The Weekly Focus A Market and Economic Update - 4 February 2019 - Stanlib
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The Weekly Focus A Market and Economic Update 4 February 2019
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
In January the SA Listed Property Index thumped the other asset classes (after its shocking
performance last year), returning +9.2%
Market Comment
In January the SA Listed Property Index thumped the other asset classes (after its shocking
performance last year), returning +9.2%, followed by the All Bond Index (which did best last
year and over the past 5 years) with +2.9%, then the JSE ALSI with +2.8% (+11.4% in
dollars) and finally Cash with +0.6%.
The ALSI 40 did +2.7%, the Mid-Cap Index +2.3% and the Small-Cap Index +2%.
Financials had the best sector return with +6% (Banks +7.6%), then Resources with +3.3%
despite Sasol’s -5.8% (Mining +5.5% after +20.8% last year…and now at its highest level in
11 years since the 2008 crash, led by both Anglos and Anglo Platinum consistently hitting
7-year highs; even Anglogold hit a one year high on Friday).
The Industrial Index, by far the biggest index in the ALSI, returned just +0.9% in January,
despite the biggest share Naspers returning +5.1%. Rand strength contributed to the weak
performance of the big Industrial shares, with Richemont -3%, Reinet -8.1%, British
American Tobacco -0.7% and Mediclinic -8.3%.
Also heavyweight AVI fell -8.5% in January (poor earnings), Bidvest -2.1% and MTN -2.2%,
while poor earnings hurt Shoprite -13.9%, Massmart -11.1%, Mr Price -9.4%, Truworths -
9.1%, Dischem -11.5% (not reported yet), Family Brands -8.4% and Vodacom -8.7%.
Kumba gained +19.6%, Angloplats +18.6%, Assore +18.5%, Absa +14.2%, Resilient
+13.3% and Sibanye +12.3%.
Last week British American Tobacco finally bounced a bit off its lows, +10.1% on the week.
Many SA shares are hurting from weak earnings reports, with General Retailers -5.3% in
January.
Anglo Platinum had the best 12-month return to end-January with +81.8%, then Capitec
+47.6%, Anglogold +42.5%, Echo Polska +40.7%, Telkom +30.7%, Harmony +33.3% and
PSG Konsult +26.8%.
Impala Platinum is +9% today at R42, its best level in 14 months, boosted by the big jump
in both palladium and rhodium prices.
Some of the worst performers over the past 12 months were EOH -58%, Tongaat -55%,
Aspen -45%, Mediclinic -43%, Coronation -42%, British American Tobacco -38.5%, Tiger
Brands -37.7% and Pioneer Foods -36.3%.
On the offshore front, the MSCI World Index did +7.8% in dollars, the highest January
return in the 32-year history of the index (-0.5% in rands), the MSCI Emerging Markets
Index +8.8% (+0.3% in rands) and the FTSE World Government Bond Index +0.8% (-7% in
rands).
Of course in December the S&P 500 Index fell -9.2%, its worst December return since
1931.
The S&P 500 is now at its highest level since early December, -7.6% below its September
record high. It is up +15% from its low on 24 December! That’s in 5 weeks.
So far in 2019 the S&P 500 is +8.4%, led by Energy +13.4%, Industrials +12.1%, Financials
+9.7%, Real Estate +9.4% and Consumer Discretionary +8.9%.
The MSCI Europe Index, which includes the UK, returned +6.9% in dollars in January, but
remains -14% below the peak of a year ago. MSCI Japan returned +6.1%, but is -14.5%
below its peak of a year ago.
US Listed Property did -14% in December and then +16% in January as bond yields fell
and risk-taking returned and of course the Fed changed tack on interest rates.
Looking ahead, earnings are certainly hurting our market and earnings in the US and
Europe in 2019 may be flat. The next big move in markets could come IF the US and
China find a solution. They have to find some solution if “The Donald” wants to get re-
elected, this being the crucial third year of his Presidency. Chinese markets and the
economy need help too. Value managers are seeing value in our market and buying. That’s usually a good sign.
The rest is patience.
