to real estate, REITs still offer plenty of upside across the globe, particularly in Japan, Europe and Australia. BCA s proxy for global construction growth shows that the state of affairs in commercial real estate construction across developed markets is quite subdued. BCA recommends an above-benchmark allocation to REITS (real estate investment trusts) globally. Overall, BCA remains neutral on equities and high yield bonds, but recommend using rallies in both to raise cash. Although they think the 35-year bond bull market is close to ending, they do still remain overweight US Treasury bonds and underweight cash. Paul Hansen Director: Retail Investing

Economic Update 1. SA retails sales slow to 1.7% y/y in June, but it won t hurt the second quarter GDP. 2. US leading economic indicator improved again in July 2016. BUT, overall the leading indicator is still not especially robust, signalling sustained, but modest growth ahead. 3. Bank of Namibia keeps rates on hold even with deteriorating inflation outlook. 1. Stats SA released the retail sales data for June 2016. According to this latest survey, retail sales, seasonally adjusted, declined by -2.0 %m/m. In the three months from April to June 2016, retail sales rose by 0.3%q/q. On an annual basis, retail spending slowed to 1.7%y/y (real) in June, down from an annual growth rate of 4.5%y/y in May 2016. The current annual growth rate compares with an average annual increase of 3.3% (real) for 2015 as a whole. More importantly, the 12-month moving average rate of annual growth is still trending at a little over 3.0%. Last year, South African consumers were helped by relatively low inflation (4.6%) compared with an average wage increase of 7.7%; but this is forecast to change significantly in late 2016. We expect inflation to average 6.6% in 2016, ending 2016 at around 7.5%y/y, while wages are also forecast to rise by 7.5%y/y. Consumer activity is expected to remain under pressure and is expected to lose further momentum H2 2016. The recent hikes in interest rates add to the pressure on the consumer, while banks have become more circumspect in the granting of credit. The net result is that the consumer will have less discretionary income available for general retail activity. Our overall perspective on retail spending and the strength of the South African consumer remains essentially unchanged. Firstly, it is clear that although the growth in consumer spending has slowed during the past two years, the sector has been relatively resilient when compared with other key sectors in the economy, especially mining and manufacturing. This is because household income growth has consistently exceeded inflation due to above inflation wage increases in key sectors of the economy. Secondly, there are concerns about the negative impact of a sharp upward move in inflation during the second half of 2016, weakening consumer confidence, an increase in usercharges (especially electricity, and water), higher fuel prices and somewhat higher interest rates. Together, all these factors will most likely slow retail spending, on a trend basis, during the remainder of 2016. Lastly, the most critical factor that will determine whether the retail sector experiences an outright and severe recession in 2016/2017 as opposed to modest growth (which is what we are forecasting), is the performance of the labour market. Widespread job cuts would, most likely, push consumer spending in recession, whereas if the economy can at least maintain the current level of employment this would ensure that the consumer sector can avoid a recession in 2016 and perhaps achieve modest growth. 2. In July 2016, the US leading economic indicator (as compiled by the Conference Board) rose by an encouraging 0.4%m/m. This follows an increase of 0.3%m/m in June. The July reading was slightly above market expectations for a rise of 0.3%m/m. Overall, the leading indicator has improved somewhat in the past two months. Overall, the leading indicator is still not robust, signalling only modest growth ahead. Over the past year, the leading index is up a modest 1.2%y/y, and has slowed noticeably from a peak annual growth rate of over 6% at the start of 2015. According to the Conference Board economist the US LEI picked up again in July, suggesting moderate economic growth should continue through the end of 2016. There may even be some moderate upside growth potential if recent improvements in manufacturing and construction are sustained, and average consumer expectations don t deteriorate further.

