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The Weekly Focus A Market and Economic Update 6 March 2017 Contents Newsflash ..................................................3 Market Comment ...................................................................................................................... 3 Other Commentators ............................................................................................................... 3 Economic Update ......................................6 Weekly Market Analysis .............................9 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 US market analyst, Steve Sjuggerud, is recommending gold as a buy. Market Comment The JSE ALSI is slightly higher early Monday morning versus a week ago this time. The Financial & Industrial Index is steady, while the Resources Index is slightly higher. The JSE Financials Index is +1.3% over the past week to its highest level since last August, buoyed by a +9.7% gain in Standard Bank on its good results, especially the final dividend which was up +18% on last year’s final dividend. Standard Bank’s share price is trading at its highest level since August 2015. The European Banks Index apparently gained 9% last week. The MSCI World Index is up +0.4% in dollars over the past week while the MSCI Emerging Markets Index is down -1% in dollars, pausing after a strong rally which saw it gain +13.4% in dollars since late December. The SA Listed Property Index is down -0.7% in the past week, although bond yields are down a bit too (usually good for listed property). But listed property looks fine on the charts. Global listed property in dollar terms is unchanged over the past week, despite a rise in the 10-year US bond yield from 2.33% to 2.48%, on the back of high expectations of a rate hike next Wednesday from Janet Yellen and the Fed. So far since December, each rise in the US 10-year yield has peaked at a lower point than the previous rise, which could be a sign of a peaking in yields, although this is by no means conclusive as yet. The yield reached 2.59% in December versus today’s 2.48%. I notice that over the weekend US market analyst, Steve Sjuggerud, is recommending gold as a buy. He says the big hedge fund traders have turned negative on gold, gold is now what he terms “hated”, it is coming off a big decline in the second half of last year and yet it has lately embarked on an uptrend. Other Commentators US Market Analyst, Elaine Garzarelli Shares continue to surge due to Trump’s speech last week, strong consumer confidence, higher house prices and declining employment claims. A bear market is unlikely to occur until the Fed tightenings lead to an inverted yield curve, which is when short-term rates rise above long-term rates. Currently the 10-year yield is at 2.48% whereas the Fed Funds rate is at 0.66%. So it would take a long string of tightenings for short rates (over 182 basis points) to rise above long rates. So it would most likely be a long time from now before an inverted yield curve becomes a problem. Garza’s quants model remains at 74.5%, which is bullish. Shares usually rise during Fed tightening cycles and generally peak after the last tightening. The Fed is still in the early stages of raising rates, so it will probably be some time before the end of the cycle occurs. The number of bullish advisors (her contrarian indicator) rose to 63.1% (a 30-year high) from 61.2%. So it still ranked bearish in her model. With the latest rise in share prices, consumer net worth is on track to rise about +9% yearon-year in the first quarter. Consumer confidence rose +3.2 in February to a 16-year high and is 22% higher than last year, which supports discretionary spending. Nominal wages and salaries rose a solid +4.5% year-on-year in January. US manufacturing was held back by a strong dollar and excess inventories over the past few years, but the latest stats indicate better times ahead for manufacturing. The February ISM (institute of supply management) PMI or purchasing managers index rose to 57.7 in February, the highest level in over two and a half years. With the S&P 500 Index up +6.4% so far in 2017, the Health Care sector (+9.5%) has overtaken the IT sector (+8.9%) for pole position, followed by Financials (+7.2%), then Consumer Discretionary (+6.6%). Telecomms is the worst sector at -4.8%, followed by the Energy sector with -3.7%. Over the past 6 months, the S&P 500 Index has returned +9.7%, with Financials the best at +25.2%, then IT at +13.4% and Industrials +12.1%. Real Estate has done worst with -3.5%. BCA Research Market momentum continues to trump all else, with the stock market surging to new highs. The forward price-to-earnings ratio (PE) on the US market has climbed to 18, its highest level in well over a decade. The scope for further expansion in the PE ratio is limited. Also the S&P 500 Index is trading about 9% higher than its 200 day moving average, which is quite high. There seems to be a fairly high degree of complacency creeping in about the market, amidst buoyant profit and economic