The Weekly Focus A Market and Economic Update 14 August 2017
Contents Newsflash ..................................................3 Market Comment ...................................................................................................................... 3 Other Commentators ............................................................................................................... 4
Economic Update ......................................6 Rates .........................................................8 STANLIB Money Market Fund................................................................................................. 8 STANLIB Enhanced Yield Fund.............................................................................................. 8 STANLIB Income Fund ............................................................................................................ 8 STANLIB Extra Income Fund .................................................................................................. 8 STANLIB Flexible Income Fund ............................................................................................. 8 STANLIB Multi-Manager Absolute Income Fund.................................................................. 8
Newsflash The JSE All Share Index remains in the lead on the local front in 2017 with a total return of +10.7%
Market Comment
It has been quite a tumultuous week with the vote in Parliament and the N Korea/US tensions. Shares have been volatile, as has our currency, not to mention the news that Naspers associate Tencent, along with other similar companies in China, are being investigated by the Chinese government for unsavoury postings on its internet, with an eye on the big party conference in a few months. Tencent fell -4% on Friday but is up over 2% this morning as markets bounce a bit. There was plenty of talk last week that the US and global markets may be starting a longawaited correction. After all, it is about 10 months since the last correction (in a long bull market too). Many investors have been “praying” for a correction, because they are underweight in equities. The MSCI World Index fell -5% between early September and early November last year, while the MSCI Emerging Markets Index fell -9.25%. That was the last real correction. Since then the MSCI World Index is +16.7% and the MSCI Emerging Markets Index is +24.3%! Wow, those ARE serious recoveries. Sure, that’s in weak dollars, but still. In euros, the recoveries have been +10% and +13% respectively, so a lot less impressive. In fact in euros the MSCI World Index has been in a downtrend (correction) since early March - that’s 5 months! It is actually down -7% since then AND is now negative for 2017 (1.5%). So in a meaningful sense there has in fact been a correction underway for a while (see chart below of the MSCI World Index in euros).
Source: IRESS
The chart shows that the index in euros rallied sharply by +33.5% from the correction low last February 2016 (point of maximum pessimism) to the recent high in euros (in early March this year), before the current -7% correction. So the MSCI World Index in euros is now lower than it was back in April 2015, despite this wonderful global bull market!! It is amazing how influential currencies can be.
However, getting back to the index in dollars as we all know it…..the truth is that corrections in dollars do not happen when everyone is expecting them, right? They typically happen unexpectedly, when everyone’s nose is pointed towards an uptrend. Just because a lot of investors think its high time for a correction (“necessary and healthy”, as many put it) does not mean its going to happen. So at this stage the -1.7% fall in the MSCI World Index last week (in dollars) is quite possibly (who knows for sure?) all for now, as well as the -3.3% fall in the MSCI Emerging Markets Index. On the local front, the JSE All Share Index remains in the lead in 2017 with a total return of +10.7% (was +12.1% a week ago) as of 10.20am this Monday morning (certainly helped by Naspers +3% this morning), followed by SA Listed Property’s +6.8% (+7.8% a week ago), then the All Bond Index with +5.8% (+5.5% a week ago), all higher than Cash’s return of +4.6%.
Other Commentators
Garzarelli is on leave, so no comment this week, but in Garza’s absence, I think it is worth relating the views of Steve Sjuggerud of Stansberry Research in the US. He makes a lot of good calls, not least of which was recommending Chinese equities early this year, partly in anticipation of the inclusion from next year of Chinese A shares (mainland shares) in the MSCI Emerging Markets Index, but also partly because Chinese shares were cheap and hated early this year AND beginning an uptrend (his three main factors for buying) Even after the pullback last week, the MSCI China Index, which is about 27.5% of the MSCI Emerging Markets Index, is still +31.6% so far this year, in dollars (excluding dividends). That is a superb return. Sjuggerud believes that there is still plenty of upside in US and global stock markets. His observation, at least from his US viewpoint, is that nobody cares about shares yet. Amazingly, the US general public is STILL not in the markets - and massive bull markets do not typically peak until the general public is in. In fact, the general public in the US is selling more shares than they’re buying, because of fears of a top, another crash (memories of 2008/9 are still acute). In early July private investors in the US sold $11bn net out of US domestic equity funds. US investors remain more fearful than greedy. Scepticism about this bull market remains quite high. So Sjuggerud says he is not worried. Also, he says this bull market is still incredibly “broad”. There are hardly any weak spots. Looking back at 1999, a year or so before the bubble burst in the mighty TMT bull market, more shares were falling than rising in the US back then, warning of impending trouble. Today the opposite is happening. More US shares are rising than falling (the so-called “Advance/Decline” ratio). Three weeks ago Sjuggerud was recommending that investors buy coffee and sugar indices on the New York Stock Exchange. They were both hated, cheap and starting uptrends. He also pointed out that platinum (the “Rolls Royce” of precious metals) was trading at one of its biggest ever discounts to gold, whereas normally platinum is worth more than gold. He says traders have given up on platinum, as noted on the “commitment of traders” report, which shows what professional traders are doing. Traders have bailed out of platinum, given up on it. So platinum looks both cheap (relative to gold) and hated. Also, it seems to have started a bit of an uptrend of late. So Sjuggerud recommended buying platinum three weeks ago. It is up +4.5% in dollars since then, it is true; but his reasons for buying remain valid. The gold price is up just +1.5% since 24th July. He always recommends having a mental stop-loss in case he is wrong. If the metal closes below a certain point on a particular day, sell first thing the next day. He recommended having the stop at $86 below the price on 24th July, so around $830 (platinum is at $974 today).
