The Weekly Focus A Market and Economic Update 17 September 2018
Contents Newsflash...3 Market Comment... 3 Other Commentators... 4 Rates...6 STANLIB Money Market Fund... 6 STANLIB Enhanced Yield Fund... 6 STANLIB Income Fund... 6 STANLIB Extra Income Fund... 6 STANLIB Flexible Income Fund... 6 STANLIB Multi-Manager Absolute Income Fund... 6
Newsflash The JSE Financial & Industrial Index has slumped this morning to a new low for the year, down -11.5% in 2018 Market Comment The US market continued its global market outperformance last week, as the S&P 500 Index rose by +1.1%, back within reach of a record high and +8.9% in 2018. The Consumer Discretionary sector is still the leading sector in the index, +18.4% in 2018, followed by the IT sector with +17.3%, then Health Care with +13.2%, then Industrials way below at +4.1% and Energy plus Utilities at +2.4%. Consumer Staples remain negative at - 4.1%. Financials are just +1%. The MSCI World Index is still -3.7% below its late January record high, although it has been trending upwards since its March low. This index is +3% so far in dollar terms in 2018, but excluding US technology shares it is - 6.2%, notes Merrill Lynch! They also note that 809 out of 1,150 Emerging Market shares are in bear markets (down more than 20%) in dollar terms. European shares continue to struggle, with the MSCI Europe Index, which includes the UK, -5.9% in dollars so far in 2018 (-11.8% from its late January high) - and trading at similar levels to June 2017. The MSCI Japan Index in dollars is also near its lows for the year and is -3.6% in 2018. The MSCI Emerging Markets Index has picked up lately, but remains -11% in dollars in 2018 and -19.2% below its late January high. The JSE ALSI in dollar terms is -27.3% below its late January high, at levels of 20 months ago. The US 10-year bond yield has risen back up to the 3% level, although the latest core inflation numbers were lower at 2.2% from 2.4% last month. The 10-year was at 2.42% at the end of 2017. It is by no means a certainty that it will continue rising. It hit a high of 3.1% in May this year and was at 4% when the 2008 stock market crash occurred. One restraining factor is that the German 10-year yield is still extremely low at 0.44%, similar to its end 2017 level. In February it hit a high of 0.77%. The French 10-year yield is at 0.77%. Unfortunately The Donald has decided to go ahead with more tariffs on another $200bn of Chinese imports. This is hurting markets this morning and currencies, because the Chinese have responded by saying they won t attend any trade meetings then. Because this could hurt the US consumer, perhaps the tariff will be 10% instead of 25%, per the Wall St Journal. Meanwhile our JSE Financial & Industrial Index has slumped this morning to a new low for the year, down -11.5% in 2018. Aspen became the latest accident on the JSE as it tumbled from 272 rand last week to 184 rand this morning as the market derated the share (from a high PE to a much lower PE, now apparently trading at just 10 times estimated earnings for the next year) after its results presentation. Imperial fell -6.2% last week to be a whopping -31.5% down in 2018. MTN fell a further -6% last week to be -48% so far in 2018. So the JSE ALSI s total return so far in 2018 is now -3% (was -2.4% last week), while the SA Listed Property Index s total return has also deteriorated to -21.4% (-19.7% last week) and the All Bond Index is also lower at +3.2% (+3.7% last week). Admittedly for the ALSI there have been a large number of big shares going ex-dividend in the past week, which hurts the index, because the shares initially fall by the amount of their dividend.
Hopefully the government s stimulus plan for the economy, to be announced next month, will help matters. President Ramaphosa says it will cover the mining, telecoms, tourism and transport industries. The only question is.where will the government get the funds from? We did see Tencent s shares gain over +5% last week (after tumbling -30%), although they fell about -3% this morning. Naspers is currently -13.6% in 2018 in rand terms or -26% in dollar terms. However, RMB Morgan Stanley notes that Naspers is trading at a 40% discount to its fair value. The value of its 31% stake in Tencent = 131% of its current share price, even after Tencent s big tumble. Investec shares gained +8.6% last week after the company announced that it would spin off and separately list the Asset Management Division and that Hendrik du Toit would continue as the CEO of Asset Management, while Fani Titi would be the CEO of the remaining Investec businesses. Other shares to gain last week were South32 +7.9%, Anglos +2.9% and Kumba +3.4%. The rand gained +2% last week but is down a bit at 15.02 this morning on the back of the stronger dollar and concerns about the trade war. The euro is still holding above the $1.16 level to the dollar at $1.165 this morning, hanging in there, despite the tariff story. Other Commentators US Market Analyst, Elaine Garzarelli The US 10-year bond yield, set by the market, remains over +1% higher than the US Fed Funds rate, which is set by the Fed, so we re still quite a way from any yield curve inversion, where the short rates rise above the medium-to-long term rates. The quants model remains bullish with a reading of 83.5%, with any stock market corrections limited to 4-7%. S&P 500 earnings surged +27% year-on-year in the 2nd quarter. It looks like 3 rd quarter earnings will rise by an even better +28%, while 4 th quarter earnings could be up +25%. Assuming +11% growth in earnings in 2019, fair value for the S&P 500 Index is about +9% higher than current levels, at 3,150. Garza believes there is underlying strength in the US economy. Nominal GDP is on track to be the best growth in 15 years and the composite PMI (purchasing managers index) - a leading indicator of the economy - is in record high territory. This is partly due to high consumer confidence, credit availability and low interest rates. Job openings are at a new record high. BCA Research BCA recommends a neutral weighting in the US tech sector as rising interest rates, higher inflation and a firming dollar offset improving industry operating metrics on the back of the virtuous capex upcycle. 60% of US technology company revenues are garnered abroad, outside the US, so the appreciating US dollar is a headwind for profits. Tech sector earnings in the US are forecast to grow by +12% in the next twelve months, below the +12.6% of the S&P 500 Index, based on consensus forecasts. Financial earnings growth is forecast at +14% and Energy at +35.4%. BCA does not see a US recession before 2020. BCA recommends under-weighting US bonds and duration, preferring shorter-term bonds to longer-term ones, because they think the Fed will raise rates more than is expected by the market.
BCA remains overweight cash in the current environment, where inflation and interest rates are both low but rising and equity valuations are stretched. Paul Hansen Director: Retail Investing
Rates These rates are expressed in nominal and effective terms and should be used for indication purposes ONLY. STANLIB Money Market Fund Nominal: 6.52% Effective: 6.72% 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 14 September 2018. 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: 7.79% 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 14 September 2018. 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: 8.22% STANLIB Extra Income Fund Effective Yield: 7.67% STANLIB Flexible Income Fund Effective Yield: 6.73% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 7.30% 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 14 September 2018. 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. The historical yield over the last 12 months is reported for the STANLIB Multi-Manager Absolute Income Fund.
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