18 April 2016
Contents Contents... 2 Newsflash... 3 Economic Update... 3 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
Newsflash Please note that Paul Hansen is currently on leave and there will be no commentary from him this week Economic Update 1. SA retail sales much better than expected in February 2016, growing by 4.1%y/y. Retail spending has actually gained momentum in the past 6 to 9 months despite rising rates and low confidence. 2. IMF revised down their world growth outlook for 2016 and 2017, once again. Most regions, including Sub-Saharan Africa revised lower. Key exception is China, with had their growth forecast revised up. 3. Economic growth in Swaziland is expected to remain under pressure in 2016. 4. The Nigeria inflation rate surprises to the upside again. 1. Stats SA released the retail sales data for February 2016 today. According to this latest survey, retail sales rose by a surprise 0.5%m/m in February, in real terms (seasonally adjusted). The month-onmonth sales performance was better than expected, which was an increase of 0.3%m/m. In comparison, the January retail sales declined by a revised -0.7%m/m. In the past three months retail sales have risen by a solid 0.5%q/q. This, together with better than expected manufacturing production data for February, should help to strengthen the Q1 2016 GDP estimate. On an annual basis, retail spending rose by a very respectable 4.1%y/y (real) in February 2016. This is up from a revised annual growth rate of 3.6%y/y in January 2016, and well above market expectations for growth of 2.6%y/y. The 12-month moving average rate of annual growth has trended meaningfully higher over the past 6 to 9 months and was recorded at 3.5%y/y in February 2016. A breakdown of retail spending by major category reveals that the highest annual growth rates were recorded for pharmaceuticals and medical goods, cosmetics and toiletries (7.8%), general dealers (5.5%), and retailers in textiles, clothing, footwear and leather goods (4.2%). More importantly, only furniture and appliance retailers recorded a decline in sales over the past year (in real terms), dropping -0.1%y/y. A number of factors appear to explain the relatively resilience of retail sales despite low consumer confidence and rising interest rates. Firstly, salary increases have risen significantly faster than inflation over the past year, secondly, higher income earners have managed to deleverage their balance sheets over the past couple of years which has led to lower debt servicing costs despite slightly higher interest rates. Thirdly, some consumers may have decided to increases purchases ahead of possible prices increases resulting from the weaker exchange rate. Fourthly, February 2016 was a leap year, which means one extra trading-day relative to last year, which would have boosted the rate of increase in retail sales during the month. Lastly, there has been a modest pick-up in unsecured credit in recent months (including store credit and credit card debt), which could have supported stronger growth in retail sales. Despite the most recent improvement in retail sales, our overall perspective on retail spending remains essentially unchanged. In particular, we remain concerned about the negative impact of a sharp upward move in inflation during 2016, especially in the second half of 2016 and into early 2017, coupled with higher interest rates and weak consumer confidence. Together, these factors will most likely slow retail spending meaningfully during 2016.