BCA Research
BCA notes that S&P 500 earnings appear to have increased by +11% year-on-year in the second quarter of 2017, based on the 80% of the companies that have reported, marking the 4th consecutive quarter of profit margin expansion. The strength has been broad-based, with all eleven sectors reporting positive growth. The earnings picture is even more impressive outside the US, where earnings estimates continue to move higher. The Euro Stoxx 600 Index is now expected to deliver +12.6% earnings growth in 2017. The earnings of shares listed on the Japanese Topix Index (a much broader index than the Nikkei 225 Index) are expected to advance by +14.8% this year and +7.3% in 2018, giving them an attractive forward PE to end 2018 of 13.6 times expected earnings. BCA continues to recommend overweighting in European and Japanese shares over their US counterparts in currency-hedged terms (BCA has been calling for a stronger dollar, hence their recommendation to hedge the European and Japanese shares back into dollars, but so far they have been seriously wrong on this, because the dollar has lost heavily against the euro). Emerging market shares have seen the strongest positive earnings revisions so far this year. BCA’s favourite market remains the Chinese “H” shares, ie those Chinese shares that trade in Hong Kong, which are trading at just 7.5 times 2017 earnings forecasts, this despite Tencent being big in this index and trading at much higher multiples. On the state of the US labour market, BCA notes that the number of US job openings rose to 6.2 million in June. There are now 28% more unfilled jobs in the US than at the prior peak in April 2007. The number of unemployed people per job opening fell to 1.1, the lowest level in the history of the series. Why is the average wage up only 2.5% over the past year? Part of the answer, says BCA, is that low-skilled workers have been entering the job market en masse over the past few years, after having deserted it during the Great Recession. This has put downward pressure on average wages, arithmetically leading to slower wage growth. Euro area wage inflation is stuck between 1% and 1.5%, although with important regional variations. It is over 2% in Germany, but close to 0% in Italy and Spain. Unemployment in Italy and Spain remains well above pre-recession levels. Wage growth in Canada has actually declined since 2014, although the unemployment rate has fallen to almost 9-year lows. In Japan there are almost 1.6 more job openings than applicants, although wage growth is still below 2%. Rising wages and rising inflation in the second half of 2018 in the US…will cause the US Fed to pick up the pace of interest rate hikes. This is likely to lead to a stronger dollar and higher bond yields.
Paul Hansen Director: Retail Investing
Economic Update 1. SA unemployment rate remained high at 27.7% in Q2 2017, with youth unemployment over 55%. The level of unemployment will intensify the longer business confidence remains depressed 2. Manufacturing production increased in the second quarter of the year indicating SA may be heading out of recession 3. Bank of Zambia cuts rates further in the backdrop of lower inflation 4. The economic highlights for the week ahead
1. Stats SA released the Labour Force Survey (LFS) for Q2 2017 last week. The LFS is a quarterly household survey specifically designed to measure the dynamics of employment and unemployment in South Africa, including the informal sector as well as small-scale subsistence farmers. The following is a summary of the key trends in the labour market as at Q2. In Q2 2017, there were 37.217 million people aged between 15 and 64 years in SA (up 157 000 relative to Q1 2017, and up 627 000 over the past year). Among these people: 22.277 million were economically active (down 150 000 relative to Q1 2017, and up 1 098 000 yearon-year); 16.100 million were employed (down 113 000 relative to Q1 2017, and up 554 000 year-on-year); 6.177 million were unemployed (down 37 000 relative to Q1 2017, and up 543 000 year-on-year). As mentioned above, the number of employed people fell by 113 000 in the second quarter of 2017, while the labour force fell by 150 000. The next result was that South Africa’s official rate of unemployment remained unchanged at 27.7%. This means that South Africa’s official unemployment rate has remained at its highest level since the data series started. The previous record high was 27.1% recorded in Q3 2016. The total number of people unemployed was recorded at 6.177 million in the second quarter, and has been trending higher for a number of years. According to the expanded definition of unemployment, which includes discouraged workers, the unemployment rate is a very worrying 36.6%, up from 36.4% in Q1 2017. In addition, the unemployment rate for the youth (younger than 25), using the expanded definition, is a shockingly high 67.4%. Clearly, the rate of youth unemployed has become a national crisis, with significant social, economic and political implications. Overall, South Africa’s labour market has failed to gain any meaningful traction over the past year with the unemployment rate (especially for the youth) remaining exceedingly high by global standards. Fundamentally, this reflects the lack of fixed investment spending by the private sector, as well as the sustained low business confidence. Furthermore, the high rate of unemployment contributes to much of the social tension and anguish experienced in South Africa on a daily basis, especially among the youth. Increasing employment in South Africa has to be the number one economic/political/social objective, and can only be resolved meaningfully through a concerted and sustained effort to improve skills development as well as encourage private sector fixed investment spending, business development and entrepreneurship. Under these circumstances the number of social grants paid will continue to increase, putting further strain on the government’s fiscal position. Back in the year 2000, a social grant was paid to 2.946 million people. This increased to 14.624 million in 2010 with the extension of the age for child grants. By 2015 the number of social grant recipients was up at 16.928 million and was budgeted at 17.335 million in 2017.