The JSE Industrial Index (graph below), (everything excluding Financials and Resources)
remains very depressed, trading at the same level as four years ago in early 2015, down -
25% from its November 2017 high.
Naspers is 39% of the index, Richemont 14%, then MTN, British American Tobacco,
Remgro, Bidcorp, Shoprite, Vodacom, Bidvest, Mr Price, Aspen, Clicks, Woolies,
Tigerbrands etc.
Over the last three years this index has returned -0.7% per year, way below the +25.2% per
year return of the JSE Resources Index, even the +8.1% per year return of the JSE
Financials Index.
Over the past 10 years Industrials lead though with +16.5% per year, then SA Financials
with +16.4% and Resources with just +4.6%.
Other Commentators
US Market Analyst, Elaine Garzarelli
The Fed voted 10-0 last week to leave rates unchanged in a range of 2.2-2.5%.
Mild inflation in the US and slower growth in the US and globally have weakened the case
for more rate hikes.
China has announced over $370bn in tax cuts and infrastructure spending, while the
European Central Bank’s Mario Draghi said they would be open to resuming quantitative
easing if needed.
The quant model’s reading remains at a bullish 75%.
60% of a share price’s movement is due to the overall direction of the stock market, 30% is
due to the sector the share is in and only 10% due to fundamentals of the share itself. So
Garza sets out to predict where the overall market is going and the sectors that should
outperform.
She remains overweight Tech, Financials, Consumer Discretionary, Industrials, Energy and
Materials.
Earnings estimates for the fourth quarter for the S&P 500 Index have increased to +16.2%
year-on-year.
Fair value for the S&P 500 Index is +5.4% above current levels at 2,844, based on earnings
of 158 for 2019 and a fair PE ratio of 18 times forecast by the quants model.BCA Research
The Fed is unlikely to get anxious about core inflation until the core rate threatens to
exceed 2.5% (currently just under 2%).
Despite the S&P 500’s gains of late, BCA remains overweight equities, believing that the
September record high could be revisited. Sentiment remains fairly weak.
They don’t like bonds and think that inflation will move higher later in 2019 because of the
tight labour market, which could spur the Fed to hike more after June.
Paul Hansen
Director: Retail InvestingEconomic Update 1. SA’s petrol price will increase by a modest 7c/l on Wed 6 February 2019. SA petrol price is still R3/l below the peak in November 2018, but a range of factors are likely to hurt the consumer in 2019. 2. In 2018 SA slipped to a ranking of 73rd in the world corruption index, down from 71st in 2017. In 2007 SA was ranked 43rd, highlighting the surge in SA corruption over the past 10 years. 3. US Federal Reserve decided to leave interest rates unchanged, as expected. The FOMC appears to have removed their forward guidance on rates. We now expect only one further rate hike in the US this year. 4. The US added an impressive 304 000 jobs in January 2019, well above expectations. Unemployment rate drifted up to 4%, but the participation rate also increased. Wage growth at 3.2%. 5. Euro-area GDP grew by 0.2%q/q in Q4 2018. The region continues to lose momentum, with Italy slipping into recession at the end of last year. 1. The Department of Energy announced that the petrol price (95 ULP and 93 ULP) will increase by 7c/l with effect from Wednesday, 6 February 2018. The latest announcement means that the price of 95 Octane (LRP, Gauteng) will now cost R14.08 per litre. This is 4c/l below the price in February 2018 and R3/l below the peak petrol price in November 2018. The price of diesel (0.05% sulphur) will increase by 1c/l while diesel (0.005% sulphur) will rise by 2c/l. In contrast, the cost of paraffin will decline by 7c/l (retail price), while the gas price will fall by 11c/kg. The latest increase in the petrol price reflects the impact of a higher oil price in January, which more than offset the positive impact from the strong rand/dollar exchange rate. In total, the oil price added 17c/l to the latest increase in the petrol price, while the stronger exchange rate subtracted around 9c/l. During January the oil price averaged around $60/barrel, compared with an average of $57/barrel in December 2018. In contrast, the average rand/dollar exchange rate for the period 27 December 2018 to 31 January 2019 was R13.95/$. This compares with R14.18/$ during the previous month. The latest petrol price increase will contribute a negligible amount to the monthly inflation rate in January. More importantly, the petrol price reduction of R1.23/l in December is still not included in SA’s inflation data. We expect SA consumer inflation will remain well under control within the next few months, moving below the mid-point of the inflation target in December. This should allow the Reserve Bank to keep rates on hold for an extended period. However, there are some risks to the upside for SA inflation in H2 2019, namely continued high water tariff inflation, a possible large increase in the electricity price, and some upward drift in food inflation, off a low base. Lastly, while SA consumer spending has been the key underpin to SA’s economic growth in recent years, a couple of factors have dampened the outlook for consumer activity in 2019, despite the large petrol price reductions in November and December 2018. These include a possible increase in indirect taxes in the February 2019 National Budget, a further slowdown in wage growth as the private sector continues to cut costs, a dwindling of bonus payments as corporate earnings take strain, a 25bps increase in interest rates during November 2018 and an upward bias to SA inflation in H2 2019. 2. The 2018 International Corruption Perceptions Index was released last week. The index is compiled by the Transparency International Institute, which is based in Berlin, and it evaluates corruption in 180 countries. The data used to compile the index is sourced from independent institutions specialising in governance and business climate analysis. The survey was first published in 1995.