expectations. BCA expects the Fed to raise rates three or four times this year, starting next week. This should drive the trade-weighted dollar up further by around +5% or so over the remainder of the year. BCA sees greater upside for the dollar against emerging market currencies. Last year BCA correctly predicted a Trump victory and also that global banks would outperform. Since September when they made the call, global banks have risen by +25% in dollars and have outperformed the MSCI All Countries World Index by 14%. The thesis for this outperformance remains intact: improving business and consumer confidence should continue to support credit demand, while stronger economic growth will reduce nonperforming loans. Also bank valuations remain attractive, especially European banks over a period of the next 12 months. Below we show a chart of the STANLIB European Equity Feeder Fund, converted into euros. In rand terms, the unit price is low because of rand strength, but in euro terms, as the graph shows, the unit price is moving up nicely, heading towards the previous all-time peak from 2015. As you can imagine, in pound terms, the fund is at an all-time record high. Shares listed in the UK comprise around 30% of the fund. In rand terms, the fund’s unit price rose from a low of 150c in 2011 to a high of almost 450c at end 2015 and is now trading at 366c, almost -19% below its record high, purely thanks to the rand’s gain against the euro and pound. Source: I-Net Bridge Paul Hansen Director: Retail Investing Economic Update 1. SA recorded a surprise trade deficit in January 2017 of -R10.8 billion. On a trend basis SA's trade account has improved measurably over the past year, helped by some pick-up in the value of exports 2. SA petrol price decreased by 8/cl due to the rand strengthening against the dollar from R13.60 to R13.30. 3. SA total new vehicle sales recorded a slight decline of 0.1%y/y in February, with vehicle exports virtually unchanged. 4. Nigeria's latest GDP figures show that 2016 was one of the worst years on record, contracting by 1.5% for the whole of 2016. 5. The Kenya National Bureau of Statistics released inflation statistics for the month of February 2017, indicating that inflation has risen sharply to 9.04% from 6.99% in January. 1. In January 2017, South Africa’s trade balance recorded a surprise deficit of -R10.8 billion. This compares with a revised trade surplus of R12.4 billion in December 2016. The market was expecting a small trade deficit of around -R3.4 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 five of the last nine months. During 2016 as a whole South Africa recorded a trade deficit of only -R2.9 billion, compared with a deficit of –R52.2 billion during all of 2015. This improving trend is expected to continue into 2017, with South Africa recording more regular trade surpluses. In fact, over the past year, the country has recorded an average monthly surplus of R0.67 billion. During January 2017 exports fell by -R13.0 billion (-14.0%m/m), while imports rose by R10.1 billion (+12.5%m/m). The rise in imports was concentrated on an increase in vehicle parts (+R4.3 billion) as well as some machinery (+R2.3 billion) and base metals (+R1.8 billion). South Africa’s imports have risen by only 2.5% in Rands over the past year. The sluggish growth in imports is closely linked to the country’s overall economic performance. Unsurprisingly, South Africa’s tax collection of import duties has been 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. The fall in exports during January 2017 was unfortunately broad-based and included a massive R2.9 billion drop in the value of vehicle exports, a R2.8 billion drop in coal exports, a R1.8bn slump in machinery exports and a R1 billion dip in food exports. Nevertheless, in dollars terms, South African exports are up almost 37% over the past year. This is the best export performance South Africa has achieved since 2011, and partly reflects the benefit of significantly higher commodity prices. 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 2016/2017. Unfortunately, the slowdown in import growth largely reflects the weakness in the South African economy, rather than an improvement in import substitution. Unsurprisingly, the collection of import duties has been well behind budget over the past year. This overall trend in the trade account is expected to continue during 2017, which should help to further narrow South Africa’s current account deficit, having already helped to reduce the pressure on the Rand exchange rate. 2. Last week, the Department of Energy announced that the petrol price (95 and 93 ULP & LRP) decreased slightly by 8c/l with effect from Wednesday, 1 March 2017. The latest announcement means that the price of 95 Octane (ULP, Gauteng) will now cost R13.54c/l. The price of diesel (both grades), also decreased, but by a minimal 2c/l. Gas will decrease by 2c/kg while the price of paraffin will decrease by a more welcome 10c/l (retail price). During the latest fuel price review period, from 27 January 2017 to 22 February 2017, the average Rand/US Dollar exchange rate was somewhat firmer at R13.30 compared to R13.60 in the previous period. The relative strength of the Rand against the US Dollar during the month led to a lower contribution to the Basic Fuels Price on petrol, diesel and illuminating paraffin. The petrol price decrease in March 2017 will have a minimal effect on the monthly consumer inflation rate. Importantly though, the cost reprieve is probably temporary, because on 1 April 2017, the fuel levy will increase by 30c/l along with the RAF levy, which will increase by 9c/l as per the latest announcement in the 2017/18 budget review. 