The Weekly Focus A Market and Economic Update - 2 July 2018
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The Weekly Focus A Market and Economic Update 2 July 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 2 weeks. Economic Update 1. SA recorded an improved trade surplus in May of R3.5 billion, with exports rising faster than imports. Welcome improvement relative to the dismal Q1 2018 trade deficit. 2. SA petrol price to increase by 23c/l (95 octane) on Wed, 4 July. Petrol price has risen by R2.26/l in the past four months and by 24% over the past year. 3. US confidence indicators remain relatively high, but have continued to soften in recent months. Worries about higher US interest rates and an escalation of the global "trade- war" have started to have an impact. 4. Ghana growth still robust in the first quarter of 2018 but slows coming off a high base. 5. Tanzania’s growth continues at a stable rate. 1. In May 2018, South Africa’s trade balance recorded an improved surplus of R3.52 billion. This compares with a revised trade surplus of R1.2 billion in April 2018 and market expectations for a surplus of around R5.8 billion. The monthly trade data is notoriously difficult to forecast accurately, especially since the data is not seasonally adjusted and prone to revisions. The latest trade surplus is a welcome improvement relative to the sharp contraction in Q1 2018. Nevertheless, SA’s trade balance is trending weaker overall as exports start to struggle somewhat in a global environment that is being hurt by increased trade protection. (In the past three months – February 2018 to April 2018 – world trade has declined by 0.6% quarter-on-quarter, seasonally adjusted). The average annual growth in imports over the past twelve months is 4.0%. This compares with an average annual decline of -0.5% in the preceding 12 months. The latest acceleration in imports, albeit off a low base, partly reflects the run-down of inventories during 2017, but also the impact of some currency weakness. Strangely, this will provide some relief to the fiscal authorities in terms of generating additional tax revenue (import duties). In contrast, over the past five months, exports have achieved an annual growth rate of only -0.3%, highlighting the more recent softening of global trade and the potential negative impact of additional trade protection measures around the world. In summary, it is fair to argue that the South African economy benefited – at least to some extent – from the buoyancy in the world economy in recent years, partly through an increase in exports. This was reflected in a narrowing of South Africa’s current account deficit to less than 3% of GDP during 2016/2017. However, as the South African economy gains some momentum in 2018/2019 and the level of global trade protection escalates, export growth is likely to remain sluggish and imports are likely to rise. This should lead to a widening of South Africa’s current account deficit to around 4% of GDP for 2018 as a whole (SA recorded a current account deficit of -4.8% of GDP in Q1 2018, but this should improve meaningfully in Q2 2018). 2. The Department of Energy announced that the petrol price (95 ULP) will increase by 23c/l, while 93 ULP will rise by 26c/l, with effect from Wednesday, 4 July 2018. The latest announcement means that the price of 95 Octane (LRP, Gauteng) will now cost R16.02 per litre. This is the highest petrol price ever recorded in South Africa. The price of diesel (0.05% Sulphur) will increase by 26c/l while diesel (0.005% Sulphur) will increase by 24c/l. Paraffin will rise by R30c/l (retail price), and gas will jump by a substantial 37c/kg.
The latest increase in the petrol price reflects the impact of a weaker exchange rate, which more than offset the positive impact of a lower oil price. In total, the weaker exchange rate added 43c/l to the monthly increase in the petrol price, while the lower oil price subtracted around 19c/l. (The oil price averaged around $75/barrel in June compared with an average of $77/barrel in May). In contrast, the average Rand/US Dollar exchange rate for the period 1 June 2018 to 28 May 2018 was R13.28 compared to R12.51 during the previous period. The latest fuel price hike means that in the past four months the petrol price has increased by a very substantial R2.26c/l, after declining by R1.00/l in the preceding three months. Over the past year, the petrol is up R3.165/l or 24.6%, (i.e. the cost of filling a 60 litre tank of petrol has increased by R190). The latest price increase will add 0.1 of a percentage points to the monthly inflation rate in July. This, together with the recent 1 percentage point increase in the VAT rate, highlights that SA consumer inflation has started to drift higher, after reaching a lower turning point of 3.8%y/y in March 2018. The economic team currently expects SA consumer inflation to increase to almost 5.5% in the final quarter of 2018 and the Reserve Bank to keep rates on hold for the remainder of the year. Lastly, while SA consumer spending remains a key underpin to SA’s economic growth forecast in 2018, a couple of factors have dampened the outlook somewhat including a range of tax increases in the February National Budget, larger than expected hikes in the petrol price, no further cuts in interest rates, subdued growth in household credit and a sluggish labour market. 3. In early 2017 we introduced an economic research product that scores a range of US confidence indicators on a monthly basis. This has been done as part of our ongoing evaluation of the effectiveness of US economic policy initiatives (especially since the election of President Trump), and the relative strength of the US economy. Overall, the mix of confidence indicators slowed slightly further in June 2018, but remain relatively high by historical standards It is clear that the initial boost in US business confidence in late 2016 and early 2017 was linked to Trump’s promises regarding tax cuts, less business regulation, greater trade protection and increased spend on economic infrastructure. Since then business confidence levels have increased further, achieving a number of record levels in May 2018, 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. There is a strong and positive correlation between US confidence and economic growth, hence high level of business confidence should lead to a noticeable improvement in GDP growth. Furthermore, the approval of a package of tax cuts from the beginning of 2018, including the sharp reduction in the US corporate tax rate, appear to be helping lift US growth to some extent – this is partly reflected in the improvement in the US durable goods orders. Importantly, Trump’s fiscal stimulus package (lower taxes and increased expenditure) has also led to concerns about rising US government debt and debt servicing costs. 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.” In the NFIB’s latest confidence survey, 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.