In essence, the index ranks countries based on how corrupt their public sector is perceived to be. A country’s score indicates the perceived level of corruption on a scale of 0 - 100, where 0 means that a country is perceived as highly corrupt and 100 means it is perceived as very clean. While no country has a perfect score, over two-thirds of countries score below 50, including SA, indicating a serious corruption problem. The global average score is a paltry 43, indicating endemic corruption in a country's public sector. In 2018 South Africa was ranked as the 73rd least corrupt country in the world with a score of only 43 out of 100, which is in line with the global average. This is slightly worse than the country’s ranking of 71st in 2017, and far below the country’s ranking of 43 in 2007. On a regional basis, Western Europe and the European Union are regarded as the least corrupt parts of the world with an average score of 66. In contrast, Sub-Saharan Africa is ranked as the most corrupt region in the world with a score of 32. Unfortunately, within Sub- Saharan Africa, 41 out of the 49 countries surveyed received a score of 43 or lower, indicating relatively high levels of corruption among an extremely wide range of countries. More positively, Seychelles (ranked 28th in the world) and Botswana (ranked 34th in the world) are the two least corrupt countries within the Sub-Saharan Africa region and also rank well on a global basis. The least corrupt countries in the world include Denmark, New Zealand, Finland, Singapore, Sweden, Switzerland, Norway, Netherlands and Canada. The most corrupt countries are Somalia, Syria, South Sudan, Yemen, North Korea, and Sudan. Corruption destroys lives and communities, undermining the development of economies and institutions, leading to further income inequality. It generates popular anger that threatens to further destabilise societies and exacerbate violent conflict. It leads to failure in the delivery of basic services like education or healthcare. It derails the building of essential infrastructure. A couple of years ago the Chair of Transparency International highlighted that: “In too many countries, people are deprived of their most basic needs and go to bed hungry every night because of corruption, while the powerful and corrupt enjoy lavish lifestyles with impunity.” 3. The US Federal Open Market Committee decided to leave the range for the Federal Funds target interest rate unchanged at 2.25% to 2.50%. This was in line with market expectations. In their statement the Federal Reserve appears to have removed their forward guidance on interest rates. This allows the Fed more freedom to consider both raising and cutting rates, depending how the economy develops over the coming months. This is likely to be assessed as a more dovish policy stance than the market had expected. Consequently, we have revised our US interest rates expectation to only one further rate hike later this year of 25bps. This is revised down from our earlier expectation that the Fed could hike rates twice more this year, by 25bps on each occasion. In making the decision to leave rates unchanged, the FOMC highlighted that the labour market has continued to strengthen and economic activity has been rising at a solid rate. Furthermore, household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year. The Federal Reserve also indicated that they will “be patient” as they determine what future adjustments to the target range for the federal funds rate may be appropriate. At this stage the FOMC has not changed their policy on slowly reducing the size of their balance sheet, but they did indicate that balance sheet normalisation is likely to be achieved much sooner than previously expected. We expect further announcements on this issue from the next few FOMC meetings, but it suggests that the balance sheet will remain larger than most market participants had previously expected. Chairman Powell suggested that this weakness in the data partly reflects prevailing “cross- currents” in the world economy including conflicting policy signals such as Brexit, trade restrictions and the US government shutdown. Hence the FOMC stressed that they are patiently waiting for further data to better assess the likely economic performance of the US
