The Weekly Focus A Market and Economic Update 3 April 2017
Contents Economic Update...3 Weekly Market Analysis...6 Rates...7 STANLIB Money Market Fund... 7 STANLIB Enhanced Yield Fund... 7 STANLIB Income Fund... 7 STANLIB Extra Income Fund... 7 STANLIB Flexible Income Fund... 7 STANLIB Multi-Manager Absolute Income Fund... 7
Economic Update 1. SA Cabinet Reshuffle additional detail including video commentary is available on our website 2. SA recorded a trade surplus of R5.2bn in Feb 2017, helped by another decline in imports and an increase in exports. SA's trade account continues to support the Rand 3. SA petrol price declined by 24c/l in April 2017, despite the higher fuel levy, an increase in the road accident fund and recent exchange rate weakness. 4. SA's maize crop for 2017 is now estimated to 84% bigger than last year, while other summer field crops are also performing well. This will be a key uplift to SA GDP growth in 2017. 5. Following the Kenyan MPC meeting last week, inflation rose substantially. 1. Last week, President Jacob Zuma announced a number of Cabinet changes. Although these were anticipated, the changes were more extensive than expected and the markets reacted negatively. We expect financial markets to take some time to interpret the full implications of the political changes. The credit ratings agencies have become more concerned about the South African government s ability to stick to its expenditure targets and to collect budgeted tax revenue in a weak economic environment. Additional detail, including video commentary is available on our website. 2. In February 2017, South Africa s trade balance recorded a further surplus of R5.2 billion. This compares with a revised trade deficit of R11.2 billion in January 2017. The market was expecting a trade surplus of around only R1.6 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 six of the last ten months. During February exports rose by R7.6 billion, while imports fell by R8.9 billion. The sharp decline in imports reflect a combination of factors including weak domestic demand including a lack of domestic fixed investment activity by the private sector. In particular, there was a R3.9bn decline in imports of machinery and equipment. Over the past year South Africa s imports have fallen by -9.7%. 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 2017. More encouragingly, the pick-up in exports during February 2017 included a massive R4.7bn increase in vehicle exports as well as a R1.4bn rise in machinery and equipment exports. In the first two months of 2017, SA s exports have risen by a very welcome 7.0% (in Rands). Overall, this is a much improved export performance that partly reflects the benefit of significantly higher commodity prices. SA s export performance looks even better in Dollar with growth of 27.7%y/y in the first two months of 2017 compared with the first two months of 2016. 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 2016 and early 2017. 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 contain South Africa s current account deficit, reducing the pressure on the rand exchange rate. Unfortunately, much of South Africa s economic data in the short-term is going to be over-shadowed by the recent political developments. 3. On Friday, 31 March 2017, the Department of Energy announced that the petrol price for 95 ULP & LRP will decrease by 24c/l with effect from Wednesday, 5 April 2017, while the price of petrol 93 ULP & LRP will fall by 22c/l. The latest announcement means that the price of 95 Octane (ULP, Gauteng) will now cost R13.30 per litre. The price of diesel will decrease by 10.50c/l (0.05% and 0.005% sulphur), while the price of paraffin will fall by 65c/l (retail price), and gas by 101c/kg. During the latest fuel price review period, from 24 February 2017 to 30 March 2017, the average Rand/US Dollar exchange rate was actually stronger at R12.91 compared to R13.29 during the previous month. The strengthening of the Rand against the US Dollar during the month decreased the Basic Fuels Price of petrol by almost 16c/l. In addition, the oil price moved noticeably lower during the month, subtracting an average of 47.5c/l from the fuel price. The net effect of a stronger exchange rate and a lower oil price should have been a 63.5c/l decline in the petrol price. However, this decline was offset by the 30c/l increase in the fuel levy announced by the Minister of Finance in the February 2017 National Budget as well as a 9c/l rise in the Road Accident Fund (RAF). Lastly the transport tariff was hiked by 0.5c/l. The petrol price decline in April 2017 will reduce the monthly consumer inflation rate by only 0.1 percentage points (based on the new CPI weights). Despite the modest monthly decline in inflation, the outcome is encouraging and welcome news after the extreme political turmoil during the past week. Although consumer inflation remains about the Reserve Bank s target range, and the Rand exchange rate has been extremely volatile over the past week, we still expect consumer inflation to drop back into the inflation target during the next month or two. Furthermore, we expect SA inflation to average 5.7% in 2017, down from an average of 6.3% in 2016. Despite the reasonably favourable inflation forecast, we still anticipate that the Reserve Bank will leave interest rates unchanged for an extended period, given the heightened political uncertainty and the potential impact of recent political developments on the exchange rate as well as South Africa international and domestic credit rating. 4. The Department of Agriculture s National Crop Estimates Committee (NCEC) released their second production forecast for the 2017 summer crops, last week. According to the committee, the current planting estimate for the 2017 maize crop is 2.628 million hectares, which is 35% or 681 850 hectares better than the area planted during the previous summer season and also 2.9% better than the initial estimate of area planted. In terms of production, the preliminary size of the commercial maize crop is forecast at 14.323 million tons, which is a massive 84.1% or 6.545 million tons bigger than the 7.778 million tons produced during the previous season. Three provinces account for over 80% of South Africa s maize production, namely Free State, Mpumalanga and North West. Free State is the largest with 40% of total output. Remarkably, maize production in the Free State is forecast to rise by 171% year-on-year, while the North West production should rise by around 145%. The outlook for the other major summer crops (sunflower, soya beans, groundnuts, sorghum, and dry beans) is also impressive. In total, the South Africa s major summer field crops are estimated to increase production by a healthy 77.5% in 2017 compared with the 2016 season. The improved rainfall during the early part of the summer season clearly prompted most farmers to make maximum use of the available arable land.
