Download Market Matters - Old Mutual Multi

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