Focus

The Weekly

A Market and Economic Update 16 April 2018

Contents

Newsflash ..................................................3

Market Comment ...................................................................................................................... 3 Other Commentators ............................................................................................................... 5

Economic Update ......................................7

Rates ....................................................... 11

STANLIB Money Market Fund............................................................................................... 11 STANLIB Enhanced Yield Fund ............................................................................................ 11 STANLIB Income Fund .......................................................................................................... 11 STANLIB Extra Income Fund ................................................................................................ 11 STANLIB Flexible Income Fund ........................................................................................... 11 STANLIB Multi-Manager Absolute Income Fund ................................................................ 11

Newsflash Despite the big fall in listed property so far in 2018, the income or dividends remain unchanged/steady, still showing growth of around 6% or so

Market Comment Offshore Market Comment Depending on what The Donald is tweeting, so go markets, at least for the past month or

so.

Maybe it is time he went on holiday - and left his tweets behind.

The trade spat with China has for the time being faded a bit after the Chinese announced

their intention to loosen restrictions on imports into their country, such as the 25% tariff on

cars.

Now we have the Russian issue with all the sanctions on Russia and various Oligarchs, as

well as the US military attack on Syria; also Japan’s Prime Minister’s popularity continues to

decline.

Garzarelli’s weekly newsletter (see below) confirms that the recent stock market volatility,

together with some pundits calling an end to the bull market and all the negative press on

trade spats and Russia/Syria/Abe of Japan, has led to a lot less bullishness out there.

This is a positive development, because it sets the stage for the next rally in global equities.

The more pessimism out there, the better, especially as it may coincide with some good

first quarter 2018 earnings reports coming out of the US.

The S&P 500 Index gained +1% last week to be -0.2% so far in 2018, while the Nasdaq

Index is +1.4%. Oil-related shares were the big gainers last week, unsurprising considering

the 3.5 year high in the dollar oil price (see chart below) AND a chart pattern on the oil price

that hints of potential further gains to come (a reverse “head-and-shoulders” pattern).

Source: I-Net Bridge

So the Energy sector of the S&P 500 Index was -6% year-to-date last week and is now -

1.5%, having gained around +4.5% over the past week.

Also, thanks to the trade spat fading a bit, mining shares were strong too as commodity

prices firmed. So it was Resources all-round that gained last week.

The IT sector of the S&P 500 Index gained +2.1% last week to be +4.1% so far in 2018,

regaining its lead, now ahead of Consumer Discretionary’ s +3.3% return.

As it stands now, these are still the only two sectors that are positive in the S&P 500 Index.

The other nine sectors are negative year-to-date, including Financials at -0.6%. Consumer

Staples are the worst at -7.8%.

JP Morgan notes that based on forward consensus earnings estimates, the S&P 500 Index

now trades at “only” 16 times forward earnings one year out, which is below the historical

median (since 1995).

This puts the current valuation lower than anytime seen during the last 5 years, even lower

than the 2014-2015 period when the outlook for equities appeared somewhat bleak.

They say another compelling argument for valuation is the excess balance sheet cash. At

no other time in history have S&P 500 companies held so much cash at near record low

interest rates.

On the threat of rising bond yields (cost of medium term and long term money), they say

that historically during periods when US GDP growth ranged between 2-3%, PE ratios were

well supported until the 10-year bond yield reached around 5%.

The current 10-year yield of 2.83% is comfortably well below these levels and gradually

higher short-term rates should not be problematic for equities in the short-term.

Local Market Comment

There was a small improvement in local equities and local listed property last week, with

property improving slightly to -14.9% total return so far in 2018 (from -15%) and the JSE

ALSI improving to -4.3% (from -5.5%). The All Bond Index improved to +7.8% (from 7.7%).

But obviously both equities and property continue to be very disappointing after 4.5 months

of 2018.

The report commissioned by Resilient on the Resilient group of companies concluded that

there had been no foul play by Resilient in terms of insider trading or market manipulation

or anything else.

The market does not yet seem totally convinced and is waiting for the FSB and JSE

reports.

Below we provide a longer-term perspective on the SA Listed Property Index, which shows

an amazing return of +20.3% per year for the last 16 years (2002 to 2018), even after the

last big knock of -16% since late December.

Source: I-Net Bridge

Of course, a big decline in bond yields has boosted the capital return. In 2002 the 10-year

bond yield was 13% versus today’s 8.08%. As bond yields decline, prices rise; also with

listed property, at least normally/historically.

The BIG long-term story on property, though, has been the compounding of the dividends

(from rentals). In the 11 years to end 2016 (see chart above) the Income return (from

dividends) was a whopping +301%, way ahead of the capital return of +138%.

Despite the big fall in listed property so far in 2018, the income or dividends remain

unchanged/steady, still showing growth of around 6% or so.

