The Weekly Focus. A Market and Economic Update 3 October 2017

The Weekly Focus A Market and Economic Update 3 October 2017

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 Equities remain the best asset class locally with a total return of almost +13% so far in 2017. Market Comment The MSCI World Index of mostly developed stock markets has risen to another record high in dollars at the end of the 3 rd quarter of 2017 and at the beginning of the 4 th quarter. This index gained +2.3% in September, +5% in the quarter and year-to-date has returned +16.5% in dollars - and now a similar return in rands, with the rand at 13.63 this morning, almost back at the 13.69 seen at end December. Europe had the best return in the quarter in dollar terms with the Dow Jones Euro Stoxx 50 Index returning +4.6% in September, +8.5% in the quarter and year-to-date a highly impressive +25.2%...in dollars. In dollar terms the European Index is at its highest level in 3 years, but it is still -22% below its 2007 record high. The FTSE 100 Index in London returned +3.2% in September, +4.8% in the quarter and has returned +15.7% in dollars year-to-date. Seventy percent of the index is effectively offshore (out of the UK). The Japanese Nikkei returned +2% in September, +2.1% in the quarter and +12.2% yearto-date and is now at a 2-year high. New business sentiment is at a 10-year high in Japan. A weaker yen and stronger global economy have fuelled record company profits. The S&P 500 Index returned +2.1% in September, +4.5% in the quarter and +14.2% so far in 2017. The tech-laden Nasdaq 100 Index did -0.1% in September, +6.2% in the quarter and +24% year-to-date, indicating just how strong the tech shares have been. The S&P 500 IT sector, which is 23.5% of the S&P 500 Index, is +22.2% so far this year (excluding dividends). Just a pity that our JSE IT sector is down so much, thanks to the huge -43% fall in the shares of EOH in 2017, back to 2014 levels. This is precisely why one should be investing offshore to gain access to sectors (eg biotechnology) and shares (the top IT shares for example) that one cannot get here. STANLIB Economist, Kevin Lings remains very positive on the US economy, especially if the tax cuts materialise. This would give the economy and company earnings (and the share market) a positive boost. Barrons Sunday newspaper in the US notes that if US company taxes are cut to 20% from the current effective average of 27%, that would boost earnings by approximately +10%. If this happens, the forward price-to-earnings ratio of the index would drop from 17.3 times to 15.6 times. The MSCI Emerging Markets Index fell -0.4% in September, but rose by +8% in the quarter and has returned +28.1% in 2017.all in dollars. Locally, our JSE All Share Index fell -0.9% in September, but returned +8.9% in the quarter and has returned +12.6% in 2017 - and a similar percentage in dollar terms. Equities remain the best asset class locally, with SA Listed Property second with a return so far in 2017 of +8.2%, then the All Bond Index with +7.8% and Cash with +5.6%. In September the All Bond Index did +1.1%, while SA Listed Property did +1.2%. In the quarter SA Listed Property returned +5.7%, while the All Bond Index did +3.7%. In September the rand lost -3.6% against the euro, -4% against the dollar and a hefty -7.7% against the recovering pound (thanks to hopes of an imminent interest rate hike in the UK). So far in 2017 (as of Friday s close), the rand is +1.3% versus the dollar, -6.8% versus the euro and -9.8% versus the pound. The dollar seems to have hit a low recently of around $1.205 to the euro and has bounced back to $1.173. It looks like the dollar could gain further in the short-term.