The consensus US GDP growth estimate for 2018 is currently around 2.7%, having been revised higher in earlier 2018 despite the disappointing Q1 2018 GDP estimate. However, at the margin some of the confidence indices have continued to soften in June 2018, and there is also a growing anxiety about impact of increased trade protection on the pace of world growth, including the United States. There is also the expectation that the US Federal Reserve will hike rates twice more in 2018 and by 25bps on each occasion. A sustained increase in US interest rates could start to dampen economic activity, especially in 2019, signaling an end to one of the longest economic upswings in the history of the US economy. We still expect US growth forecast for 2019 to start to be revised slightly lower. 4. Ghana’s first quarter GDP print for the year was 6.8% y/y down from 8.1% y/y in the previous quarter and 6.7% y/y in the first quarter of 2017. The extractive sector was the major driver of growth in the economy in 2017. What is encouraging is that non-oil GDP growth picked up from 5% in the final quarter of 2017 to 5.4% for the first quarter of 2018. There has been some concern about Ghanaian growth outside of oil however it seems to have picked up. This is consistent with the latest PMI which suggests the momentum should continue. Agricultural growth moderated to 2.8% from 8.5% in the last quarter of 2017. Fishing was a big drag on the sector and contracted by 8.1%. The industry sector grew the fastest at 9.6% from 17.5%. Mining continues to perform well growing 28% and although high, it is lower than last quarter’s impressive figure of 43.9%. The sector grew by as much as 80.3% in the second quarter of 2017 (with Oil and Gas contributing the most, growing at 200% in the same period). This is unlikely to be repeated as much of the growth was from increased production from new oil and gas pipelines (which is the primary reason why we think growth in Ghana softens this year). Construction contracted by a disappointing -0.8%. Services, the biggest sector, showed some impressive growth at 5.2% y/y from 3.4% in the previous quarter. Within services, the Information and Communications sector performed well growing by 25.9% which bodes well for companies in the sector such as MTN. The Finance and Insurance sector, however, contracted by -7.9%. The banking sector has undergone regulatory changes which have caused banks to focus on strengthening balance sheets. Ghana is rebasing its economy and the results are to be released in September. It is expected that the revision will be quite significant. Although this will make debt to GDP ratios look better, other aspects such as the tax revenue to GDP ratios (which are already low) are going to look worse. The Ghanaian economy performed well in 2017 being one of the fastest growing economies in the world - however it has failed to translate this into improved government revenues. Going forward the key challenges for authorities will be to urgently address revenue mobilization as well as stimulating the non-oil economy. 5. Tanzania grew by 7.1% as a whole in 2017, up from 7% as a whole for the last 3 years in a row. Consequently this was the highest growth in 4 years. Growth in the region was largely driving by mining and infrastructure activity. The Agricultural sector increased activity recording growth at 3.6% from 2.1% in 2016. Fishing however fell to 2.7% growth from 4.2% in the previous year. Other activities such as crops recovered to 3.7% last year from 1.4% as the sub-sector recovered from 2016’s drought. Agriculture constitutes 30% of Tanzania’s economy (Agriculture tends to be a contributor to GDP in East Africa).
Overall growth was driven by the Industrial sector, particularly mining activity. Gas, coal and diamond production grew by 15%, 103% and 41% respectively. Construction expanded by 14.1% which was driven by infrastructure investment in East Africa and should continue at around the same levels for the foreseeable future. Industry contributed 26.4% towards Tanzanian economic activity. Services were slightly weaker at 6.6% from 7.6%. What was concerning is that the financial sector weakened to 1.9%, sharply down from 2016’s 10.7%. This was likely caused by private sector credit extension slowing as banks seem to have become more conservative. This spilt over to consumer demand as supply of credit decreased. This was revealed in wholesale and retail trade systematically falling to 6% in 2017 from 6.7% last year and 7.8% in the year before that. Services contributed 37.5% to Tanzania’s GDP in 2017. Going forward we think that growth will slow somewhat this year but will still be robust at 6.5% driven by continued infrastructure. Mining will be coming off a high base in 2017 and the data is likely to soften this year. Weather conditions continued to improve in the region which will be supportive for the Agricultural sector. 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: 6.42% Effective: 6.61% 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 22 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: 7.80% 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 29 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: 8.33% STANLIB Extra Income Fund Effective Yield: 7.78% STANLIB Flexible Income Fund Effective Yield: 6.15% 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 29 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.
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 (RF) (Pty) 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. The Manager is a member of the Liberty Group of Companies. As neither STANLIB Wealth 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 Wealth 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 Wealth Management (Pty) Limited is an authorised Financial Services Provider in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (Licence No. 26/10/590). Compliance No.: HX0117 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 Wealth Management (Pty) Limited Reg. No. 1996/005412/07 Authorised FSP in terms of the FAIS Act, 2002 (Licence No. 26/10/590) STANLIB Collective Investments (RF) (Pty) Limited Reg. No. 1969/003468/07
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