during the remainder of 2019 and into 2020. Powell did acknowledge that “the reason for further rate hikes has diminished”. Lastly, the FOMC seems fairly comfortable with the current US inflation data as well as the outlook for inflation over the coming months. 4. In January 2019, the US unemployment rate increased marginally to 4.0% from 3.9% in December 2018. This was slightly higher than market expectations, which were for the rate to remain unchanged at 3.9%. Encouragingly, the labour market participation rate edged higher to 63.2% from 63.1% in December 2018. Overall, the participation rate still remains extremely low relative to historical trends, but appears to be drifting higher, especially over the past four months. A further sustained increase in participation would start to adjust wage growth expectations. Non-farm payrolls rose by a very impressive 304 000 jobs in January 2019, which was well above market expectations for an increase of only 165 000 (Bloomberg). Over the past six months job gains have averaged a remarkable 231 000 per month, despite a sharp downward revision to the December jobs number, which was initially reported as a gain of 312 000, but then revised down to 222 000. The level of US employment is an impressive 12.15 million above the peak reached before the global financial market crisis. During the financial market crisis the US lost a total of 8.7 million jobs. It has created more than 20 million jobs since the financial crisis ended. The private sector gained a substantial 296 000 jobs in January 2019, after gaining a revised 206 000 jobs in December 2018. This was also well above market expectations for a gain of 175 000. The private sector has gained employment in each of the past 107 months at an average of 194 000 jobs a month and is at a record high, comfortably surpassing the previous peak in January 2008. In January 2019, average hourly earnings for all employees on private nonfarm payrolls rose by a modest 3c to $27.56. Over the year, average hourly earnings have increased by 85c, or 3.2%. This is down from a revised increase of 3.3%y/y in December 2018. The annual rate of growth in wages has trended modestly higher in recent months, but is still not high enough to alarm the Federal Reserve from an inflation perspective. It is still fair to argue that the growth in US wages remains modest given the low unemployment rate, record number of job openings and ongoing rate of monthly job gains. Wages are expected to continue to trend higher over the coming months, which is one of the reasons why we still expect the Federal Reserve to hike rates once more in 2019. Overall, the January US labour market report is impressive, especially the large gain in jobs, as well as the ongoing increase in labour market participation. The downward revision to December employment data is a little concerning, especially since the number of companies submitting labour market data has declined recently. That could see a further large revision to the employment data next month. The current conclusion on the US economic data remains essentially unchanged, namely the current activity indicators for the US remain fairly robust (especially the labour market and consumer spending), but the US forward looking indicators, especially business and consumer confidence, the ISM manufacturing index, and the yield curve have all weakened noticeably in recent months suggesting that the US economy is likely to lose momentum in 2019/2020. 5. In the final quarter of 2018, euro-area GDP rose by a very modest 0.2% quarter-on-quarter. This was in line with market expectations, confirming that the region lost momentum in 2018, especially in the second half of the year. The euro-area GDP data is reported as a non-annualised growth rate, whereas the US and many other countries, including SA, focus on the annualised quarterly growth rate. On an annual basis, euro-area economic activity was up a modest 1.2%y/y, compared with growth of 1.6%y/y in Q3 2018, and a recent peak of 2.8%y/y in the third quarter of 2017. For 2018 as a whole, Euro-area GDP grew by 1.8%, which is down from 2.5% in 2017.