The Conference Board s Leading Indicator has a reasonable track record in forecasting GDP growth by up to one year. Correspondingly, the most recent trend in the leading indicator suggests that although the US economy will continue to show some growth in the second half of 2016 and early 2017, the rate of expansion is likely to still be modest and well below the historical average GDP growth of 3%, More realistically GDP growth will remain around 2%. In their latest economic outlook, the IMF revised the US GDP growth forecast down slightly to 2.2% in 2016 and 2.5% in 2017. The US economy grew by 2.4% in both 2015 and 2014. This basic conclusion is supported by a broad range of forward looking US economic indicators including the weekly jobless claims, ISM manufacturing index, the slope of the yield curve, consumer confidence, housing affordability and the ECRI leading indicator. In fact the US ISM manufacturing index is actually signalling a pick-up in economic activity ahead and has historically been an excellent forward looking indicator. Perhaps US industry is becoming accustomed to the relatively strength of the Dollar? Lastly, the highly respected Federal Reserve Bank of Chicago s National Activity Index also suggests that the US can continue to avoid a recession, but that growth remains well below trend. (The Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure in the US). In June 2016 the index s three-month moving average (which is the key overall measure of economic activity in US) improved to -0.12 from -0.39 in May. This is the 10 th consecutive month that the reading has been below zero. As mentioned above, June s outcome suggests that growth in the US economy remains below trend, but the index is also not signalling a return to recession conditions. The latest index reading also suggests limited inflationary pressure from economic activity over the coming year. 3. The Monetary Policy of the Bank of Namibia decided to leave rates on hold at 7% at their meeting on 17 August 2016. This is despite inflation reaching a near four-year high. According to the bank, the decision was made to support the economy as regional growth has slowed especially amongst Namibia s trading partners. This means that essentially Namibian real rates are 0% and are likely to go negative as the year progresses. In July 2016, Namibia s headline inflation rate accelerated to 7%y/y after recording 6.7% for the past 2 months. This is the sixth consecutive month that inflation has been outside the target of 3% 6% and is the highest since October 2012. The main drivers of inflation were Housing, Water, Electricity, Gas & Other Fuels as well as Food Inflation which were recorded at 8.2%y/y and 12.2%y/y respectively. Together these categories constitute 45% of the Namibian CPI basket so the overall headline figure is sensitive to movements in both. The bank, however, feels that although inflation is likely to continue to increase for the rest of the year, it still remains within acceptable levels. Water tariffs were increased in Namibia by Nam Water as the country struggles with water shortages. The water shortages have also slowed economic activity. The construction sector slowed due to lower water supply. According to the communique economic activity slowed in the first half of the 2016. Credit extension slowed to 12.4% in the first half of 2016 from 15.6% in the first half of 2015. This was due to lower demand reflecting the effect of the 50 basis points hike implemented in the first half of the year. The agricultural sector is still suffering from the effects of the drought and posted weak performance. The stock of international reserves has lowered to 2.4 months of import cover, a level at which the bank is comfortable with. There is a possibility that the bank could hike rates as the year progresses. The inflation outlook is expected to deteriorate for the rest of the year, which could force the bank to hike rates. Another possible outcome is that the increase in inflation is temporary and the bank looks past it.

The risks to economic activity are low commodity prices, the uncertainty around Brexit and the drought in the Southern African region. Namibia s trading partners, namely South Africa and Angola, are facing slower growth which will negatively impact Namibia s economic performance. The next meeting will be on 18 th October 2016 where there will be further clarity on inflation outcomes as well as how the bank will respond to the data. Namibia is expected to be the outperformer in the region even though growth will be slower than in previous years. Please follow our regular economic updates on twitter @lingskevin Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

Weekly Market Analysis Currencies / Indices / Commodities Friday s Close 12/08/16 Weekly Move (%) YTD (%) Indices * MSCI World US Dollar 1731.85 2.43 4.15 * MSCI World Rand 23435.09 0.03-8.81 * MSCI Emerging Market US Dollar 910.34 0.03 14.63 * MSCI Emerging Market Rand 12318.50 0.30 0.36 All Share Index US Dollar 3936.15 0.12 20.04 All Share Index Rand 52771.95-0.07 4.10 All Bond Index 535.07-0.11 15.80 Listed Property J253 2143.73-0.83 12.32 Currencies US Dollar/Rand 13.41-0.78-13.28 Euro/Rand 15.13 0.61-9.93 Sterling/Rand 17.48 1.76-22.53 Euro/US Dollar 1.13 1.43 4.28 Commodities Oil Brent Crude Spot Price ($/bl) 50.79 7.70 36.24 Gold Price $/oz 1354.20 1.40 26.00 Platinum Price S/oz 1130.50 1.20 28.00 * MSCI - Morgan Stanley Capital International Source: I-Net Bridge

Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 7.50% Effective: 7.79% 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 August 2016. 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: 8.26% 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 19 August 2016. 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: 8.63% STANLIB Extra Income Fund Effective Yield: 8.20% STANLIB Flexible Income Fund Effective Yield: 7.44% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.83% 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 19 August 2016. 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.

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