The Weekly Focus A Market and Economic Update 6 August 2018
Contents Newsflash...3 Market Comment... 3 Other Commentators... 4 Economic Update...6 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 The US dollar gets stronger when Trump orders more tariffs on China Market Comment The JSE ALSI is slightly down over the past week, with the 2018 total return now at -2.9% (-2.8% last week), while the SA Listed Property Index is up about +0.6% over the past week, leaving its 2018 return at -21.2% (-21.8% last week). The All Bond Index was hurt last week by rand weakness arising from the government s land story, as well as sentiment and by the strong US dollar. The All Bond Index has now returned +5.6% in 2018 (was +6.5% a week ago). The US dollar gets stronger when Trump orders more tariffs on China. At this stage the dollar at $1.156 to the euro is approaching its high for the year of $1.154 and is +3.6% versus the euro in 2018. The dollar is at its highest level versus the pound in 11 months too. It hit a low of $1.43 to the pound in April and has since bounced strongly by +9.3% to $1.296 to the pound. This is negatively affecting risk-taking - investment in other regions and currencies of the world, including emerging markets. We prefer a weaker dollar for that. The strong dollar and the trade war have also hit a number of the metal prices, such as copper, which is at a 13 month low and is down a hefty -15% in the past month; also gold, platinum and palladium. Last week Arcelor Mittal rose from an extremely low level by +41.7% on better numbers, Sibanye Gold by +17.5% (reporting its first profit since taking over the American palladium miner), Clover gained +11.3%, Afox +9.6% and Lonmin +9.2%. Also Mondi has shot up to a record high after releasing better numbers. The share is +17.7% so far this year, benefiting from its business in stronger European economies. African Retail Capital fell -9.4%, Peregrine -7.5%, Imperial -4.5%, Invicta -4.5% and Brait - 4.2%. On the offshore front, the Nasdaq appears to have steadied and stabilised from its wobbly after Facebook s disappointing quarterly story. The index is +11.5% so far this year and is - 1.5% from the record high just before Facebook shook the market. Clearly Apple s better-than-expected results have helped a lot to offset the Facebook news. Apple traded at $160 a year ago and is now at a record high of $208, +30% over the past year. The S&P 500 Index is still in its 4-month long uptrend, just -1.1% below its late January record high. The Value Line Index of 1,675 shares equally-weighted hit a record high two weeks ago, finally surpassing its late January high. In this index Apple and all the other shares like Amazon are exactly the same weight. With the S&P 500 Index up +6% in 2018, the IT sector (the biggest sector at 25.6%) is once again in the lead with +13.3% in 2018, then the Consumer Discretionary sector (12.7% of the S&P 500) with +13.1%, then the Health Care sector (14.5% of the S&P 500) with a return of +8.5%. Next best is Energy with a return of +3.7%. Energy is 6.2% of the S&P 500. Garza recommends remaining overweight in IT, Health Care, Financials, Consumer Discretionary, Industrials and Materials. The strong dollar and trade issues are keeping other global stock markets in check, certainly in dollar terms. Of the bigger markets, only the Indian stock market is at a new record high, with the country growing its economy by over 6%. In dollar terms the MSCI Europe (excluding the UK) Index is back where it was a year ago and is -9.9% below its late January high, although it has stabilised over the past 2 months. The Nikkei has also stabilised over the past 3 months, but isn t making any headway like the US indices have been doing.