This latest gain in the dollar has hurt the precious metal prices, as well as iron ore. In September the crude oil price jumped +9.8% in dollars, but the copper price fell -4.8% and Nickel fell -11.3%, both after strong advances. There was good news out of China this morning with the official Chinese government s manufacturing leading indicator, the so-called PMI or purchasing managers index, rising to a 5-year high of 52.4 in September from 51.7 in August. This was the 14 th consecutive month of expansion. Also the Chinese banks now have a lower reserve ratio, meaning they can lend out more. Their banks were very strong this morning in Hong Kong. This manufacturing indicator looks at the big companies, including the state-owned enterprises. The smaller companies are monitored by the Caixin manufacturing PMI. This showed a fall to 51 in September from 51.6 in August. Today we have Anglo American rising to a new high for 2017 and a 3-year high in all, possibly on the back of the Chinese news, although recent revelations from billionaire Indian investor Anil Agarwal that he wants to buy more Anglo shares to up his stake to close to 20% could be helping too. We had a very unusual situation in the platinum/palladium space on Monday (changed on Tuesday), with palladium trading at a premium to platinum ($935 v $911). This is no doubt related to the negativity surrounding diesel vehicles in Europe (emissions), which use platinum. Platinum is back above palladium this Tuesday morning. BHP Billiton is trading just below its recent 2017 high, as is Glencore. Naspers has hit a new record high this Tuesday morning, on the back of a very strong Tencent share price in Hong Kong. Naspers is trading at R3036 per share, +49.3% so far in 2017. See the chart below. In the month of September the Platinum Index lost -11.1%, the Gold Index lost -7.5% and the Coal Index -3.9%. Personal Goods gained +7.6%, Tobacco +4.8% and Pharmaceuticals +3.9%. In the quarter Assore gained +46%, Anglos gained +41%, Kumba +38%, Exxaro +35%, Goldfields +32%, Glencore +27%, Greenbay +23%, BHP +22%, Imperial +21%, Richemont +16% and Naspers +14.7%, while EOH fell -24%, Pioneer Foods -17%, Implats -16%, Curro -15%, Zeder -11%, Steinhoff -10.5% and Brait -10.3%. Lately we have seen the rand weaken from 12.90 to 13.63, along with a number of other emerging market currencies, although the rand has been trading broadly sideways since January, mostly between 13.60 and 12.80. Lately the JSE Mid-Cap Index (share 41 to 100) has declined back close to its low for the year (-3.8% return in 2017), while the JSE Small-Cap Index is still trading close to its low for the year (-0.5% return in 2017). The Mid-Cap Index fell -5.1% in September. Below we show a chart of Naspers, which is up 49% so far in 2017 and comprises over 17% of the JSE All Share Index. The share traded at 335 rand six years ago, versus the 3,000 rand today (Tuesday 3 rd October). It has been an amazing climb/uptrend. UBS is targeting 4,500 rand a share. Source: I-Net Bridge

Other Commentators US Market Analyst, Elaine Garzarelli The combination of the probable tax cuts and a December rate hike have pushed the US dollar higher recently. Garza s quants model declined to 83.5% from 85.5%, but remains very bullish. The decline is due to the downgrade of her sentiment indicator as more advisors moved to the bullish camp implying that they have put much of their clients funds into the market already (so leaving less spare cash on hand to go into the market). Earnings have been a key driver of share performance. Recently 70% of US S&P 500 companies reported earnings that beat estimates. The largest beats came from the IT sector (85% beat estimates). Garza is looking for 2018 earnings of 146 (+14% y/y), suggesting fair value for the S&P 500 at 2,628, meaning the market is currently 4% undervalued. Overall, we have had a favourable environment of global economic and earnings growth, stimulative monetary policy, increasing US consumer net worth, low inflation, lower dollar and possible tax cuts. The US economy is in a Goldilocks state with stable corporate earnings growth, low inflation, with the longest and consistently positive growth in jobs (83 months) in history. This positive economic environment should continue to buoy shares going forward. So far the IT sector remains the best performer in the US with a return of +22.2%, then Health Care with +18.2%, Materials with +14.1%, Industrials with +14%, Financials +11%...and the S&P 500 +12.3%. Energy is improving but is still -9.2%. BCA Research US financial conditions have eased sharply this year, thanks to a decline in government bond yields, narrower credit spreads (the spread or gap between US government bonds and corporate bonds), a weaker dollar and rising share prices. BCA thinks the downtrend in bond yields in the US and the dollar are over (although they did get the dollar badly wrong this year because they thought it would rise; it fell sharply). They expect the dollar to appreciate by +10% in the next 12-18 months, but mostly next year. If history is any guide, US growth should rise to about 3% in the first half of 2018. If Congress enacts the tax cuts, which BCA expects them to do in the first quarter of 2018, growth may even be higher temporarily. BCA expects faster wage growth in the next year, which should boost consumer spending. Inflation could pick up to 3.5% next year, which would cause more rate hikes than the four hikes currently forecast by the Fed. Capital spending (building new plants etc) tends to accelerate in the later stages of the business cycle expansions as firms realise they are running out of capacity to meet rising demand. This appears to be starting now in the US economy and globally, with capital spending forecast to grow at the fastest rate in 6 years globally. This should benefit global industrial shares (manufacturers etc), but hurt some of the interest sensitive shares like electric utilities (power plants). On US company earnings for the third quarter, currently the consensus expects +6% growth year-on-year over the 3 rd quarter of 2016.and +12% overall for 2017, with energy (oil related) and technology companies leading the way in the 3 rd quarter. In fact energy earnings could be up over +100% year-on-year. Even in Japan many of the structural drivers of deflation are fading.