3. In January 2017, total new vehicle sales (as reported by the Department of Trade and Industry and confirmed by NAAMSA) totalled 48 113, falling by 31 units or 0.1%y/y. Export sales remained virtually unchanged, recording only a slight increase of 65 vehicles or a gain of 0.2%. Passenger vehicles sales declined by 4.4%y/y, down from positive growth of 4.7y/y last month. The car rental industry made a strong contribution and accounted for 31.8% of new car sales in January 2017 and managed to maintain its strong contribution accounting for 19.1% of new car sales this month (excluding BMW). Domestic sales of new and light commercial vehicles, bakkies and mini buses at 14 416 units during February reflected a significant improvement of 1 277 units or a gain of 9.7% compared to the 13 139 light commercial vehicles sold during the corresponding month last year. Sales of vehicles in the medium and heavy truck segments of the industry recorded a welcome gain of 705 units and 1592 units respectively. Overall, the headline figure for vehicle sales, along with the latest PMI indicator suggest a mild recovery in the medium term economic outlook. If the economy starts showing signs of improvement and interest rates remain stable as expected in 2017, the sector could hopefully see some improvement in the second half of 2017. However, household expenditure remains under pressure given the latest tax hikes tabled in the 2017 budget. It would therefore be prudent to anticipate a very moderate improvement in the sector for 2017, if at all. 4. The Nigeria Bureau of Statistics released the fourth quarter 2016 GDP numbers for Nigeria last week. The latest figures indicate that the Nigerian economy contracted by 1.3%y/y from -2.2%y/y in the previous quarter. The growth rate in the same period of 2015 was recorded at a far higher rate of 2.1%. This means the Nigerian economy contracted by 1.5% for the whole of 2016, which is the first outright recession in Nigeria in 25 years. The Nigerian economy averaged growth of 7.6% between 2004 and 2013. Disappointingly, the Non-Oil sector has drifted back into negative territory at -0.3%y/y, after coming out of recession in the third quarter of 2016 when it grew by 0.03% y/y. Growth in the sector was recorded at -0.18% and -0.38% in the first and second quarters of 2016 respectively. The Non-Oil sector contributed 92.85% of total GDP output in the final quarter of 2016. As the largest part of the economy, the non-oil sector is the main driver of growth in the Nigerian economy. Agriculture was, once again, one of the better performing parts of the economy, recording growth of 4%y/y, driven by crop production. The agricultural sector has been a relatively stable part of the Nigerian economy for year. Furthermore, the government and Central Bank have directed a great deal of initiatives towards strengthening this part of the economy as it has the potential to employ a large part of the population. Manufacturing and Construction, which recorded double digit growth in 2014, continued their recession into the fourth quarter of 2016. Hopefully these turn around in 2017, helped by planned government expenditure. Telecommunications held up again with growth at 1% y/y, the same figure as the previous quarter. The Oil Sector experienced another deep contraction in the fourth quarter when it fell by 12.4%y/y, however this was an improvement on the -22% contraction y/y in the third quarter and -17.5% in the second quarter of 2016. The Oil-Sector is now 7.15% of the Nigerian economy. Oil production improved to 1.9 Million Barrels Per Day (MBPD) from 1.63 MBPD in the third quarter and 1.69 in the second quarter. Oil production in 2016 was plagued by militant attacks on pipelines in the Niger Delta. Encouragingly, peace talks with the militants have resulted in fewer disruptions in production and in addition, Nigeria has been exempted from the oil production cuts agreed by OPEC members. The issues which plagued the economy in 2016 are expected to reverse in 2017. It is clear however that going forward the country will need to find a new path of growing the economy which is not dependent on oil. The government is attempting to implement its well laid out [and delayed] plans from 2016, which include increased capital expenditure. A Eurobond of $1 billion was successfully issued to the market. There are talks of another $500 million bond issue, which is likely to also be successful as there seems to be an appetite for the paper on the market. The Central Bank of Nigeria seems to be working on another de-valuation of their currency. This should help ease the liquidity issues in the economy. It has already loosened some of its policies surrounding the currency. 