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MARKET MATTERSNOTE INVESTMENT OLD MUTUAL MULTI-MANAGERS 1 MAY - 5 MAY 2017 8 MAY 2017 CHECKING THE DOWNGRADE SCOREBOARD Dave Mohr and Izak Odendaal, Old Mutual Multi-Managers Just over a month has passed since South Africa joined the junk status economies’ GRADUAL US RATE HIKES, BUT NO RATE SHOCK FOR SA club. What does the scoreboard say? There have been no discernible changes The US Federal Reserve appears on track to hike interest rates in June. Its monetary in government policy. The new Finance Minister has been talking the talk (his policy meeting and statement last week did not deliver any news, except the controversial adviser aside) on maintaining the commitment to fiscal prudence. opinion that the slowdown in the first quarter was transitory. With data showing October’s Medium Term Budget Policy Statement will be the first opportunity to see that the US added 211 000 jobs in April, more than expected, and the unemployment if he walks the walk. rate falling to 4.4%, market pricing of a June hike jumped from less than 50% to almost 100%. Nonetheless, despite the low unemployment, wage growth is FINANCIAL MARKETS DRIVEN BY GLOBAL EVENTS stubbornly low at 2.5% year-on-year. Historically, low unemployment put upward Financial markets responded negatively to the political events surrounding the pressure on wages which in turn put upward pressure on inflation and, ultimately, downgrades, but there was no collapse in bonds or the rand. This is partly because interest rates. In the absence of this process, interest rate increases should remain a lot of political risk was (and is) already priced into local assets, and global very gradual. developments quickly overtook this initial response. For one thing, global investors bought billions of rands worth of local bonds during March and April, shrugging With a Fed hike looming, and commodity prices lower, the rand closed last week off the Cabinet reshuffle and ratings agencies. at R13.40 per US dollar, down from the post-downgrade closing best of R13 per dollar (the rand fell to a closing low of R13.92 per US dollar after the Fitch downgrades, The current global environment is still favourable to South Africa on balance, as seen on chart 1). Government’s borrowing costs, as indicated by the yield on although it is not all moonshine and roses. the benchmark R186, are still below the average 2017 level. To reiterate: there has been no currency or interest rate shock since South Africa lost its investment Political risk – which is clearly not unique to South Africa – has receded with centrist grade status. Emmanuel Macron’s emphatic victory in the French presidential election over the weekend. This outcome, which was expected, together with solid first quarter ECONOMIC OUTLOOK HAS NOT CHANGED MUCH corporate earnings results, has seen global equities rally. The MSCI World Index Where does this leave the economic outlook? It is worth reminding ourselves that has hit new record-high levels in the past two weeks. Emerging markets are the local economy was hit by a number of shocks in recent years, including load- outperforming developed markets (in US dollars). Despite this, the MSCI Emerging shedding, plunging commodity prices, a food price spike, the worst drought in Markets Index is still some 20% below its record high of a decade ago. decades, prolonged strikes, capital outflows (along with other emerging markets) and rising interest rates. While the real economic growth rate declined from 2.5% Global growth is pretty solid. The US disappointed in the first quarter’s gross in 2013 to only 0.3% last year, there has been no recession despite these shocks, domestic product