The MSCI Emerging Markets Index has stabilised over the past month, in dollar terms, but is trading where it was a year ago and is -15.7% below the late January high. The biggest component of this Index is the MSCI China Index (30.5% of the index), which is hurting from the US trade tariffs and threats of more to come. The MSCI China Index is - 19.7% in dollar terms from its high in late January and fell quite sharply over the past week. The Information Technology sector is by far the biggest sector of the MSCI China Index at 39% of the index, with Tencent the biggest share at 15.5% of the MSCI China Index, then Alibaba at 13%. ICBC Bank, which owns 20% of Standard Bank, is the 6 th biggest share at 3.1% of the index, followed by Ping An Insurance H at 2.9%. Tencent s share price has fallen some -26% from its record high in late January, back at last October s level. Naspers owns 31% of Tencent, so is hurting from the share price fall (- 9.8% in 2018). Tencent s earnings to March were up very strongly (+75% year-on-year), so we await with interest their earnings report for the quarter to end June. Tencent and Naspers combined comprise about 8% of the MSCI Emerging Markets Index, so when nervous investors (thanks to Trump s trade war) sell exchange traded funds like the MSCI Emerging Markets Index this causes undue selling of Tencent and Naspers shares. This has been a big cause of the recent decline in their share prices. Below is a graph of the US dollar to the euro. It looks like it s at a critical point, because a break below the line, meaning a stronger dollar, could cause more pain for markets, driving the dollar to $1.14 per euro or similar. Source: I-Net Bridge Other Commentators US Market Analyst, Elaine Garzarelli Garza s quants model remains in bullish mode with a reading of 83.5% out of a maximum possible 100% (30% or lower is a bear market signal). She believes that equities remain the best asset class. Fair value for the S&P 500 Index is 3,150, which is +11% above the current level. Looking at all the numbers, including wage inflation of 2.8%, Garza does not expect inflation to be a problem in the US this year. Core CPI inflation is at 2.2% currently. She expects the Fed to hike in September and December, which would put the Fed Funds rate at 2.5% by year-end. Good wage gains and lower personal tax rates will help to support US consumer spending, which is two-thirds of economic momentum.
Garza expects 3% real GDP growth for the US this year and 2.7% in 2019. Past recessions usually began about 5 years after the Fed first tightens (raises rates), on average, meaning this expansion has about 2.5 years left. BCA Research BCA says China cannot win a tit-for-tat trade war with the US because the US only exported $188bn of goods and services to China in 2017, a small fraction of the $525bn of goods and services that China exported to the US. In contrast, China is better positioned to wage a currency war with the US. The Chinese just need to step up their purchases of US Treasury bonds, which would drive up the value of the dollar. A Chinese currency devaluation would upset financial markets, causing risk asset prices to plunge. Metal prices would take it on the chin, since a weaker RMB would make it more expensive for Chinese businesses to import commodities. China now consumes close to half of the world s supply of copper, zinc, nickel, aluminium and iron ore. So investors should remain underweight emerging market equities relative to developed markets and shun the currencies of commodity-exporting countries. Paul Hansen Director: Retail Investing
Economic Update 1. SA unemployment rate rose sharply to 27.2% in Q2 2018, with the economy losing 90 000 jobs in the quarter. Number of discouraged workers also noticeably high and at record levels. 2. SA petrol price increased by a very modest 1c/l (95 Octane) on Wed, 1 Aug. However, this provides little consolation to consumers since the international price of petrol and the currency remain volatile. 3. ABSA PMI rose to above the neutral 50-point mark to 51.5 index points from 47.9 index points in July 2018. Even so, the data remains volatile suggesting that manufacturing is stagnating. 4. US added a disappointing 157 000 jobs in July, while wage growth remained modest and unchanged at 2.7%. More positively, the unemployment rate fell to 3.9%. 5. Softening across the board for Sub-Saharan Africa s PMIs. 1. Stats SA released the Labour Force Survey (LFS) for Q2 2018. The LFS is a quarterly household survey specifically designed to measure the dynamics of employment and unemployment in South Africa, including the informal sector as well as small-scale subsistence farmers. The number of employed people fell by 90 000 in the second quarter of 2018, while the number of discouraged workers jumped by a substantial 77 000. Over the past year the number of discouraged workers has risen by a phenomenal 503 000. The net result is that South Africa s official rate of unemployment rose by 0.5 percentage points to 27.2% in Q2 2018. Bizarrely the rate of unemployment was helped by the further increase in the number of discouraged workers. The total number of people unemployed was recorded higher at 6.083 million in the second quarter of 2018, which is still down from a peak of 6.214 million, but trending firmly higher. South Africa s unemployment data will continue to deteriorate if the country is not able to meaningfully lift its economic growth rate.