The Weekly Focus A Market and Economic Update 18 June 2018
Contents Newsflash...3 Economic Update...3 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
Newsflash There will be no commentary from Paul Hansen for the next 3 weeks. Economic Update 1. SA retail sales fell more than expected in Apr 2018, declining in four out of the past five months. Delayed increase in government salaries could boost retail through the middle of 2018, but the sector is likely to struggle to gain momentum. 2. SA business confidence slumped in Q2 2018 after increasing modestly in Q1 2018 suggesting that "Ramaphoria" may be fizzling out. 3. US small business confidence index rose sharply in May 2018. Second highest level on record. More companies indicating that they are experiencing difficulties finding qualified staff. 4. US consumer inflation increased to 2.8%y/y in May, in-line with expectations, pushed higher by oil. Core inflation up slightly to 2.2%. Modest upward pressure on inflation becoming a little more evident. 5. US Federal Reserve decided to increase interest rates by 25bps, as expected. Four rate hikes expected in 2018. Powell made some very positive statements about the performance of the US economy. 6. Nigeria s inflation continues its downward trajectory however Central Bank decision is still unclear. 1. Stats SA released the retail sales data for April 2018 last week. According to this latest survey, retail sales declined by a worrying -1.2%m/m in April 2018, after recording a drop of -0.2%m/m in March. The latest month-on-month sales performance was worse than market expectations, which was for spending to increase by 0.6%m/m. Over the past year, retail sales rose by a modest 0.5%y/y, although this was helped somewhat by favourable base effects. On a trend basis, retail activity has achieved an annual average growth rate of 3.9% over the past 12 months, which is well up from a mere 0.8%y/y in March 2017, but is likely to lose momentum in 2018 as inflation trends higher. SA retail data remains relatively volatile from month-on-month, highlighting the importance of analysing consumer activity on a trend basis. Critically, in the past three months (Feb Apr 2018) retail sales fell by a substantial - 1.2%q/q, hurt by the decline in retail spending during the past two months. The latest retail data suggests consumer activity has remained relatively subdued at the start of Q2 2018, which is worrying from a GDP growth perspective. However, it is likely that when the recently concluded government salary adjustment takes effect at either the end of June or possibly July (the salary increase will be back-dated to April 2018) retail spending will improve fairly noticeably. For 2017 as a whole, SA retail sales grew by 2.8% in real terms, with acceleration in the second half of the year as inflation fell. While the pick-up in retail spending during 2017 was fairly broad-based, the stand-out categories included clothing and footwear, cosmetics/pharmaceuticals, on-line retailing as well as furniture and appliances. Unfortunately, the retail sector has clearly lost some momentum more recently across most categories of spending, declining in four out of the past five months. There has also been no real acceleration in the use of consumer credit. Looking ahead to the next 12 months, some of the factors that supported retail activity in 2017 are likely to dissipate somewhat. These include inflation, which is forecast to exhibit an upward bias over the next year, an increase in taxes (including the VAT hike that was announced in the February 2018 National Budget), and no further cuts in interest rates.
Countering these negatives is the fact that consumer confidence rebounded sharply in Q1 2018, household income should continue to rise by more than inflation (mainly because the average increase in wages remains above inflation, especially government), and interest rates are still expected to remain relatively low. The net result is that we anticipate the growth in retail spending to remain positive in 2018 but will probably struggle to gain significant momentum unless there is a sustained increase in employment. 2. The RMB/BER Business Confidence index deteriorated by 6 points from 45 in Q1 2018 to 39 in Q2 2018. This means that close to three fifths of respondents now believe prevailing business conditions are unsatisfactory. The Q2 2018 business confidence survey covered more than 1 700 senior executives, spread across the building, manufacturing, retail, wholesale and motor trade sectors. Building contractor confidence retracted to 37 in Q2 from 41 in Q1 and retail confidence slipped back to 33 from 42. New vehicle trade registered a noticeable worsening in sales, possibly because consumers brought their purchases forward in Q1 to avoid paying the extra 1% VAT rate which came into effect on 1 April 2018. A substantial deterioration in demand depressed manufacturing confidence from 37 in Q1 to 27 in Q2. In contrast, wholesale confidence climbed by 9 points from 53 in Q1 to 62 in Q2 which is difficult to explain and unlikely to be sustained. The Q1 2018 increase in the BCI was in all likelihood owing to the Ramaphoria which has fizzled out somewhat in Q2 2018 based on the hikes in the petrol price as well as the political debate around the expropriation of land without compensation and the unresolved mining charter. It is important to reiterate that the deterioration in confidence in Q2 2018 suggests that overall the SA business sector lacks the level of confidence typically associated with a broad-based pick-up in economic activity, most especially fixed investment spending. Under current circumstances it is critical that the building blocks needed for growth in business investment, for example supportive infrastructure, policy certainty, and adherence to the rule of law, are strengthened for the benefit of everyone. 3. In May 2018, the US Small Business Optimism Index increased to 107.8 index points, the second highest level in the 45-year history of the NFIB survey. The record high was recorded in 1983 when the index reached 109. The business confidence index moved sharply higher immediately after President Trump was elected. According to the NFIB, main Street optimism is on a stratospheric trajectory thanks to recent tax cuts and regulatory changes. For years, owners have continuously signaled that when taxes and regulations ease, earnings and employee compensation increase. The May confidence report achieved several records including the highest reading for the rate of increase in salaries and wages, highest level for company earnings, and highest index level ever for expansion plans. This is a very impressive set of business confidence indicators and argues that the US economy is likely to continue to expand at a fairly robust rate. It is interesting to see in the report that 35% of the companies reported increases in salaries in order to attract job applicants, while 23% of businesses cited the difficulty of finding qualified workers as their single most important business problem. Logically, this should start to reflect in higher wages and, potentially, higher inflation, justifying further rate hikes by the US Federal Reserve. 4. In May 2018, US consumer inflation increased by 0.2%m/m, in-line with market expectations. Despite the relatively moderate monthly increase, the annual rate of inflation jumped to 2.8%y/y, up from 2.5%y/y in April 2018. The annual inflation rate was negatively impacted by the recent rise in the oil price, which in May was up a massive 47.5%y/y. The latest reading for US headline inflation is at its highest level since 2012.