growth number, but the underlying growth rate is still fairly stable demonstrating an underlying robustness that many seem unwilling to recognise. at slightly less than 2% per year. To expect the economy to go into recession now because of a change in credit rating is overly pessimistic. Eurozone economic growth was 1.7% year-on-year in the first quarter. After lagging US growth since 2011, the Eurozone economy is finally growing at a similar pace, Economic data is released with a lag, and mostly still predates the downgrades. and appears to be accelerating. The Eurozone Purchasing Managers’ Index Manufacturing production, retail sales and wholesale sales numbers were negative increased in April, alone among major economies. on a year-on-year basis in February. Mining production was positive, supported China posted the best economic growth numbers in a year in the first quarter, with by a rebound in platinum output. However, these numbers point to a sluggish first the economy expanding 6.9% year-on-year in real terms. However, with the stronger quarter GDP growth number. Credit growth continues to slow, with household growth comes concern that the property sector is again running too fast and that borrowing growth barely positive in March. authorities will have to tap the brakes. Regulators are also increasingly clamping The Reserve Bank’s composite leading indicator, which points to the trend of down on leverage in the banking sector and in financial markets. Certain commodity economic activity in six to 12 months, increased further to the highest level in two prices (notably iron ore) ran well ahead of this growth improvement, supported by years in February. This is positive. leverage, and have recently fallen back. The oil price also took a tumble last week as US shale production is increasing faster than expected. This places pressure on Also positive is that South Africa posted a substantial trade surplus in March. The the OPEC countries to agree to further output cuts. trade surplus for the first quarter as a whole is also larger than for the fourth quarter HELPLINE +27 21 524 4430 | FACSIMILE +27 21 441 1199 | EMAIL [email protected] | INTERNET www.ommultimanagers.co.za 1 INVESTMENT NOTE MARKET MATTERS 8 MAY 2017 OLD MUTUAL MULTI-MANAGERS 1 MAY - 5 MAY 2017 on a seasonally-adjusted basis. This suggests that the recent narrowing of the CHART 1: current account deficit can be sustained. RAND-DOLLAR EXCHANGE RATE AND SA GOVERNMENT BOND YIELD 9.2 14.5 The three available post-downgrade data releases were sharply lower, indicating a blow to the confidence of consumers and business. New vehicle sales fell to a 9.0 14.0 seven-year low in April, while the Absa Manufacturing Purchasing Managers’ 8.8 13.5 Index slumped to 44.7 index points, below the 50 neutral level. The Standard 8.6 Bank Private Sector Purchasing Managers’ Index (covering a broader number of 13.0 sectors) was lower but still above 50. However, the high number of public holidays 8.4 12.5 8.2 in April probably also contributed to less selling and production activity, which 8.0 12.0 Dec 16 would have weighed on both indicators. Therefore, May’s data will give a better Jan 17 Feb 17 Mar 17 Apr 17 RAND TO US $ EXCHANGE RATE SA GOVT R186 BOND YIELD % (RH Scale) SA GOVT R186 BOND YIELD % (RH Scale) reflection. Source: Datastream One bit of good news is that the inflation outlook continues to improve. Local consumer inflation declined to 6.1% in March, with lower food inflation contributing. However, core inflation – excluding food and energy – declined meaningfully to CHART 2: below 5%. Headline producer inflation fell to 5.2% while StatsSA’s import price index fell 9% year-on-year in February, due to a combination of the firmer rand SOUTH AFRICA’S IMPORTS, EXPORTS AND TRADE BALANCE, SEASONALLY-ADJUSTED 110 000 and low global inflation. 