The Weekly Focus A Market and Economic Update 22 January 2018
Contents Newsflash...3 Market Comment... 3 Other Commentators... 5 Economic Update...7 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 While most of 2017 witnessed a very narrow bull market on the JSE (very few shares participating), 2018 should see a broadening of that bull market as more and more shares participate in response to the stronger currency, lower inflation, a better economy and better politics. Market Comment It seems reasonably clear that global share markets (developed and emerging) AND the JSE remain in powerful bull markets.that will turn nine years old on the 9 th of March. Most bull markets typically last around 4 to 5 years, so this one is extraordinary, thanks to the slow nature of the global economic recovery (until recently) - after the great recession - plus still low inflation and resulting low interest rates in most of the world. Last year was the first year in ninety years since the S&P 500 Index started that the index recorded a positive return in all twelve months of the calendar year, indicating that very unusually there was no correction of substance in the US in 2017. While this creates some concern that a correction in US and other markets must surely be imminent - we know they can happen at any time - we are also aware that most investors around the world have been very conservatively invested during this bull market, if anything too conservatively because of fears of another crash, of N Korea and and. So the bull market appears to be reaching a stage when many investors decide that holding too much in cash and/or fixed interest is not working and it is time to upweight equities. We are seeing strong flows into emerging market shares and bonds and into global equities. SBG Securities (stockbroker in the Standard Bank Group) says that even in SA foreigners were large buyers of SA shares in December to the value of R30.3bn! Stripping out the dual-listed companies like Anglos and BHP Billiton, foreigners were also buyers to the value of R32.8bn, no doubt due to the election of Cyril Ramaphosa as ANC President. SA Industrials received R19bn of foreign buying (Naspers R13.4bn). SA Financials excluding dual-listeds saw foreign inflows of R9.8bn in December, with aggressive buying of Banks (R6.9bn). The movement of shares on the JSE in December, when most of us were relaxing on holiday, provides one of those prime examples where if you miss out on certain days or months, you lose out big time. Although ironically the All Share Index was slightly down in December (-0.34%) thanks to the rand s +9.3% jump versus the dollar and Steinhoff s -91.7% collapse, there were an extraordinary number of shares that rose (over 50 shares). In fact 30 shares gained more than +10% in December in very strong rand terms (so over +19% in dollar terms) - in one month! Foschini led the pack with +24.9%, then Massmart +24.3%, Assore +20% (a rand hedge!), Firstrand +19.3%, Mr Price +19.1%, RMB Holdings +18.3%, Truworths +18.1%, Intuprop +17.1%, Kumba +16.6%, Barclays Africa +15.3%, Imperial +15.3%, JSE +14.9%, Bidvest +14%, Tsogo Sun +13.2%, Standard Bank +13.1%, Italtile +13.1%, Discovery +12.9%, Woolies +12.6%, Netcare +11.8%, Capitec +11.5%, Sanlam +11.2%. So December was one of the most amazing months in the JSE s history. By the way, apart from Steinhoff International, Steinhoff Retail Africa fell -37.1%, EOH fell - 19.8%, Implats -16.8%, Sibanje -15.7%, Echo Polska -15%, Harmony -10% and Anglogold -9.9%, all in December, so it wasn t all one way traffic. Aspen fell -9.2% and Naspers fell -6.4% too. So in summary it was mostly the SA Inc. shares that pumped in December, with General Retailers +15.9%, Banks +15.2%, Automobiles & Parts +10.5% etc. Gold Mining fell - 10.2% and Platinum -5.5%, also rand-hedge Tobacco -4.4%.