Back to our local stock market, as it was offshore, so the Resources Index did best on our

market last week, with both Anglo American and BHP Billiton rising over +6%.

The JSE Resources Index, however, is still -10% below its recent high on 15th January.

Sasol is trading at the same price as 10 years ago, before the crash of 2008 and has been

range-bound for the past 3.5 years between 480 rand 360 rand (now 427).

Other Commentators

US Market Analyst, Elaine Garzarelli Garza’s quants model reading rose to 77.5% last week (out of a maximum of 100%) from

73.5% due to the upgrade of her bullish sentiment indicator.

This sentiment indicator shows that the number of bullish investment advisors declined

from 48% the previous week to 42% last week as pes

This caused an upgrade to her quants model because it implies that advisors are building

cash levels, which can be invested at some later stage, giving more fire-power.

Garza expects a rising trend for shares to continue once the uncertainties about trade,

geopolitical risk, inflation and Fed tightening fade.

Using an 18 times fair PE ratio for the S&P 500 index and earnings of 156 for 2018, she

calculates fair value for the S&P 500 at 2,808, which is 5.4% above current levels.

Global monetary conditions remain easy, given that the fed funds rate remains below 2%

and the European Central Bank and Bank of Japan policy rates are still zero - and their

balance sheets are still expanding.

For Garza’s quants model to turn negative or bearish, she says many of her indicators

would need to turn negative simultaneously to cause her to worry about shares.

Events that would cause concern include: the Fed raising rates aggressively, an inverted

yield curve (short rates higher than long rates), indications of recession, inflation rising

consistently, bullish sentiment high, or valuation problems. Most of these events, she feels,

are far away.

There remains underlying strength in the US economy, as indicated by the large amount of

liquidity. There have been over $300 billion in deals just this week, supporting business

confidence.

Also, the economy is being buoyed by tax cuts, dollar weakness and deregulation.

While CPI inflation rose to +2.4% in March, PPI or producer inflation rose to 3% in March,

the fastest rate in 7 years due to accelerating services prices and food prices.

BCA Research

The capital expenditure cycle now underway, a soft U.S. dollar and improving end demand signal that it no longer pays to underweight the S&P tech sector. Lift exposure to neutral.

Firming domestic and global final demand, the synchronized global capex upcycle, an overly pessimistic sell-side analyst community and cheap valuations compel BCA to upgrade the S&P tech hardware, storage & peripherals index to overweight.

Currently, consensus forward earnings growth for the S&P 500 Index one year out is +16.3%. For Technology the earnings growth forecast is +14.6%.

Paul Hansen Director: Retail Investing

Economic Update 1. US core consumer inflation increased by 2.1%y/y in March 2018, its highest level since

early 2017. Base effects related to cell phone charges have been a factor, while the underlying rate of inflation appears to be drifting moderately higher.

2. Global household wealth divide remains phenomenon with the United States having more wealth than five countries combined and Netherlands having more wealth than all of Africa.

3. Bank of Namibia holds off on interest rate cut to protect reserves. 4. Ghana becomes one of the fastest growing economies in the world in 2017. The growth

momentum is expected to continue into 2018. 5. Inflation in Nigeria falls by more than expected which should bring closer the first

interest rate cut 1. In March 2018, US consumer inflation declined by -0.1%m/m, slightly below market

expectations for the index to remain unchanged. Despite the monthly decline in the inflation index, the annual rate of inflation jumped to 2.4%y/y, up from 2.2%y/y in February 2018. The annual inflation rate was negatively impacted by base effects. This was partly due to the very favourable pricing on cell phone services a year-ago that came about as a result of a price-war on cell phone contracts. Back in March 2017, the inflation rate for cell phone services (wireless-telephone services) decline by 7%y/y as companies introduced some aggressive pricing strategies. The US Federal Reserve has an informal inflation target of 2.0%.

For 2015 as a whole, US consumer inflation averaged only 0.1%, its lowest annual average since the 2009 recession. It then rose to an average of 1.3% in 2016 and 2.1% in 2017, and is forecast to average 2.4% in 2018. The main reason for the exceptionally low inflation rate in 2015 and early 2016 was the oil price, which fell sharply from an average of $96/barrel in 2014 to $51/barrel in 2015, a decline of 47%. Since then the oil price has moved higher. Many analysts have argued that US inflation is effectively on a slight upward trend, and that the downward move in US inflation during a portion of 2017 was transitory. This argument would appear to have merit

Core consumer inflation, which excludes food and energy, rose by 0.2%m/m in March 2017. This was in-line with market expectations. On an annual basis core inflation increased to 2.1% from 1.8% in February, largely as a result of base effects, and is the highest rate of core consumer inflation since February 2017. US core inflation averaged only 1.8% in 2015 before increasing to an average of 2.2% in 2016 and 1.9% in 2017. As mentioned above, the underlying inflation rate in the US appears to be trending moderately higher, but not at the pace the latest annual increase would suggest.