8 000 6 000 100 000 4 000 Maize prices have fallen substantially as the 2017 crop is expected to be twice 90 000 as large as last year’s. This is yet to completely feed into food prices at the consumer 80 000 0 level. Against this backdrop, the Reserve Bank is likely to keep rates unchanged 70 000 -2 000 for most of the year. In fact, the inflation outlook and weak growth calls for modest 2 000 -4 000 60 000 rate cuts, but the SARB remains focused on the potential risks to the rand from -6 000 50 000 further political uncertainty. -8 000 -10 000 TRADE BALANCE (RH Scale) IMPORTS even have a credit rating prior to 1995, and many of our international peers are Jan 17 Jul 16 Jan 16 Jul 15 Jan 15 Jul 14 Jan 14 Jul 13 Jul 12 Jan 13 It is not junk status per se that should concern us. After all, South Africa did not Jan 12 Jan 11 KEEP CALM AND CARRY ON Jul 11 40 000 EXPORTS Source: Datastream not investment grade. An unexpected change in rating can cause volatility in financial markets but it does not by itself limit government’s ability to fund itself or cause its borrowing costs to rise. What we should monitor are the conditions that gave rise to the downgrades. Until these fundamentals change, there is no reason to make knee-jerk adjustments to portfolios. South Africa remains a vibrant and noisy democracy, with a free press and independent judiciary. Crucially for investors, the Reserve Bank is also independent and committed to stable inflation over time. Checks and balances exist, they just work slowly sometimes. The court ruling that sent Government’s nuclear ambitions back to the drawing board is a good recent example since concerns over Eskom’s government guarantees were a key reason for the downgrades. The court did not rule on whether or not we should invest in more nuclear energy, only on the unlawful process that was followed to date. HELPLINE +27 21 524 4430 | FACSIMILE +27 21 441 1199 | EMAIL [email protected] | INTERNET www.ommultimanagers.co.za 2 OLD MUTUAL MULTI-MANAGERS INDICATORS INVESTMENT NOTE 8 MAY 2017 EQUITIES - GLOBAL DESCRIPTION INDEX Global MSCI World US$ 1 897.0 1.01% 1.01% 8.34% 15.60% United States S&P 500 US$ 2 399.0 0.63% 0.63% 7.15% 16.97% Europe MSCI Europe US$ 1 666.0 2.90% 2.90% 13.26% 14.50% Britain FTSE 100 US$ 9 471.0 1.53% 1.53% 7.48% 6.88% Germany DAX US$ 1 279.0 3.23% 3.23% 12.58% 23.57% Japan Nikkei 225 US$ 172.8 0.00% 17.84% 17.84% 15.34% Emerging Markets MSCI Emerging Markets US$ 978.0 0.00% 0.00% 13.46% 20.89% Brazil MSCI Brazil US$ 1 848.0 1.15% 1.15% 10.53% 36.18% China MSCI China US$ 67.0 -1.30% -1.30% 14.41% 22.37% India MSCI India US$ 528.1 -0.54% -0.54% 18.15% 19.21% South Africa MSCI South Africa US$ 489.0 -1.21% -1.21% 7.71% 15.33% CURRENCY INDEX VALUE EQUITIES - SOUTH AFRICA (TR UNLESS INDICATED OTHERWISE) CURRENCY INDEX VALUE DESCRIPTION INDEX WEEK WEEK MONTH-TO-DATE MONTH-TO-DATE YEAR-TO-DATE YEAR-TO-DATE 1 YEAR 1 YEAR All Share (Capital Only) All Share (Capital Index) Rand 53 579.0 -0.44% -0.44% 5.77% 3.17% All Share All Share (Total Return) Rand 7 481.0 -0.44% -0.44% 7.09% 6.08% Top 40/Large Caps Top 40 Rand 6 560.0 -0.14% -0.14% 8.39% 5.87% Mid Caps Mid Cap Rand 15 485.0 -2.36% -2.36% -2.06% 2.64% Small Companies Small Cap Rand 20 475.0 -1.57% -1.57% 0.27% 4.75% Resources Resource 20 Rand 1 966.0 -1.78% -1.78% 0.42% 5.49% Industrials Industrial 25 Rand 13 782.0 0.74% 0.74% 14.34% 6.93% Financials Financial 15 Rand 7 858.0 -1.36% -1.36% 0.69% 5.80% Listed Property SA Listed Property Rand 2 142.2 -0.02% -0.04% 1.86% 3.09% FIXED INTEREST - GLOBAL DESCRIPTION INDEX Global Government