Please note, the Euro-area GDP data will most likely be revised in two further estimates of Euro-area economic activity for the final quarter of 2018. Importantly, a range of forward looking indicators as well as measures of current economic activity suggest that the euro-area is likely to continue to lose momentum in 2019. These include the PMI data, industrial production, confidence indices, exports, vehicles sales as well as the leading indicator. There is clearly a risk that the current loss of momentum could result in the region experiencing a recession in 2019. Italy is already in recession. All of this highlights that the euro-area’s economic performance has weakened noticeably compared with the better than expected performance in 2017. It is also concerning that the monetary and fiscal authorities in the euro-area have very little room to respond to the current economic slowdown. Interest rates are already zero, the ECB recently stopped adding QE, and most governments within the region (with perhaps the exception of Germany) have very little ability to embark on a sustained policy of fiscal expansion. At the same time the threat of a no-deal Brexit is plaguing the trade relationship with the UK, while the increase in global trade protection is undermining the region’s export performance – especially Germany. Longer-term, a number of key structural issues are still limiting Europe’s economic progress, including the need for social payment reforms as well as a unified system of bank supervision. The region is also plagued by high government debt, lack of private sector investment, a range of social pressures including increased migration and terrorism, and an ageing population. Ultimately the union needs to be strengthened in order to prosper, but that will require further political, social and economic integration that impinges more fully on the sovereignty on each country in the region. Please follow our regular economic updates on twitter @lingskevin Kevin Lings & Laura Jones (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: 8.53% Effective: 8.88% 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 01 February 2019. 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: 7.92% 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 01 February 2019. 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: 7.83% STANLIB Flexible Income Fund Effective Yield: 7.37% STANLIB Multi-Manager Absolute Income Fund Effective Yield: 7.6% 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 future performance. 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 01 February 2019. 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.
Disclaimer 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 future performance. CIS are traded at ruling prices and can engage in borrowing and scrip lending. Portfolios are registered under the STANLIB Collective Investments Scheme (the Scheme). The manager of the Scheme is STANLIB Collective Investments (RF) (PTY) Ltd (the Manager). The Manager is authorised in terms of the Collective Investment Schemes Control Act, No. 45 of 2002 (CISCA) to administer Collective Investment Schemes (CIS) in Securities. Liberty is a full member of the Association for Savings and Investments of South Africa (ASISA). The Manager is a member of the Liberty Group of Companies. The manager has a right to close a portfolio to new investors in order to manage the portfolio more efficiently in accordance with its mandate. A schedule of fees and charges and maximum commissions is available on request from the Manager. The Manager does not provide any guarantee either with respect to the capital or the return of a CIS portfolio. 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. A money market portfolio is not a bank deposit account. 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. An annualised seven day rolling average effective yield is calculated for Money Market Portfolios. Excessive withdrawals from the portfolio may place the portfolio under liquidity pressures; and that in such circumstances a process of ring-fencing of withdrawal instructions and managed pay-outs over time may be followed. TER is the annualised per cent 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 except Fund of Funds which are valued at 24h00 daily. Investments and repurchases will receive the price of the same day if received prior to 15h00. The trustee of the Scheme is Standard Chartered Bank. The investments of this portfolio are managed, on behalf of the Manager, by STANLIB Asset Management (Pty) Ltd, an authorised financial services provider (FSP) under, FSP No. 719, under the Financial Advisory and Intermediary Services Act (FAIS), Act No. 37 of 2002. As neither STANLIB Asset Management (Pty) Limited nor its representatives did a full needs analysis in respect of a particular investor, the investor understands that there may be limitations on the appropriateness of any information in this document with regard to the investor’s unique objectives, financial situation and particular needs. The information and content of this document are intended to be for information purposes only and STANLIB does not guarantee the suitability or potential value of any information contained herein. STANLIB Asset Management (Pty) Limited does not expressly or by implication propose that the products or services offered in this document are appropriate to the particular investment objectives or needs of any existing or prospective client. Potential investors are advised to seek independent advice from an authorized financial adviser in this regard. STANLIB Asset Management (Pty) Limited is an authorised Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (Licence No. 26/10/719). Compliance No.: 59ZB47 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: contact@stanlib.com Website: www.stanlib.com STANLIB Asset Management (Pty) Ltd Reg. No. 1969/002753/07 Authorised FSP in terms of the FAIS Act, 2002 (Licence No. 26/10/719) STANLIB Collective Investments (RF) (Pty) Limited Reg. No. 1969/003468/07
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