What was amazing about 2017 as a whole was that despite our poor economy (and company earnings), despite the downgrades of our government debt, the terrible political landscape and all the money heading out of the JSE to offshore investments, the JSE ALSI did a lot better in dollars (+34.2%) than the mighty S&P 500 Index s +21.8%, or the MSCI World Index s +23.1%. Sure, that was due to the rand gaining +10.6% against the dollar in 2017 and the returns of certain shares like Kumba s +148.5%, Exxaro +89.5%, Dischem +64.1%, Discovery +64.1%, Capitec +60%, Clicks +59.3%, Mr Price +58%, Assore +57.9%, Imperial +47.2%, African Rainbow +42.9%, Sanlam +42.6%, Glencore +40%, Barlows +38%...and especially of course Naspers +71.8% - despite the strong rand. Maybe unknown to many investors was that the JSE Banks Index returned an amazing +30.7% in 2017 (so over +40% in dollars), while Life Insurance did +27.9% and Food & Drug Retailers did +27.8%. So where to now? The sense is that while most of 2017 witnessed a very narrow bull market on the JSE (very few shares participating), 2018 should see a broadening of that bull market as more and more shares participate in response to the stronger currency, lower inflation, a better economy and better politics, noted last week by the sharp unexpected pickup in Retail Sales, up +8.2% year-on-year in November excluding or net of inflation. Also so far it appears that emerging markets, of which SA is one, are still favoured over developed markets, partly thanks to the stronger global economy and the weaker dollar as more cash looks for higher returns outside of the US and the resulting pick-up in commodity prices. So far forecasts for earnings growth on the JSE range from 12-15% for 2018, with dividend growth about half that. Last year our market was dominated by the ALSI 40 shares, with the ALSI 40 returning +23.2%, thanks to Naspers, Anglos +34%, Richemont +25.8%, BHP Billiton +19.5%, Standard Bank +34.5%, Firstrand +31.3% etc. The JSE Mid-Cap Index of sixty shares from share 41-100 did only +7.4%, while the JSE Small-Cap Index did even less at +3.1%, mostly because of the weak economy and resulting poor company earnings. So 2018 should be a lot better for these two indices and the shares within them. They could outperform the ALSI 40 Index. So far in 2018 the ALSI 40 Index is +2.8%, the Mid-Cap Index is +0.1% (was +3.9% in December though) and the Small-Cap Index is +0.7% (gained +2.1% in December). On the currency front, apart from the rand, the biggest surprise came from the euro. At one stage in early December it looked like the euro may be forming a double top versus the US dollar, which usually indicates it would take a knock in the coming months. However, in the midst of our holidays in December, the euro suddenly reversed course and shot up to a new two year high versus the dollar.which makes a huge difference to a lot of things, not least to the prices of commodities in dollars, including oil, gold etc. The euro touched $1.04 per dollar a year ago versus today s $1.226, a rise of +17.9% from the 2 nd biggest global currency versus the biggest in just 12 months! The pound was $1.20/pound last January versus $1.39/pound today, a gain of +15.8%. On the chart it certainly looks likely that the dollar may continue to weaken as 2018 progresses, with obvious implications for many other developed and emerging market currencies including the rand, at least versus the dollar. On the listed property front, global listed property has broadly trended sideways for the past 3 years in dollar terms. In the past when US interest rates were rising, listed property typically did well because of a stronger economy and increased demand for rentals and leases. Hopefully the same will occur in 2018. On the local listed property front, thanks to the political changes and the resulting rand strength, the All Bond Index returned +5.7% in December (+10.2% in 2017) as bond yields fell sharply and bond prices rose, which helped the SA Listed Property Index jump by +4.2% in December (+17.2% n 2017).
There have been rumours in early 2018 about possible accounting issues with the Resilient group of properties, including Greenbay, Fortress and Nepi Rockcastle. This is related to rumours that the small US short-selling company called Viceroy that wrote a very negative report on Steinhoff International, could be about to produce another negative report on one or two other SA listed companies, rumoured to be Aspen or Resilient and related companies. In response, Resilient announced it will be releasing its interim results two weeks earlier than expected, attempting to lay to rest the rumours. The rumours caused a sharp fall in these shares and a -8% fall in the SA Listed Property Index in the first 3 weeks of 2018, back into its 3-year trading band. This could be opening up a buying opportunity, because forecasters are looking for 10%+ returns from local property in 2018. Other Commentators US Market Analyst, Elaine Garzarelli Despite rising interest rates in the US, the dollar has softened somewhat versus the euro. This along with the tax cuts and higher oil prices are positive for S&P earnings. Garza s quants model reading remains at a bullish 74.5% (out of a maximum of 100%), despite the almost 9 years duration of the existing bull market. She expects the bull market to continue and corrections to be limited to 4-7%. For her model to turn bearish would require a combination of events. One would be an inverted yield curve, when short-term rates rise above long-term rates. Currently the fed funds rate is 1.4% and the 10-year bond yield is 2.66%, so an inverted yield curve would not occur until the Fed tightens significantly, by 130 basis points. The bottom-up consensus for S&P revenues in the 4 th quarter of 2017 rose to +6.9% y/y, the largest rise in six years. Historically a peak in earnings indicates that a peak in share prices is near, but the corporate tax cuts will likely cause the peak in earnings to be pushed out. Stronger global growth is also a support for earnings. Based on this, first quarter S&P 500 earnings could rise as much as +20% year-on-year. This explains why the S&P 500 Index is surging (already up +4.8% in the first 3 weeks of 2018). Garza s model attaches a fair value for the S&P 500 Index of 2,736. So at 2,810 now it is +2.7% above fair value. She says shares usually rise by 20-50% above fair value when her model is in such bullish territory as it is now. Economic data continues to be robust and shares should be supported by solid growth globally and upwardly revised earnings. Garza doesn t believe that we are late in the economic cycle yet. The cycle could carry on for another 3 years. Economic data continues to be robust. For example, retail sales in the US rose at the fastest rate in seven years in the fourth quarter of 2017 (+11.3% annualised). She thinks inflation could perk up. Usually the early stages of higher inflation are positive, indicating improving pricing power for companies and rising consumer wages. It is also a sign the economy is improving. So far in 2018, Health Care shares and Consumer Discretionary shares are leading the S&P 500 Index, both +6.7%, followed by IT shares at +5.8%, Financials at +5.3% and Energy/oil at +5.2%. Interest-sensitive shares like Utilities (-4.9%) and Real Estate (-4.9%) are negative.
