The Weekly Focus A Market and Economic Update 10 July 2017
Contents Newsflash ..................................................3 Market Comment ...................................................................................................................... 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 Market Comment Please note that there will be no Market Commentary from Paul Hansen this week.
Economic Update 1. SA’s ABSA PMI declined in June 2017 to below the neutral 50 point mark. The fall-off is indicative of the uncertainty around the outlook for the domestic economy 2. US created a very impressive 222 000 jobs in June 2017. Higher than expected, while the prior two month's data was revised up meaningfully. Wage growth still remains modest at 2.5%y/y 3. Latest Nigeria PMI data shows improvement in Manufacturing and Non-Manufacturing parts of economy 4. Ugandan Q1 2017 GDP recovered modestly after severe drought in the region 5. Economic data and events for the week ahead - 10 to 15 July 2017 1. The seasonally adjusted Absa Purchasing Managers’ Index (PMI) declined to 46.7 index points in June 2017, from an average of 51.5 in May 2017. Overall, the index lost significant traction falling well below the neutral 50 point mark. The decline is relatively broad based, with five of the key sub-components weakening. Looking at the sub-components of the index for June, new sales orders fell to 43.7 index points, down from 54.1 in May suggesting overall demand is remains under pressure. The business activity index also saw a drop-off from 52.3 to 45.4. The Purchasing Commitments index declined to 39.4 in June, down from 44.0 in May. Overall the index averaged 39.8 in Q2, well below the average of 48.8 recorded in Q1. Inventories ticked lower to 48.9 in June from 49.7 in May, marking the third consecutive month that the index remained below 50. The index measuring business conditions in six months’ time also fell sharply fell from 61.4 to 50.0 in June, which is the lowest level since February 2016. The purchasing price index declined by 7 points to 61.3 index points in June, which is the lowest since October 2016. The decline in the purchasing price index is a result of an on average almost $4 (per barrel) drop in the Brent crude oil price as well as the stronger rand exchange rate which traded below R13/USD for most of June. The stronger rand lowers the cost of imports or raw materials and intermediate goods used in the local production process. The notable fuel price decline effective from Wednesday may lead to a further deceleration of upward cost pressures. Overall, the latest PMI reading is worrying, exacerbated by continued uncertainty about the outlook for the domestic economy. Several domestic data releases, such as the economy having entered a technical recession and business confidence plunging to very low levels, as well as continued uncertainty on the political front during the month can probably explain why respondents are less optimistic about business confidence going forward. In addition, the manufacturing sector is also bracing itself for a possible strike in the steel and engineering sectors if a wage agreement is not reached soon.
2. In June 2017, the US unemployment rate rose slightly to 4.4% from 4.3% in May 2017. This was marginally worse than market expectations for the rate to remain unchanged. The US unemployment rate has moved steadily lower from a peak of 10% in late 2009. The labour market participation rate also rose in June to 62.8% from 62.7% in May. Overall, the participation rate remains extremely low on a trend basis, which means that the extremely low unemployment rate is still somewhat misleading given that the participation rate remains well below its historical average. Non-farm payrolls rose by a robust and surprising 222 000 jobs in June 2017. The market was expecting a gain of around 177 000. Also, the change in total nonfarm payroll employment data for the previous two months was revised up by a substantial 47 000 jobs. Over the past 3 months, job gains have averaged a solid 194 000 per month. The level of US employment is 7.97 million above the peak prior to the global financial market crisis. During the financial market crisis the US lost a total of 8.7 million jobs. Consequently, the US has created almost 17 million jobs since the financial crisis ended. The private sector added 187 000 jobs in June 2017, after gaining a revised 159 000 jobs in May 2017. The private sector has gained employment in each of the past 88 months at an average of 190 000 jobs a month and is at a record high, comfortably surpassing the previous peak in January 2008. During 2010 as a whole, the US economy created 1 061 000 jobs, or an average of 88 000 jobs per month. In 2011, the job gains averaged a far more respectable 174 000 a month, while in 2012 job gains averaged 179 000 a month. In 2013 employment rose by an average of 192 000 jobs a month, suggesting that although the labour market was still struggling to gain significant upward momentum, the rate of increase remained encouraging. In 2014 employment rose by a very impressive monthly average of 250 000 jobs, but then slumped somewhat to an average gain of 226 000 in 2015, hurt by the especially weak job reports in March and September 2015. During 2016 job gains averaged 187 000 per month, and appears to have sustained close to that momentum in 2017, although the pace of job creation is expectedly to naturally slow over the coming months as the economy edges closer to full employment and the participation rate remains structurally low. In June 2017, average hourly earnings for all employees on private nonfarm payrolls rose by a very modest 4 cents to $26.25. Over the year, average hourly earnings have still only risen by 2.5%, which remains one of the most disappointing components of recent labour market reports. Wage growth is still extremely low by historically standards. Clearly, US wage growth is constrained by structural impediments and is not adding much upward pressure to US inflation despite the low rate of unemployment. Overall, the latest employment report is fairly impressive, especially the fact that more than 200 000 jobs were created in the month as well as the upward revisions to prior months. The key areas of disappointment remain the subdued wage growth and structurally weak participation rate. Despite the lack of wage growth, the latest employment report will still tend to encourage the Federal Reserve to continue to normalise monetary policy. Hence, we still expect the Fed to hike rate once more this year, having already hiked rates by 25bps in June 2017. 3. The Central Bank of Nigeria (CBN) released the latest Purchasing Manager’s Index (PMI) Report for the month of June. The report is based on survey responses which indicate the change in the level of business activity in the month. The latest PMI reading was 52.9, up slightly from 52.5 in May (neutral is 50). This points towards a slight expansion in manufacturing activity. This is also the highest the index has been in 3 years. Twelve of the sixteen sub-indicators showed expansion. The survey showed that New Orders, Employment, Order of Raw Materials as well as Inventory Levels all grew at a faster rate than May. Production continued to expand albeit at a moderate pace. Supplier delivery times have gone from contraction to expansion.