Land prices have stopped falling for the first time in 25 years and bank balance sheets are in good shape. Goods prices are rising again too. Profit margins have soared, giving firms the ability to raise wages and salaries, although they have so far been resisting that. It seems that in the not-too-distant future bond yields in Japan will likely rise quite sharply as wages rise and inflation rises. So be short of Japanese bonds. Paul Hansen Director: Retail Investing

Economic Update 1. SA recorded a trade surplus of R5.9 billion in August 2017, better than market expectations. This is the seventh consecutive monthly trade surplus 2. SA ABSA PMI rose somewhat in September 2017 to 44.9 index points. The index remains well below the neutral 50-point mark, suggesting the manufacturing sector remains under pressure 3. SA petrol price to rise by a 29c/l on Wednesday, 4 October. Current daily underrecovery on the petrol price of 27c/l, implying further risk to the upside 4. The Central Bank of Nigeria kept rates on hold with food inflation still holding the key to the overall inflation rate moving meaningfully lower 1. In August 2017, South Africa s trade balance recorded another impressive surplus of R5.9 billion. This compares with a revised surplus of R9.3bn in July and a surplus of R10.6 billion in June 2017. The market was expecting a trade surplus of around R2 billion for the month, although the trade data is extremely difficult to forecast accurately on a month-bymonth basis, especially since the data is not seasonally adjusted and prone to revisions. South Africa has recorded a trade surplus in each of the past seven months and in nine of the last twelve months. An impressive turnaround! During August exports rose by R10.3 billion (11.0%m/m), while imports were up a substantial R13.7 billion (16.3%m/m). The rise in imports included a massive R5.6 billion increase in oil imports; which had fallen in the preceding two months. Very importantly, the average annual growth in imports over the past twelve months is -1.8%. This moderation in import demand appears to reflect a combination of factors, including weak domestic demand, more specifically a lack of domestic fixed investment activity by the private sector and slowing consumer spending. Unsurprisingly, South Africa s tax collection of import duties still remains well behind budget (see report on tax receipts), and is expected to disappoint further during the current fiscal year. In contrast, over the past year, exports have achieved an improved average annual growth rate of 6.3%. This improved export performance (see chart attached) partly reflects the benefit of higher commodity prices, a more stable supply of electricity and less labour market unrest. SA s export performance looks even better in Dollars (see chart attached), but has not been supported by manufactured exports. In summary, South Africa s trade balance has generally improved over the past year, helped by a combination of slowing import growth and some pick-up in exports. Higher international commodity prices have provided some 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, but ultimately is also reflects a stagnant economy. Lastly, the weakness. 2. The seasonally adjusted ABSA Purchasing Managers Index (PMI) rose by 0.9 points to 44.9 in September. Despite the second consecutive improvement, the index remained well below the neutral 50-point mark for a fourth month in a row. Reassuringly, the rise in September was well supported by the key sub-components, with four of the five increasing compared to August. Looking at the sub-components of the index for September, new sales orders increased by 3.1 points to 43.2 suggesting that despite overall demand being under pressure, some respondents noted an improvement in exports after a dip last month. The business activity index also saw a slight increase from 41.3 to 42.8. The purchasing commitments index increased to 45.2 in September from 40.3 last month, which is the best level since March this year and almost 9 points above the level recorded in July. Inventories moved higher to 48.2 from 46.5 in September.