Lastly, the critical factor that will determine whether the retail sector experiences an outright recession in 2016 as opposed to modest growth, 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. At this stage of the business cycle the labour market appears to be relatively resilient. 2. Unsurprisingly, the IMF has once again, revised down their world growth forecast in the World Economic Outlook (WEO) publication for April 2016. Downward revisions to global growth have been a perpetual theme in the WEO for many years, which has effectively undermined the credibility of the IMF forecasts. This quarter the key global growth theme highlighted by the IMF is that the global economic recovery remains too slow, too fragile, with the risk that persistent low growth can have damaging effects on the social and political fabric of many countries. In other words, according to the IMF persistent slow growth has scarring effects that themselves reduce potential output. The world economy grew by an estimated 3.1% in 2015 and is now forecast by the IMF to grow by 3.2% in 2016, which is down 0.2 percentage points relative to the IMF s January 2016 forecast. In addition, the IMF forecasts world growth to improve to 3.5% in 2017. This estimate is 0.1 percentage points below the January 2016 estimate. I suspect the 2017 estimate will be systematically revised lower during the course of 2016. The latest downward revisions were relatively broad-based across most geographic regions, with the key exception of China, which the IMF revised up by 0.2 percentage points for both 2016 and 2017. The IMF highlighted that China appears to be managing their economic transition from production to consumption more effectively than was assumed a number of months ago. Other key forecast changes include Japan, which is now forecast to go back into recession in 2017 as a result of a scheduled increase in the consumption tax rate. In addition, the IMF has slashed the growth outlook for the Sub- Saharan African region by a full 1 percentage point in 2016 and by 0.7 percentage points for 2017. This downward revision applies especially for Nigeria. The IMF s latest growth forecast for South Africa in 2016 was revised slightly lower to 0.6% from 0.7% in January 2016. However, the IMF s outlook for South Africa in 2017 has sharply reduced to 1.2%, down from an estimate of 1.8% in January 2016 and much higher estimates compiled in 2015. In the United States, domestic demand will be supported by improving government finances and a stronger housing market which will help offset the drag on net exports coming from a strong dollar and weaker manufacturing. In the Euro-area, low investment, high unemployment, and weak balance sheets weigh on growth, which will remain modest. Risks to the economic outlook include: A return of financial turmoil, impairing confidence. For instance, an additional bout of exchange rate depreciations in emerging market economies could further worsen corporate balance sheets, and a sharp decline in capital flows could force a rapid compression of domestic demand. A protracted period of low oil prices could further destabilise the outlook for oil-exporting countries. A sharper slowdown in China than currently projected could have strong international spill overs through trade, commodity prices, and confidence, and lead to a more generalized slowdown in the global economy.
Shocks of a noneconomic origin related to geopolitical conflicts, political discord, terrorism, refugee flows, or global epidemics loom over some countries and regions and, if left unchecked, could have significant spill overs on global economic activity. On the upside, the recent decline in oil prices may boost demand in oil-importing countries more strongly than currently envisaged, including through consumers possible perception that prices will remain lower for longer. To support global growth the IMF suggests that there needs to be a more potent policy mix. More specifically, a three-pronged policy approach mutually reinforcing policy levers. These include (1) structural reforms, (2) fiscal support, with growth-friendly composition of revenue and spending, and fiscal stimulus where there is a need and where fiscal space allows, and (3) monetary policy measures. The IMF highlighted the need for market reforms which aim to boost competition among firms and make it easier to start a business or attract investment. The IMF argues that these policies boost output even under weak macroeconomic conditions and without weighing on public finances. Reforms that are coupled with fiscal support are seen to be the most valuable at this juncture of the global business cycle, including reducing inefficient taxes on labour and increasing public spending on research and development and active labour market policies, more specifically reforms aimed at getting the unemployed back into work, such as job training programs. 3. The slower economic activity in the Swazi economy stems from lower commodity prices, power constraints, rising prices of goods and services as well as fiscal constraints. Prices in commodities have recovered somewhat in the beginning of the second quarter of 2016, however they are still well below their historical highs. This will hurt receipts from commodity exports in the region as well as the mining sector in Swaziland. The Swazi economy grew by an estimated 1.7% in 2015 compared to 2.4% in 2014. The withdrawal of the African Growth and Opportunity Act arrangement affected exports of manufactured goods. Power constraints as well as a drought, which disrupted water supply, also affected the manufacturing sector. The tourism sector was hurt by changes in immigration regulations in South Africa. The Monetary Policy Committee of the Central Bank of Swaziland met in March and decided to increase interest rates from 6.5% to 6.75%. This was in an effort to align the Swaziland bank rate with the South African repo rate which was raised by a similar magnitude to 7% in March. This was also in response to the rising inflation in the country, which was recorded at 7.3% in February. This figure was significantly higher than the 5.6% recorded in January and reflects the rampant increases in food prices. The region has been experiencing a severe drought and prices of maize have risen substantially. The drought also caused severe slow-down in agricultural activity which is expected to contract in the first half of 2016. The Swazi Lilangeni depreciated quite sharply at the end of 2015 and beginning of 2016 which will exert upward pressure on prices. However this will assist export competitiveness and might also provide a boost to the tourism industry. Going forward activity is expected to be subdued for the region in 2016 with a possible recovery in 2017 as commodity prices rebound and inflation slows. Revenues from the South African Customs Union are expected to decrease by more than 30% for this fiscal year. Consumption expenditure and fixed investment are expected to be affected. Inflation is expected to mirror that of South Africa s and stay above the 6% level for most of 2016. We expect growth of sub 2% in the region with the exception of Namibia as the challenges of 2015 continue into 2016.