In the interim oil production has shown further improvements. According to OPEC data, an average of 1.75 Million Barrels Per Day (MBPD) were shipped from Nigeria in the month of June, up from 1.7 MBPD in May. This is a vast improvement from the trough of 1.39 MBPD recorded in August 2016. The peace talks and budget allocation to the militants in the Niger Delta seem to have resolved the conflict and vandalism issues for now. At an oil price of between $45 -$50, it seems as if foreign exchange reserves stabilize at the $30bn level, which is enough to stop economic activity from contracting (this is assuming oil production levels are stable). Hopefully authorities will use this as an opportunity to re-structure the economy especially in terms of diversifying exports as well as increasing the efficiency of the tax system. Allowing the currency to naturally find its own equilibrium level will allow it to act as a shock absorber should the external environment become unfavourable. It should also increase investor confidence and allow for a meaningful recovery in FDI and portfolio flows. The Nigerian economy is expected to move out of recession by the second half of 2017 and produce its first positive growth figure as soon as the second quarter of this year. With that being said, it is easy to wrongly assume that the challenges facing Nigeria have disappeared. Although it is only 8% of the economy, the increase in the oil price and oil production has a meaningful impact on the economy. Our base case for a recovery in Nigeria this year is based on an improvement in oil prices as well as in oil production. We expect the Nigerian economy to recover with a growth rate of 0.8% in 2017, up from the 1.5% contraction in 2016. We still forecast that the Nigerian economy will grow slower than its long term average of 4% and estimated population growth of 2.7%. 4. The Uganda Bureau of Statistics released its latest GDP figures for the first quarter of 2017. The Ugandan economy grew by 1.8%y/y in the first quarter of 2017 from 1.4%y/y in the last quarter of 2016. This reverses the downward trend in growth when it peaked at 3% in the fourth quarter of 2014 and has moved systematically lower since. The Agricultural sector has improved by 3.4%, after declining by 0.4% in the previous quarter. Food crops increased by a healthy 7.3%. This is an indication that the effects of the drought on the economy are starting to wane. The industry sector expanded by 1.9% after declining by 0.9% in the previous quarter. Mining activity as well as construction drove the better performance in the quarter growing by 6.6% and 3.6% respectively. The discovery of oil reserves in the Lake Albert Rift Basin (with estimated reserves at around 1.7 billion barrels of oil) are expected to give the economy a boost over the longer term. Manufacturing, however, lagged the sector and declined by 0.9%. Services grew by 2.7% from 2.6% in quarter 4 of 2016. Information and Communication, Accommodation as well as Financial Services were the key drivers of growth in the sector. (This is consistent with regional trends where tourism has been picking up). The declining interest rates in the country will hopefully help by providing a stimulus to financial sector activity. The Ugandan economy is expected to recover modestly in 2017 driven by a rebound in credit extension and agricultural production. Mining, which is more of a longer term story, is gaining traction and will be a meaningful part of the economy by 2021. Overall we are still cautiously optimistic on the region.
5. Key economic data and events scheduled for this week are likely to be: South African manufacturing data on Tuesday, which will provide further insight into the prospects of SA emerging from recession during the remainder of 2017. US small business confidence on Tuesday, which will have stressed needs to remain elevated if the US economy is going to accelerate in H2 2017 and H1 2018. South African consumer confidence on Wednesday, which is the first consumer confidence reading since the cabinet reshuffle and credit rating downgrade. US consumer inflation on Friday, which should provide further insight into the pace of monetary policy tightening by the Federal Reserve.
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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:
8.00%
Effective:
8.30%
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 07 July 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:
8.04%
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 07 July 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:
8.58%
STANLIB Extra Income Fund Effective Yield:
8.22%
STANLIB Flexible Income Fund Effective Yield:
7.60%
STANLIB Multi-Manager Absolute Income Fund Effective Yield:
6.31%
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 07 July 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 (Pty) Limited (“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.: HX0157
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