Typically, in South Africa the summer crops are planted between October and early January. Planting as late as mid-january significantly increases the risk that an early frost in May could substantial damage the crop. Under those circumstances the crop would then mostly be used for animal feed or destroyed. South Africa still needs follow-up rains before the major harvesting season get under-way in order to ensure a bumper maize crop. At this stage the estimated improvement in agricultural output in 2017 is expected to boost SA GDP growth by an estimated 0.30 to 0.50 percentage points. Cleary the summer crops will add the bulk of this uplift, while fruit farming also appears to be in good shape. The major concern remains the winter field crops, especially wheat, since the Western Cape (SA s major source of wheat production) is struggling with low rainfall and poor groundwater levels ahead of the winter planting season. The re-building of cattle herds will also hurt total agricultural output in 2017 as will the increased importation of chicken meat. The summer crop estimate is expected to be updated on 25 February 2017, and then at regular intervals until the final production estimate is released around September 2017. 5. The Kenya National Bureau of Statistics released inflation statistics for the month of March 2017, which indicated that inflation edged even higher to 10.3% from 9% in February 2017 and 7% in January. A year ago the inflation rate was at a steady 6.45%. Food inflation was recorded at 18.6% driven mainly by vegetable price increases. This was a result of the drought that has plagued the region. The Kenyan agricultural sector is sensitive to extreme weather patterns with droughts causing a spike in food prices. Improvements in agro-processing techniques would go a long way in reducing this sensitivity. Agricultural goods are Kenya s largest export category, and the biggest portion of the economy. The current drought could significantly put a dent in the expected GDP growth for Kenya in 2017. What could keep supporting growth, however, would be the continuing infrastructure investment by government. All other inflation items were below 5%, which indicates that at the core level there are no underlying demand side price pressures. The central bank kept rates on hold at its last meeting citing that non-food inflation was well within the target of 2.5 7.5% and the current above target inflation figure is likely to be temporary. It is not really certain when the drought conditions will subside which could push the headline figure even further. Kenya s real interest rate is now negative at -0.28% after being in positive for the last five years. The central bank decided to keep rates on hold at their meeting earlier this week mentioning that the breach in the inflation target was entirely due to food prices. This could be transitory and food prices are likely to stabilize as soon as weather patterns improve. However, if the situation deteriorates further and the central bank fails to move this could increase inflation expectations and drive up cost push inflation. 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 31/03/17 Weekly Move (%) YTD (%) Indices * MSCI World US Dollar 1853.69 0.43 5.85 * MSCI World Rand 24915.19 8.39 3.43 * MSCI Emerging Market US Dollar 958.37-1.11 11.14 * MSCI Emerging Market Rand 13065.59 8.26 10.16 All Share Index US Dollar 3881.77-6.94 4.90 All Share Index Rand 52056.06 0.46 2.77 All Bond Index 546.60-3.22 2.49 Listed Property J253 2131.86-2.74 1.37 Currencies US Dollar/Rand 13.41 7.76-2.03 Euro/Rand 14.30 6.46-1.01 Sterling/Rand 16.63 8.56-0.41 Euro/US Dollar 1.07-1.32 1.27 Commodities Oil Brent Crude Spot Price ($/bl) 53.53 5.00-5.79 Gold Price $/oz 1249.10 0.33 8.56 Platinum Price S/oz 950.50-1.35 5.26 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: 7.27% Effective: 7.84% 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 31 March 2017. 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: 8.09% 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 31 March 2017. 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 investors 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: 8.64% STANLIB Extra Income Fund Effective Yield: 8.34% STANLIB Flexible Income Fund Effective Yield: 8.02% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 6.04% 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 31 March 2017. 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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