2. Manufacturing production growth declined to -2.3% in June, from -0.9% in May (revised marginally downwards from -0.8% previously). Seasonally adjusted m/m growth was 0.0%. However, manufacturing production increased in Q2 2017 off a low base, which could indicate that SA may be heading out of recession. The biggest positive contributors to manufacturing growth in June were the motor industry and nonferrous metal and structural metal products. In contrast, there was a big drag on manufacturing growth from the textiles and clothing industry, sawmilling, basic iron and steel products, electrical machinery and furniture. The most recent ABSA PMI statistics which declined steeply support the suggestion that the lower trend of manufacturing seen in the first half of the year may well be sustained, impacting negatively and constraining growth in the economy for the remainder of the year. 3. The Bank of Zambia (BoZ) cut rates by a surprising 150 basis points from 12.5% to 11%. The reserve ratio was reduced from 12.5% to 9.5%. Whilst a cut in rates was expected, the magnitude of the cut was largely unexpected. Inflation in Zambia had moderated to 6.6% in July 2017 well within the target of 6 – 8%. This is down from the 6.8% recorded in June. The Zambian Kwacha has been stable which should ensure inflation stays at current levels holding all other things constant. Inflation had peaked at 22.9% in February 2016 after the Kwacha had depreciated by over 108% at the end of 2015. The currency subsequently appreciated by 22% and stabilized since. Financial sector activity in Zambia had improved markedly. Demand for securities, especially by foreigner investors, had picked up in the second quarter. The T-Bills and Government bond issuances were oversubscribed by 1.22 and 1.7 times respectively at last auction. Government bond yields have also compressed to a weighted average of 19.9% in June from 20.4% in March. According to the BoZ economic activity picked up in the second quarter. Preliminary data shows that economic output increased driven by the primary sector as well as the manufacturing sector. This is confirmed by the PMI numbers which indicated an acceleration in output. Going forward economic activity is expected to improve this year in Zambia however household consumption has remained weak. The economy grew by 3.5% in 2016 and the Bank of Zambia has revised up their forecast to 4.3% for 2017 and 5.1% for 2018. This will be driven by mining, electricity generation as well as agriculture. The financial services sector is the biggest concern as credit extension has been in negative territory for the last year and has just broken positive at 1.6%. Despite the political tensions in the country, we are still optimistic on the Zambian economy expecting growth of 4.5% however we are more wary of the heightened risks. 4. The economic highlights for the week ahead are likely to be: US Retail Sales on Tuesday - in June sales were 2.8% above their year-ago level but the weakest growth since August. SA Retail Sales on Wednesday - overall, while retail sales are expected to remain weak, we think the sector will continue to avoid slipping into an outright recession as inflation slows. Under these circumstances, it is critical that SA avoids any further job losses, otherwise the risk of an outright consumer recession will intensify. US leading Indicators on Thursday - better times appear to lie ahead for the US economy. The Conference Board’s Leading Economic Index rose 0.6% in June following a 0.2% increase in each of the prior two months. Consensus expects a further gain in July. 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:
6.91%
Effective:
7.13%
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 11 August 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:
7.94%
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STANLIB Income Fund Effective Yield:
8.57%
STANLIB Extra Income Fund Effective Yield:
8.10%
STANLIB Flexible Income Fund Effective Yield:
7.77%
STANLIB Multi-Manager Absolute Income Fund Effective Yield:
5.87%
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