Bonds Citi Group WGBI FIXED INTEREST - SOUTH AFRICA DESCRIPTION INDEX CURRENCY INDEX VALUE US$ 907.8 CURRENCY INDEX VALUE WEEK 0.09% WEEK MONTH-TO-DATE 0.09% MONTH-TO-DATE YEAR-TO-DATE 4.20% YEAR-TO-DATE 1 YEAR -4.05% 1 YEAR All Bond BESA ALBI Rand 553.5 -0.15% -0.15% 3.78% Government Bonds BESA GOVI Rand 551.8 -0.16% -0.16% 3.86% 11.76% 11.65% Corporate Bonds SB JSE Credit Indices Rand 141.8 -1.11% -1.11% -1.91% -15.61% Inflation Linked Bonds BESA CILI Rand 247.2 0.03% 0.03% 0.63% 1.26% Cash STEFI Composite Rand 365.4 0.14% 0.14% 2.58% 7.60% COMMODITIES DESCRIPTION INDEX Brent Crude Oil Brent Crude ICE US$ 48.7 -6.36% -6.27% -14.49% 8.31% Gold Gold Spot US$ 1 221.0 -3.71% -3.71% 6.08% -4.46% Platinum Platinum Spot US$ 915.0 -3.07% -3.07% 1.33% -13.92% CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE 1 YEAR CURRENCIES DESCRIPTION INDEX ZAR/Dollar ZAR/USD Rand 13.40 -0.33% -0.33% 2.13% 11.60% ZAR/Pound ZAR/GBP Rand 17.10 0.94% 0.94% -2.34% 26.67% ZAR/Euro ZAR/EUR Rand 14.75 -1.31% -1.31% -2.13% 15.57% Dollar/Euro USD/EUR US$ 1.10 -0.91% -1.00% -4.36% 3.64% Dollar/Pound USD/GBP US$ 1.30 -0.24% -0.61% -5.23% 11.72% Dollar/Yen USD/JPY US$ 0.01 0.00% 0.00% -4.44% 3.33% CURRENCY INDEX VALUE WEEK MONTH-TO-DATE YEAR-TO-DATE Source: I-Net, figures as at 5 May 2017 HELPLINE +27 21 524 4430 | FACSIMILE +27 21 441 1199 | EMAIL [email protected] | INTERNET www.ommultimanagers.co.za 3 1 YEAR OLD MUTUAL MULTI-MANAGERS ASSET MANAGER MOVEMENTS INVESTMENT NOTE There were no manager movements over the past week. 8 MAY 2017 THE WEEK AHEAD THE WEEK AHEAD SOUTH AFRICA • Unemployment rate • Mining and manufacturing production US • Consumer and producer inflation • Consumer confidence EUROPE • Bank of England interest rate decision • Eurozone industrial production • Germany first quarter GDP growth CHINA • Trade balance • Consumer and producer inflation • Credit growth JAPAN • Current account balance Whilst every care has been taken in compiling the information in this document, the information is not advice and Old Mutual Multi-Managers and/or its associates, do not give any warranty as to the accuracy or completeness of the information provided and disclaim all liability for any loss or expense, however caused, arising from any use of or reliance upon the information. Please note that there are risks associated with investments in financial products and past performances are not necessarily indicative of future performances. The Old Mutual Wealth Investment Note is published on a weekly basis to keep our clients and financial planners informed of what is happening in financial markets and the economy and to share our insights. Markets are often very volatile in the short term and similarly, economic data releases or central bank actions may cause concerns for investors. This does not mean that investors should take action based on the most recent events. It is better to be disciplined and remain invested in well-diversified portfolios that are designed to achieve long-term objectives. Our Strategy Funds are actively managed, with asset allocation changes based on valuations and in anticipation of future real returns, and not in response to the most recent market noise. The future is always uncertain and that is why our Strategy Funds are diversified and managed with a long-term focus. HELPLINE +27 21 524 4430 | FACSIMILE +27 21 441 1199 | EMAIL [email protected] | INTERNET www.ommultimanagers.co.za Old Mutual Multi Managers (“OM m|m”) is a business unit of Old Mutual Life Assurance Company (South Africa) Limited (“OMLACSA”), a licenced Financial Services Provider, Reg. No: 1999/004643/06. OM m|m is authorised to provide financial services on the OMLACSA license, FSP 703. 4