The Purchasing Prices Index gained solid ground, indicating some steadiness with an increase of 4.2 points from 67.2 in August to 71.4 in September despite the fuel price increase at the start of September and a further anticipated increase for October. Encouragingly, respondents were more optimistic about future business conditions. The index tracking expected business conditions in six months time rose back above the 50-point mark to 52.4 index points. The PMI leading indicator remained stuck below 50 one due to inventories outstripping new sales orders, which does not bode well for output growth and then, unfortunately, the employment index lost the gains made in August and fell back to July s level of 44.1 index points. According to the Quarterly Employment Statistics released by Stats SA last week, the manufacturing sector shed 13 000 formal sector jobs in Q2. The average for the employment index for Q3 so far is below the average recorded in Q2, which suggests further job losses could be looming. Overall, the latest PMI reading is concerning. The lackluster manufacturing output, will most probably lead to further retrenchments in the sector, worsening South Africa s economic performance more broadly. The recent 25bps reduction in the interest rate during July may provide some boost to demand, but the sector continues to face a number of headwinds, including the possibility of strike activity and subdued domestic demand. 3. The Department of Energy announced that the petrol price for 95 ULP will increase by 29c/l and 93 ULP will increase by 25c/l from Wednesday, 4 October 2017. The latest announcement means that the price of 95 Octane (ULP, Gauteng) will now cost R14.01 per litre. The price of diesel will increase by 42c/l (0.05% and 0.005% sulphur), while the price of paraffin will rise by 52c/l (retail price), and gas by 39c/kg. During the latest fuel price review period, from 1 September 2017 to 28 September 2017, the average Rand/US Dollar exchange rate was stronger at R13.13 compared to R13.21 during the previous month. The slight strengthening of the Rand against the US Dollar during the month decreased the Basic Fuel Price of petrol by around 4c/l which means that the increase in the fuel price was as a direct result of a sharp increase in the oil price during the month, adding an average of 33c/l to the fuel price. Unfortunately, at the end of September 2017 the daily under-recovery on the petrol price is 27c/l. This means there is a significant risk that the petrol price could increase again in November; depending on what happens to the Rand exchange rate and oil price during the next few weeks. The petrol price rise in September 2017 will increase the monthly consumer inflation rate by 0.2 percentage points (based on the new CPI weights). This outcome is clearly negative for the inflation forecast, and could start to adversely impact the current favourable outlook for SA inflation and interest rates, especially if the oil price were to move noticeably higher. At this stage we still expect SA inflation to remain inside the target range through to the end of 2018. 4. The Monetary Policy Committee of the Central Bank of Nigeria kept interest rates on hold at 14% at its meeting last week. The Cash Reserve Ratio was maintained at 22.5% as was the liquidity ratio at 30%. The asymmetric corridor stays at +200 and -500 basis points. Reserves have risen to a 2 year high of 32.9 billion US Dollars from as low as 24 billion US Dollars last year. The current oil price along with ongoing increased production should see reserves continuing to increase. Inflation moderated slightly to 16.01% in August 2017 from 16.05% in July and 16.1% in June. Inflation is expected to move sideways meaning that the real rate could stay negative for an extended period. Whilst non-food inflation moved lower, food inflation continued accelerating. Food prices were driven higher by an increase in farm inputs as well as attacks on farmers in the North East region.

The bank argued that even though real rates are negative, a hike could depress demand driving the economy back into recession which would have an adverse effect on credit extension, and would increase finance costs which would depress investments by companies. A cut in rates would have likely widened the negative real rate and would make inflation harder to bring under control. During the Q&A session the bank mentioned that the performance of the NAFEX window had exceeded all expectations. More than Seven Billion US Dollar (USD) inflows had been seen through the window. According to the CBN the system still needs some tweaking before it works optimally. At this stage it appears as if rates are likely to remain on hold for the rest of the year and are likely to be eased next year if food prices start to moderate. The full benefits of the strengthening currency are yet to be passed through to the consumer which is more likely to happen in 2018. Food inflation still holds the key to the overall inflation rate moving meaningfully lower. Please follow our regular economic updates on twitter @lingskevin Kevin Lings, Laura Jones & Kganya Kgare (STANLIB Economics Team)

Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 6.83% Effective: 7.04% 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 02 October 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: 7.74% 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 29 September 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: 8.42% STANLIB Extra Income Fund Effective Yield: 7.97% STANLIB Flexible Income Fund Effective Yield: 7.22% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 6.06% 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 29 September 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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