+ According to the expanded definition of unemployment, which includes discouraged workers, the unemployment rate is a very worrying 37.2%, up from 36.7% in Q1 2018. In addition, the unemployment rate for the youth (younger than 25), using the expanded definition, is a shockingly high of 67.1%. Clearly, the rate of youth unemployed has become a national crisis, with significant social, economic and political implications. The Q2 2018 deterioration of the unemployment rate is consistent with the overall performance of the South African economy (SA GDP declined by a shock -2.2%q/q in Q1 2018 and is likely to record very modest growth in Q2 2018). It is extremely concerning to see that the formal sector employment is still well below the increase in the working age population and the number of discouraged workers is on the rise. This will lead to a further increase in social tension and sluggish tax revenue collection. Overall, South Africa s labour market has failed to gain any meaningful traction over the past few years with the unemployment rate (especially for the youth) remaining exceedingly high by global standards. Fundamentally, this reflects the lack of fixed investment spending by the private sector, as well as the sustained low business confidence. Furthermore, the high rate of unemployment contributes to much of the social tension and anguish experienced in South Africa on a daily basis, especially among the youth. Increasing employment in South Africa has to be the number one economic/political/social objective, and can only be resolved meaningfully through a concerted and sustained effort to improve skills development as well as encourage private sector fixed investment spending, business development and entrepreneurship. Under these circumstances the number of social grants paid will continue to increase, putting further strain on the government s fiscal position. Back in the year 2000, a social grant was paid to 2.946 million people.
This increased to 14.624 million in 2010 with the extension of the age for child grants. By 2015 the number of 2. The Department of Energy announced that the petrol price (93 and 95 ULP) will increase by a very modest 1c/l, with effect from Wednesday, 1 August 2018. The latest announcement means that the price of 95 Octane (LRP, Gauteng) will now cost R16.03 per litre. This is the highest petrol price ever recorded in South Africa. The price of both grades diesel (0.05% and 0.005% Sulphur) will increase by 4c/l. Paraffin will rise by 5c/l (retail price), and gas will increase a substantial 17c/kg. The latest increase in the petrol price reflects a slightly better exchange rate performance as well as a small decrease in the international oil price. While the average Rand/US Dollar exchange rate for the period 29 June 2018 to 26 July 2018 was weaker at R13.47 compared to R13.28 during the previous period, the lower oil price offset almost all of this impact. This latest price stability comes as little consolation, since both the rand and international oil prices have proven particularly volatile in the past month, with oil prices ranging between $71.84 and $79.44, and the rand reaching lows of R13.74 to the US dollar at the beginning of July and highs around R13.18 later in the month. The latest fuel price hike means that in the past five months the petrol price has increased by a very substantial R2.27c/l, after declining by R1.00/l in the preceding three month. While the latest price increase will not add to the monthly inflation rate in August the economic team currently expects SA consumer inflation to drift higher over the coming months to a high of almost 5.5% in the final quarter of 2018. Nevertheless, the Reserve Bank is expected to keep rates on hold for the remainder of the year and well into next year. Given the uncertainty surrounding Donald Trump s trade wars and his hard-line approach on Iran, both the oil price and emerging market currencies such as the rand remain vulnerable. This suggests that South African consumers are unlikely to get any meaningful fuel price relief in the short term. Another factor which has dampened the outlook somewhat is the heavy tax burden imposed on local fuel prices, with the various levies accounting for around 38% of the pump price. 3. The seasonally adjusted ABSA Purchasing Managers Index (PMI) rose by 3.6 index points to 51.5 index points in July from 47.9 in June 2018 which brings the index back above the key 50-point mark. Among the PMI s sub-components in July, a large part of the recovery was driven by an improvement in demand reflected by the new sales orders index which increased by 3.7 index points to 52.8 in July from 49.1 in June and although the data is relatively volatile, the new sales orders index have performed significantly better in 2018 compared to H2 2017 suggesting that demand may slowly be on the mend. The sub-components of the index saw the employment index increase by a surprising 4.8 points in July to 50.8 from 46.0 in June, possibly supported by the improvement in business activity which rose by 4.5 points to 50.3 from 45.8 after two consecutive months of declines. The purchasing prices index increased substantially by 10 index points