BCA Research BCA suspects that an increase in the synthetic supply of bitcoins via financial futures/derivatives, along with the launch of bitcoin-like alternatives by large established technology companies could cause the cryptocurrency market to collapse under its own weight. Other areas that could see supply-induced pressures over the coming years include oil, high yield bonds, global real estate and low volatility trades. In contrast the US stock market has seen an erosion in the supply of shares due to buybacks and voluntary delistings. So investors could consider switching out of high yield bonds into equities. However, from a tactical perspective, equities are currently extremely stretched and warrant some caution. Higher oil prices and interest rates could begin to bite somewhere quite soon. Also speculation is running rampant. BCA s Equity Speculation Index is almost two standard deviations above the historical mean. It has only ever been higher during the dotcom bubble. While it can rise further, it is waving a yellow flag. Investor sentiment has also gone extremely bullish, with the bull-to-bear ratio reaching a level last seen before the 1987 crash. Thirdly, financial conditions are as good as they get. The St Louis Fed Financial Stress Index recently hit an all-time low level. This should be cause for some trepidation. Fourthly, overbought technical conditions are near levels that have previously marked temporary broad market pullbacks. However, if the market corrects by 5-10%, BCA would recommend buying the dip, because no recession is expected in the next 6-12 months. There is now a once-in-a-decade opportunity to prefer value shares over growth shares, so BCA recommends switching from growth to value shares. Financial shares dominate value indices, while Information Technology shares comprise 40% of growth indices. Energy/oil shares offer a lot of value, while health care shares sit prominently in growth indices. So BCA is now overweight Financials and Energy shares and underweight IT and health care shares. Growth shares have outperformed value shares for the past approximately 10 years. BCA thinks this could change starting soon. BCA expects the 10-yield to rise to 3% (currently 2.66%) and is constructive on oil prices. Both these issues favour value shares over growth shares. The Fed has raised interest rates five times over the past 2 years and is forecast to do so three times more in 2018. This also favours value over growth. BCA also recommends taking profits on small shares and parking the funds in cash. They believe the outperformance of small versus large shares is close to ending. Small shares are much more sensitive to interest rate moves and typically don t have any international businesses, i.e. are US-centric. Small caps have also been adding debt at a much faster rate than large caps in the US. Paul Hansen Director: Retail Investing
Economic Update 1. SA outlook summary for 2018 2. SA Reserve Bank decided to leave the Repo rate unchanged at 6.75% in January. The Bank highlighted the improved outlook for inflation helped by the stronger exchange rate 3. SA retail sales much better than expected in November 2017, surging by 8.2%y/y in real terms. Retail activity was clearly boosted by Black Friday sales 4. Global outlook summary for 2018 1. Given the relatively positive global economic backdrop, the South African economy should currently be growing at around 2.5% instead of the projected 0.9% for 2017 as whole. Closing the gap between South Africa s current growth rate of 1% and 2.5% hinges on lifting South Africa business and consumer confidence. Without a sustained pick-up in economic growth, the fiscal authorities are going to find it increasingly difficult to meet their fiscal projections and the country will continue to face the risk of a further credit rating downgrade in 2018. Fortunately, and unsurprisingly, the reaction in South Africa s financial markets to the election of Cyril Ramaphosa as President of the ANC has been extremely positive, especially the Rand exchange rate and the domestic bond market. This is partly because Cyril Ramaphosa has highlighted the need for policy clarity and the importance of lifting business and consumer confidence. It is clear that, on its own, government is going to struggle to directly boost domestic economic activity given their constrained balance sheet, faltering tax receipts, demands to fund free tertiary education and the need to provide the SOEs with further financial support. All of this means that a meaningful uplift of the South African economy is going require and expansionary private sector. In the short-term it is hoped that government will focus on improving the fiscal position in many of the large State Owned Enterprises, including Eskom, as well as strengthening key institutions such as National Treasury and the South African Revenue Services. Under these circumstances it is possible for the country to avoid any further rating downgrades. Moody s remains the only major credit rating agency to assign South Africa an investment grade rating for both its long-tern foreign debt as well as its long-term domestic debt. 2. The South African Reserve Bank decided to leave interest rates (the Repurchase Rate) unchanged at 6.75% at its MPC meeting last week. This was in-line with market expectations, although some analysts had anticipated a cut (STANLIB expected rates unchanged). The Reserve Bank last adjusted interest rates in July 2017, when they cut rates by 25bps. According to the MPC, the interest decision was not unanimous, with one of the six members voting for a 25bps rate cut. In making the decision the SARB highlighted the improved outlook for SA inflation due to the stronger exchange rate, but also noted the event risk associated with the National Budget in February 2018 and the upcoming credit rating decision by Moody s in early March 2018. Although the outlook for SA inflation has improved, economic growth remains subdued and along with the near-term event risks surrounding the National Budget and the Moody s credit rating decision these factors influenced the Reserve Bank to leave interest rates unchanged. This is partly because a further credit rating downgrade could lead to Rand weakness. Importantly though, the latest downward revision to the inflation forecast coupled with the event of a confidence boosting National Budget in February, implies that South Africa could avoid a further rating downgrade and gain some growth momentum and this could open the door for the Reserve Bank to cut interest rates modestly into the middle of 2017; possibly two cuts of 25bps each, after which interest rates would then remain on-hold into 2019.