4. The Nigeria Bureau of Statistics released inflation figures for March 2016, which revealed that the inflation rate is recorded at 12.8%. The March figure is the highest recorded inflation rate since May 2012. This was up from the already high 11.4% recorded in February 2016. Although many were expecting increased inflation the latest figure was a surprise to most market participants. The price increases were across the board with food rising by 12.7% and core inflation by 12.2%. Prices across the board, with exception of, hotel, recreational and communication sectors, have risen significantly and are now above the central bank s target of 6% 9%. The reduced supply of foreign exchange has caused the parallel market, which trades at 324 Naira (NGN) to 1 Dollar, to move further away from the official rate of NGN199. Importers of goods have started to pass on this currency weakness to the consumer which has manifested in sharp price movements. An increase in electricity tariffs have also added meaningfully to inflation. The real rate in Nigeria is currently -1.8% which is lower than the 0% recorded in February. The Central Bank of Nigeria meets again in May and will have to consider increasing rates by as much as 200 basis points. They increased interest rates by 100 basis points in the previous meeting after cutting by 200 basis points in the meeting before that. The lack of liquidity is hampering growth in Africa s largest economy as most of the goods consumed are imported. The recent currency swap deal with China (no full details as yet) is expected to alleviate some pressure however the challenges will still continue. 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 08/04/16 Weekly Move (%) YTD (%) Indices *MSCI World US Dollar 1670.47 2.34 0.46 *MSCI World Rand 24350.83-0.49-5.25 *MSCI Emerging Market US Dollar 846.70 3.66 6.62 *MSCI Emerging Market Rand 12342.54 0.79 0.56 All Share Index US Dollar 3652.57 6.28 11.39 All Share Index Rand 53038.91 3.14 4.63 All Bond Index 497.60 1.45 7.69 Listed Property J253 2124.69 0.65 11.33 Currencies US Dollar/Rand 14.52-2.95-6.07 Euro/Rand 16.44-3.74-2.15 Sterling/Rand 20.50-2.11-9.10 Euro/US Dollar 1.13-0.98 3.91 Commodities Oil Brent Crude Spot Price ($/bl) 43.07 2.92 15.53 Gold Price $/oz 1234.21-0.44 16.34 Platinum Price S/oz 985.00 1.97 10.55 Source: I-Net Bridge * MSCI - Morgan Stanley Capital International
Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: Effective: 7.11% per annum 7.37% 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 17 April 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: 7.53% 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 15 April 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: 8.61% 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 15 April 2016.
STANLIB Extra Income Fund Effective Yield: 7.93% 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 15 April 2016. STANLIB Flexible Income Fund Effective Yield: 7.64% 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 15 April 2016. STANLIB Multi-Manager Absolute Income Fund Effective Yield: 6.32% 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 15 April 2016.
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.
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.
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 4 2007, Investopedia (www.investopedia.com) and The South African Financial Planning Handbook 2004.
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.: HX2448 17 Melrose Boulevard, Melrose Arch, 2196 P O Box 202, Melrose Arch, 2076 T 0860123 003 (SA Only) T+27(0)11 448 6000 E contact@stanlib.com Website www.stanlib.com 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