again in July to 83.6 from 73.6 in June based on the recent increases in fuel costs, an important input-cost for most manufacturers. The weaker rand exchange rate has also contributed to an increase in the cost of imported intermediate goods and raw materials (in rand terms). The inventories index rose to 48.5 points in July from 47.9 in June however, this continues to remain below the neutral 50-point mark suggesting that inventory is still being reduced but possibly at a slightly slower pace. The index tracking expected business conditions in six months time turned negative and declined to 48.7 points in July from 55.7 in June with prospects for exporters possibly being more subdued due to concerns about the potential negative impact on global growth from the wave of US trade protectionism. The purchasing commitments index edged marginally lower to 44.6 index points in July after remaining unchanged at to 45 index points in June.
Overall, the data remains extremely volatile, suggesting that manufacturing is stagnating, exhibiting no real growth on a trend basis. The PMI reading is likely to remain volatile with several factors dampening optimism, in particular, the return of load shedding along with concerns about an intensification of the trade war between the US and the rest of the world. Finally, rising cost pressures may also be weighing down expectations based on the substantial increase in the purchasing price index. 4. In July 2018, the US unemployment rate eased to 3.9%, up from 4.0% in June. This was in-line with market expectations. In addition, the labour market participation rate also remained unchanged at 62.9%. Overall, the participation rate still remains extremely low on a trend basis for a variety of reasons, but needs to be watched for any signs of a sustained increase as this would start to adjust wage growth expectations. Non-farm payrolls rose by a disappointing 157 000 jobs in July 2018, which was well below market expectations for an increase of 193 000 (Bloomberg). Despite the latest disappointment in the non-farm payroll data, over the past 6 months, job gains have averaged a remarkable 221 000 per month. The level of US employment is an impressive 10.0 million above the peak prior to the global financial market crisis. During the financial market crisis the US lost a total of 8.7 million jobs. Consequently, the US has created well over 18 million jobs since the financial crisis ended. The payroll data for May and June 2018 was revised up by a combined and impressive 59 000 jobs. The private sector gained 170 000 jobs in July 2018, after gaining a revised 234 000 jobs in June 2018. This was also below market expectations. The private sector had gained employment in each of the past 101 months at an average of 193 000 jobs a month and is at a record high, comfortably surpassing the previous peak in January 2008. In July 2018, average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents to $27.05. Over the year, average hourly earnings have increased by 71 cents, or 2.7%. The annual rate of growth in wage is unchanged compared with June. The growth in US wages remains very modest given the low unemployment rate, record number of job openings and ongoing rate of monthly job gains. However, wages are expected to continue to trend higher, leading to a sustained upward bias in consumer inflation and interest rates. In that regard, it is important to recognise that the number of job openings now exceeds the number of people that are unemployed. It will also be important to watch the labour market participation rate. A meaningful increase in participation would argue for wages to continue to rise at a fairly gradual pace. Overall, the latest US labour market report is disappointing, but not especially problematic, especially since the previous two months data was revised significantly higher. The other strengths in the report include the decline in the unemployment rate, as well as the strong gains in manufacturing employment. Furthermore, job openings remain well above 6.5 million and exceed the number of people that are unemployed. On a trend basis, the US labour market remains robust. This together with solid business activity data, strong confidence indicators, as well as Trump s fiscal stimulus package, should encourage the Federal Reserve to continue to hike interest rates. Especially since the US inflation rate is now up at 2.9%. Consequently, we still expect the US Federal Funds Target Rate to increase two more times in 2018, and by 25bps on each occasions, with the next rise taking pace in September 2018. 5. Sub-Saharan Purchasing Manager s Indexes (PMI) for July show softening for all countries in the region. The global trade tensions are starting to have a negative impact on the economies as well as idiosyncratic issues. The second half is expected to be tougher globally and SSA economies are not expected to escape the effects of the slowdown. A PMI figure of above 50 denotes expansion whilst below 50 indicates contraction. The PMI in Nigeria dropped to 56 In July from 58.4 in June. One of the main issues for Nigeria is that household expenditure remains subdued as wages have not been adjusted for years whilst inflation has been high. Prices have been moderating sharply in Nigeria but this is partly due to the weak consumer demand.