Given that both headline and core US inflation are both above 2%, and the fact that underlying inflation has been trending higher, while economic growth appears reasonably robust, it is extremely likely that the US Federal Reserve will feel comfortable in continuing to raise interest rates further in 2018. At this stage we expect 2 or possibly 3 more rate hikes of 25bps each in 2018.

2. The global income and wealth divide is a regular point of discussion at IMF/World Bank

meetings, the World Economic Forum in Davos, as well as other global gatherings. Thomas Piketty, a well-known French economist wrote a thought provoking book on the topic a couple of years-ago, with a number of controversial suggestions on how to deal with the problem. That does not mean that there has been any meaningful improvement in global measures of inequality across regions and countries in recent decades.

According to the first ever World Inequality Report published in 2018 “income inequality has increased in nearly all world regions in recent decades, but at different speeds”. Furthermore, the report stressed that inequality levels are very different among countries, even when countries share similar levels of development, suggesting that national policies and institutions play a key role in shaping inequality.

Global trends in wealth inequality have followed a somewhat different path of development when compared with income inequality, nevertheless the divergence in household wealth between countries as well as within countries remains phenomenal and a source of constant social conflict. Using 2017 annual data on household wealth, measured across most parts of world, the following facts are perhaps worth highlighting, especially in relation to the level of household wealth in Sub-Saharan Africa.

The United States remains the wealthiest country in the world, with household wealth of almost $94 trillion. This is equivalent to 33% of global household wealth, yet the United States has only 4.9% of the world’s adult population.

US household wealth exceeds that in all of Europe and is larger than the wealth in the next five richest countries combined, namely China, Japan, UK, Germany and France.

Iceland has the world’s highest level of household wealth per adult, with an average of $587 649, followed by Switzerland, Australia and the United States. South Africa is ranked 64th in the world with average household wealth of $21 849 per adult in 2017.

There is a massive gap in household wealth per adult between the richest countries and the poorest. For example, the average household wealth in France (the home of Thomas Piketty) is $263 399 while in Tanzania it is estimated at an average of $858 per adult, Uganda $645 per adult and Ethiopia $153.

Households in North American represent the richest region in the world, with 36% of total household wealth followed by Europe (28%), and Asia-Pacific (20%). In contrast, Africa is the poorest region, representing a mere 0.9% of global household wealth. The Netherlands (ranked 15th in the world) have more household wealth than all of Africa.

China has experienced a massive growth in household wealth over the past seventeen years. Back in 2000, China represented 4% of global household wealth. However, in 2017 this had increased to almost 10.5%, which is an annual average growth rate of 11.3% in Dollars, making China the world’s second wealthiest country. In comparison, household wealth in the United States has growth by an annual average of 4.8% over the same period, hurt by the impact of the global financial markets crisis in 2008/2009.

Sub-Saharan Africa represents only 0.6% of total global household wealth, with South Africa accounting for 49% of the region’s wealth. The second largest is Angola with 10.5%, Nigeria 9.9%, and Kenya 2.8%. Because of its extremely large population Nigeria is ranked 146th in the world in terms of wealth per adult, which is a lower ranking than Angola, and Kenya. Interestingly, within Sub-Saharan Africa, Namibia has the second highest household wealth per adult after South Africa.

At least 17 countries within Sub-Saharan Africa have a level of household wealth that would equate to less than 0.005% of global household wealth.

Overall, it seems clear that income and wealth inequality remains a massive global problem. It also is apparent that the existence of wealth (especially financial investments) leads to more wealth, and so the gap between the rich and the poor continues to expand. More positively, some countries (for example China, South Korea) have managed to generate high levels of economic growth and job creation for many years. This type of economic performance can lift national incomes (China is now an upper-middle income country) generating many opportunities for people to become wealthy - but even in China the wealth divide is now starting to become problematic. Sub-Saharan Africa continues to lag the world in terms of levels of national income, job creation and wealth creation. Addressing this issue is going to require a bold policy response and significant political resolve.