For 2015 as a whole, US consumer inflation averaged only 0.1%, its lowest annual average since the 2009 recession. It then rose to an average of 1.3% in 2016 and 2.1% in 2017, and is forecast to average 2.6% in 2018. The main reason for the exceptionally low inflation rate in 2015 and early 2016 was the oil price, which fell sharply from an average of $96/barrel in 2014 to $51/barrel in 2015, a decline of 47%. Since then the oil price has moved sharply higher, and will tend to push US inflation higher in the short-term. Core consumer inflation, which excludes food and energy, also rose by 0.2%m/m in May 2017. This was in-line with market expectations. On an annual basis core inflation increased slightly to 2.2% from 2.1%y/y in April. US core inflation averaged only 1.8% in 2015 before increasing to an average of 2.2% in 2016 and 1.9% in 2017. As mentioned above, the underlying inflation rate in the US appears to be trending moderately higher, but not at a pace that will necessarily worry the US Federal Reserve. The US Federal Reserve has an informal inflation target of 2.0%. Given that both headline and core US inflation are both above 2%, and the fact that underlying inflation has been trending higher, while economic growth appears reasonably robust (especially the labour market), it is extremely likely that the US Federal Reserve will feel comfortable in continuing to raise interest rates in 2018. At this stage we expect 3 more rate hikes of 25bps each in 2018. 5. The US Federal Open Market Committee decided to increase the Federal Funds targeted interest rate by a further 25bps, taking the target range up to 1.75% to 2.00%. This was inline with market expectations. The Fed also adjusted their forward guidance statement on rates in order to allow them more flexibility on the pace and extent of rate hikes. The FOMC decision was unanimous. (Out of interest, Jerome Powell appears far more comfortable and confident during the press conference with an impressive ability to answer questions effectively). The Federal Reserve has also indicated that they will hold a press conference after every FOMC meeting from the beginning of 2019. This will give them more opportunities to discuss key economic developments and explain how this is impacting policy. In making the decision to hike rates, the FOMC highlighted that the labour market has continued to strengthen and that economic activity has been rising at a solid rate. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. The FOMC has not changed their policy on slowly reducing the size of their balance sheet. There has been a modest upward adjustment to the FOMC s outlook for interest rates as well as inflation and growth and a further downward adjustment to the expected unemployment rate. Back in December 2017, the dot-plot suggested the FOMC members expected to raise rates three times in 2017. Today, this was adjusted to an expectation of four hikes. Unsurprisingly, the Dollar is stronger and the Rand is weaker. (Stanlib is expecting four hikes from the Fed in 2018). From our perspective, the most recent US economic data remains fairly robust, especially business and consumer confidence, the employment data, house prices and some of the more recent fixed investment data. There has also been some upward drift in US inflation, partly linked to a higher oil prices. All of this would argue that the Fed is likely to hike rates at least two more times this year and continue to hike rates in early 2019. 6. Nigeria s inflation rate for May 2018 was recorded at 11.6% from 12.5% in April 2018. This marks the sixteenth month of disinflation in the economy. Month-on-month inflation accelerated to 1.1% after increasing at 0.8% for 4 consecutive months.
Headline inflation was driven down by food inflation which was recorded at 13.5% from 14.8% in the previous month. This is coming off a peak of 20.3% in October last year. Core inflation was lower at 10.7% from 10.9%. This now puts the real policy rate at 2.4% which is the highest it has been since October 2015 after being negative for over 2 years. The stability of the Naira has helped reign in inflationary pressures as the black market rate came from a peak of over 500 Naira to one Dollar (NGN/$) to converging to the NAFEX rate at NGN/$360. It is likely that the currency rate will remain at such levels until end of elections in the first quarter of 2019. Therefore price increases are expected to continue their downward trajectory and could come close to the central bank s target of 6 9% by the end of the third quarter this year. However election campaign spending is like to offset that in the second half of the year. At this rate it is possible that inflation could reach single digits by September and the central bank would have achieved what many doubted was possible this year. However there are some upward price pressures that are expected from the second half of the year from the expansionary budget as well as campaign spending. We still expect the Central Bank of Nigeria to start cutting rates however the bank is still worried about the second half price pressures which could keep rates on hold for the rest of the year. 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: 6.62% Effective: 6.83% 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 15 June 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: 7.78% 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 15 June 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: 8.30% STANLIB Extra Income Fund Effective Yield: 7.77% STANLIB Flexible Income Fund Effective Yield: 6.12% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 7.10% 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 15 June 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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