5. The Kenya National Bureau of Statistics released inflation statistics for the month of February 2017 which indicated that inflation in Kenya rose quite sharply to 9.04% from 6.99% in January and 6.35% in December 2016. This is the highest inflation rate in almost 5 years and is the first time inflation has breached the target band since January 2016. The m/m inflation rate accelerated to 1.8% from 1% in the previous period. The main price pressures came from food inflation which rose to 16.5% from 12.5%. This is the highest food inflation has been since March 2012 (16.24%). Food is the biggest portion of Kenya’s CPI basket, while food production in the region is very sensitive to weather conditions. Non-Food inflation is still within the target at 3.2%. However, a weaker currency and lower energy output has the potential to put upward pressure on prices. Transport inflation was recorded at 4.26%y/y from 1.85%y/y. Lower fuel prices have had an anchoring effect on the overall headline inflation figure in 2015 and 2016. The unfavourable base effect (from higher oil prices and weaker Kenya Shilling) has meant that the inflation rate will rise further in the months ahead. The Shilling has been under pressure lately, and the higher inflation figure could lead to further weakness. At this rate inflation could hit double digits as soon as the next print (March) and stay at elevated levels for the first half of the year. This is likely to put pressure on the Central Bank of Kenya to hike rates and maintain positive real rates. An interest rate hike to 12% (currently 10%) is not out of the question. 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 03/03/17 Weekly Move (%) YTD (%) Indices * MSCI World – US Dollar 1848.98 0.44 5.58 * MSCI World – Rand 24138.16 1.10 0.21 931.07 -1.32 7.98 * MSCI Emerging Market – Rand 12154.93 -0.68 2.48 All Share Index – US Dollar 3970.35 -0.44 7.30 All Share Index – Rand 51708.61 0.19 2.08 All Bond Index 548.33 0.20 2.81 Listed Property J253 2151.89 -0.37 2.32 * MSCI Emerging Market – US Dollar Currencies US Dollar/Rand 13.02 0.64 -4.86 Euro/Rand 13.69 0.42 -5.23 Sterling/Rand 15.80 -0.80 -5.35 Euro/US Dollar 1.06 0.58 0.96 55.76 -0.32 -1.87 Gold Price $/oz 1234.62 -1.78 7.30 Platinum Price S/oz 998.00 -2.82 10.52 Commodities Oil Brent Crude Spot Price ($/bl) 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: 7.12% Effective: 7.35% 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 03 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: 8.18% 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 03 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: 8.69% STANLIB Extra Income Fund Effective Yield: 8.33% STANLIB Flexible Income Fund Effective Yield: 8.04% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 5.93% 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 03 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. Disclaimer The price of each unit of a domestic money market portfolio 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. 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. An investment in the participations of a CIS in securities is not the same as a deposit with a banking institution. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees and charges and maximum commissions is available on request from STANLIB Collective Investments Ltd (the Manager). Commission and incentives may be paid and if so, would be included in the overall costs. A fund of funds is a portfolio that invests in portfolios of collective investment schemes, which levy their own charges, which could result in a higher fee structure for these portfolios. Forward pricing is used. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. TER is the annualised percent of the average Net Asset Value of the portfolio incurred as charges, levies and fees. A higher TER ratio does not necessarily imply a poor return, nor does a low TER imply a good return. The current TER cannot be regarded as an indication of future TERs. Portfolios are valued on a daily basis at 15h00. Investments and repurchases will receive the price of the same day if received prior to 15h00. Liberty is a full member of the Association for Savings and Investments of South Africa. 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STANLIB Wealth Management Limited is an authorised Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (Licence No. 26/10/590) Compliance No.: HX0800 17 Melrose Boulevard, Melrose Arch, 2196 P O Box 202, Melrose Arch, 2076 T: 0860123 003 (SA Only) T: +27 (0) 11 448 6000 E: [email protected] Website: www.stanlib.com STANLIB Wealth Management Limited Reg. No. 1996/005412/06 Authorised FSP in terms of the FAIS Act, 2002 (Licence No. 26/10/590) STANLIB Collective Investments Limited Reg. No. 1969/003468/06