3. The Bank of Namibia’s Monetary Policy Committee (MPC) decided to keep rates on hold at 6.75% at its meeting last week. This was against markets expectations of a cut. In the communiqué the MPC said it made the decision to protect the level of reserves considering that SACU revenues were in decline. They further mentioned that the current monetary policy stance is still accommodative and does not impede growth. Inflation was recorded at 3.5% for February 2018, which was the lowest figure in over 2 years and this was down from January’s figure of 3.6%. The lower inflation rate was driven by lower food and administrative price increases. The Namibian economy contracted by 0.8% for 2017 as a whole even though the rest of the world was recovering from an economic slow-down in that period. This was especially disappointing considering that the economy’s performance was already weak in 2016 registering growth of only 0.6%. Credit extension to the private sector had slowed to 5.3% in the six months to February 2018 from 7.2% in the previous six months. Overall demand in the economy was weak coupled with a stronger exchange rate meant price pressures were subdued. We had expected a cut in interest rates in Namibia as the latest GDP statistics revealed that Namibia is in a recession. With the inflation rate at the bottom of the regional target of 3 – 6% and with the South African Reserve Bank cutting rates to 6.5% from 6.75%, it created room for the Bank of Namibia to ease to monetary policy. It is clear that the decision was more weighted towards protecting against capital outflows by creating a positive spread between South Africa and Namibia’s rates. Should the SARB cut rates at its next meeting it is likely that the Bank of Namibia will follow suit with at 25 basis point cut. Should that not be the case then it is likely that rates will remain on hold in Namibia for the rest of the year in attempt to protect against capital outflows.

4. The Ghana Statistical Office released GDP figures for the fourth quarter of 2017 and

showed that GDP had slowed slightly but grew at a robust 8.1%y/y. This is down from the third quarter figure of 9.7%y/y. For 2017 as a whole the economy grew by a remarkable 8.5% which makes Ghana one of (if not) the fastest growing economies in the world. The Ghanaian economy only grew by 3.7% in 2016. However when oil sector is stripped out of the data, the economy was up only 4.9% for 2017. GDP per capita increased to $1,632 in 2017 from $1,508. Most of the growth in 2017 was driven by the oil and gas sector which grew by an impressive 80.4% as oil production ramped up. The industrial sector grew by 16.7% for all of 2017, after it had contracted by 0.5% in 2016. Preliminary data suggests that the country’s performance is expected to continue into the first half 2018 as PMI figures show an improvement. Industry contributes around 25% of all economic activity.

The Agricultural sector grew by 8.4% supported by better crop harvests. Cocoa production expanded by an impressive 17.3%. Agriculture contributes around 23% of all economic activity. In the services sector growth (3.4%) was driven largely by telecoms, which is the second biggest sub-sector. MTN Ghana had a really good performance in 2017 which is likely to have contributed to the sector’s performance. Services represent just over half of all economic activity. The increase in oil exports has helped support the current account balance. This should help to further support the currency and stabilize inflation, allowing for further interest rate cuts. Growth in 2017 set a high base for Ghana. However, we expect the momentum to continue in 2018 supported by the services sector. The concern is still the fiscal matrices as Ghana is carrying a high debt-to-GDP ratio of around 70%.

5. The Nigeria Bureau of Statistics released inflation data for the month of March 2018 which revealed that inflation fell sharply to 13.3% y/y from 14.3% y/y in the month before. This is the fourteenth consecutive month of disinflation and was supported by the high base from last year. Both core and food inflation fell lower and in sync showing that overall price pressures are moderating. Month-on-month inflation increased slightly to 0.84% m/m from 0.79% m/m.

Food inflation continued to slow to 16.1% y/y from 17.6% y/y which was encouraging as it was stubbornly on the high end in 2017. It is likely that food inflation will keep moderating for the next few months which bodes well for overall inflation. Core inflation was measured at 11.2% y/y down from 11.7% y/y. Part of the reason is that the currency (especially in the black market) has stabilized. The Naira depreciated to 360 Nairas to 1 Dollar (NGN/$) in April of last year with the introduction of the NAFEX window. This allowed other currency windows, namely the bureau de change and parallel market, to converge at that same level. Those other windows had much sharper depreciations to levels as low as NGN500/$ at the beginning of 2017. The stabilization in the currency has shown evidence of passing through to prices of goods in the economy and allowed inflation to moderate from a peak of 18.7% in January. (It is worth noting that the official rate is still NGN/$305 however most of the market transacts at NGN/$360 which is also the rate quoted on Bloomberg). The real rate now stands at 0.7% which should theoretically give the Central Bank of Nigeria room to cut rates. We had expected the first cut to be this week however the central bank mentioned its commitment to inflation targeting. With the latest print the argument becomes more compelling for a rate cut at the next meeting in May 2018. This is also considering that the recovery in the non-oil sector remains fragile and could use some welcome stimulus in the form of monetary easing with an addition to an expansionary fiscal policy.

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: 6.75%

Effective: 6.96%

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 13 April 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: 7.87%

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 13 April 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: 8.60%

STANLIB Extra Income Fund

Effective Yield: 8.03%

STANLIB Flexible Income Fund

Effective Yield: 6.39%

STANLIB Multi-Manager Absolute Income Fund

Effective Yield: 5.50%

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 13 April 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.

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.: HX0014

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