This could change in the second half of the year with the election campaigning process. Even with an oil price above $70 per barrel we still expect Nigeria to grow at 1.9% in 2018. With the drop in oil production in the second quarter there is a risk that growth could even be lower than that. As the February 2019 elections come closer the political backdrop is becoming more and more uncertain. Key members from the ruling party have defected to the opposition as support for the president is waning quickly. Whilst Ghana was one of the fastest growing economies in the world in 2017 activity is expected to slow however still remain robust. The PMI fell to 51.8 in July from 52.7 in June which shows 19 months of expansion however at a slower pace. Oil production is expected to remain stable this year even though some pipelines will be shut-down due to maintenance. What is encouraging is that employment growth is still strong and hopefully this will translate into consumption. Ghana s main weakness has been tax collections however the recent budget revealed that work has been done to increase compliance. Most of the growth this year is expected to come from the non-oil sector which should also help increase tax revenues. Kenya s PMI slowed to 53.6 in July from 55 in June however, it has been in expansionary territory for eight straight months. The rate of expansion slowed but was still positive. Even though interest rates were cut, business activity is hampered by the slow growth of credit. With that being said activity in the private sector still remains buoyant. The improvement in the agricultural sector has spilt over to other related sectors such as food manufacturing. The increase in the oil prices has had a negative impact on transport inflation but the spillover to other categories has been muted. Kenya is expected to grow at 5.2% this year supported by strong agricultural activity and recovery from the election slump last year. The interest rate cuts are expected to add further stimulus but the effect will be limited by the interest rate caps. Zambia s PMI fell sharply to 50.3 in July from 51.9 in June however was still in positive territory. It has been slowing for the last 3 months which is raising concerns that growth in 2018 could be slower than 2017 s figure of 4.1%. Government s fiscal and debt issues are starting to spill over into the rest of the economy. Arrears to private companies are increasing whilst the government is struggling to conclude a deal with the IMF. The weakness in the domestic currency is also starting to feed through into prices as inflation has started to tick up. What is encouraging is that companies continue to increase their employment levels. However debt sustainability is still the most pressing issue in Zambia at the moment. Uganda s PMI was recorded at 53.2 in the month of July which was the same reading as in June. Investment in infrastructure by both government and the private sector (mainly in the oil sector) ensures that growth remains steady in the country. Government has implemented some new tax measures which could have an inflationary impact however there has been pushback from the populous for some of those measures. The country has experienced some strong FDI and FPI inflows which has kept the domestic currency steady. Inflationary pressures are only expected tick up slightly as the year progresses. Employment is continuing to improve as companies have stated that they are increasing staffing levels. 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: 8.23% Effective: 8.55% 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 3 August 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: 7.82% 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 3 August 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: 7.70% STANLIB Flexible Income Fund Effective Yield: 6.06% 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 3 August 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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