3. Stats SA released the retail sales data for November 2017. According to this latest survey, retail sales rose by an extremely impressive 4.0%m/m during the month, after falling by - 0.1%m/m in October, in real terms (seasonally adjusted). This is the largest monthly increase in SA retail sales since the middle of 2012. In the past three months from September to November retail sales rose by a solid 2.4%q/q. The latest retail sales data will clearly boost the Q4 GDP estimate and could mean that South Africa will achieve an average annual growth rate of around 1% for 2017 as a whole. The annual growth in retail spending was also much better than the market expected, increasing by an amazing 8.2%y/y versus a forecast for sales to rise by only 3.5%y/y. Furthermore, the 12-month moving average of the annual growth rate remains firmly positive at +2.4%, suggesting that on a trend basis the retail sector is still showing signs of improving. The latest increase in retail sales was broad-based with most categories of sales recording a sharp pick-up in activity. However, the stand-out categories of spending in November were clothing and footwear, (+12.4%y/y real), household appliances (+14.1%y/y real) and on-line retailing (+20,8%y/y real). The latest surge in retail sales appears to have been boosted by Black Friday sales, which has become a stand-out feature in SA retailing over the past few years. During November 2017 many retailers across a broad range of categories offered bargains/specials, enticing the consumers with great deals. Furthermore, these sales have largely purchased with cash, as reflected in the fact that the growth in consumer credit remains very modest and trending only modestly higher. Unfortunately, the latest retail data for November suggests that shopping activity in December 2017 might have been a little disappointing given the high base of activity in November. This is what occurred last year, with retail sales falling sharply in December 2016 after a buoyant Black Friday spending spree in November 2016. In summary, during 2015, South African consumers were helped by relatively low inflation (4.6%) compared with an average wage increase of 7.7%. 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 was that at the start of 2017 the consumer had less discretionary income available for general retail activity. At the same time consumer confidence had fallen and is still well below the long-term average. Fortunately, in recent months inflation has moved back well inside the target range and is likely to remain relatively low in the months ahead. This coupled with the reduction in interest rates (July 2017) and the discounting of retail goods has provided some support to the household sector, especially in the second half of 2017, helping retail sales gain some momentum - despite the still weak labour market. 4. In the final quarter of 2017 the IMF released an update on the World Economic Outlook. According to their latest estimates world growth is projected to improve from 3.2% in 2016 and 3.6% in 2017 to 3.7% in 2018. The growth forecast for 2018 is slightly above the longterm average growth rate of 3.5%. The IMF highlighted that the global recovery is continuing, and at a faster pace. Furthermore, from the IMF s perspective this broadening of growth is more evident than at any time since the start of this decade. This accelerating cyclical upswing is, according to the IMF, boosted by Europe, China, Japan, and the United States, as well as emerging Asia. The IMF also expects sub-saharan Africa growth to improve, helped by higher commodity prices and acceleration in global. On the downside the IMF highlighted that nominal and real wage growth in advanced economies remains low, including the United States and Euro-area and that the current cyclical upswing masks slow productivity growth in most of the developed world, which is being aggravated by an ageing of the population.
Overall, the tone from the IMF s latest world economic outlook is upbeat, with the IMF encouraging policy officials to use the improved global economic conditions in order to implement important economic reforms. It is much easier to undertake tough structural adjustments when economies are growing strongly, rather than when economic conditions are deteriorating and social pressure are rising. Please follow our regular economic updates on twitter @lingskevin Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)
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