Dec 11, 2017 - government policy. Meanwhile, listed technology group EOH also saw its share price collapse last week fol
INVESTMENT NOTE 11 DECEMBER 2017
A DRAMATIC END TO A DRAMATIC YEAR DAVE MOHR & IZAK ODENDAAL, OLD MUTUAL MULTI-MANAGERS
11 DECEMBER 2017
WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
particularly household debt, rising faster than incomes; accelerating wage growth and consumer inflation; large budget and current account deficits; and overvalued currencies. Unsustainably high commodity
A DRAMATIC END TO A DRAMATIC YEAR
prices are another indicator for countries like South Africa. These warning signs are largely still absent, except perhaps in China, a risk area that is constantly highlighted. The other big risk is that central banks hike interest rates quickly, perhaps spooked by ‘financial stability’ worries (to take away the punchbowl before the party gets out of hand, in the famous phrase of a former Fed chair). With Friday’s payrolls report showing 228 000 jobs created in November in the US, a Federal Reserve interest rate hike this week is a near certainty. The big question is really how quickly rates will rise next year, and how the US dollar responds. A strengthening dollar can cause havoc, putting emerging market currencies and commodities
The JSE was down sharply last week as scandal engulfed one of the
under pressure. The good news is that the Fed’s interest rate view is
biggest shares on the exchange. Steinhoff International shares plunged
based on an improving economy. The fall-out for the rest of the world
after the company’s auditors refused to sign off on its latest financial
is minimal and in such a scenario, rate hikes send a positive signal.
statements and its CEO resigned.
This was the case during the previous hiking cycle, which occurred
Before its collapse, Steinhoff was the seventh biggest company in the
against the backdrop of strong growth, and therefore had virtually no
FTSE/JSE Shareholders Weighted Index (SWIX), the benchmark widely
impact on financial markets.
used by professional investors, with a 2.3% weight. A number of other
ANOTHER POSITIVE QUARTER
listed companies closely associated with Steinhoff and Chairman
Locally, the economic outlook is also improving. The economy grew
Christo Wiese also suffered sharp declines.
faster than expected in the third quarter, with seasonally adjusted real
It is not immediately clear if outright fraud is involved, but German
gross domestic product increasing at an annual rate of 2% from the
prosecutors (the share is also listed in Frankfurt) said they are still
second quarter. The prior quarter’s growth rate was also adjusted
investigating possible accounting irregularities and fraud. Either way,
upwards from 2.5% to 2.8%. Growth for the first nine months of the
it is yet another blow to South Africa’s reputation for good corporate
year compared to the same period last year is at 1%, a run rate that
governance, coming so soon after allegations that a subsidiary of
is ahead of most forecasts.
Naspers, the biggest company on the JSE, improperly influenced
From a sector point of view, the third quarter benefited from a 44%
government policy. Meanwhile, listed technology group EOH also
jump in agriculture, a 6.6% increase in mining and a 4.3% rise in
saw its share price collapse last week following a probe by the
manufacturing. The services sectors saw slower but still positive growth
Independent Police Investigative Directorate (IPID) into subsidiaries that
of 0.3%, largely due to weak wholesale sales and declining government
do business with Government. In a country where the popular view of
spending.
big business is often very negative, also among some policymakers, these are unwelcome developments.
The post-drought rebound in agriculture - responsible for 0.9 percentage
GLOBAL MARKETS SOFTER
points of the quarter’s overall growth - is clearly not sustainable, but there are other signs that point to a more lasting but subdued upswing.
The Steinhoff debacle occurred against the backdrop of a softer patch
Private fixed investment spending grew by 4.1% in the third quarter,
for global equities. It is perfectly normal for markets to pull back after
up from an 8.4% decline in the second quarter (fixed investment by
a strong run (though it is never pleasant). The S&P 500 has been
businesses has declined in seven of the past 10 quarters).
positive every month this year, an almost unheard of feat. Whether or not December is positive, global markets are still up substantially this
Household final consumption spending rose 2.6% in the third quarter,
year, supported by a healthy economic backdrop and good earnings
with spending on durable goods (cars and furniture) contributing almost
growth.
half. Spending on these big ticket items tends to rise and fall with the economic cycle much more than on clothing and food.
In contrast to corrections, big market moves are usually shifts in perceptions about underlying fundamentals (large changes in sentiment)
Real income growth is supporting the outlook for household spending
or changes in underlying fundamentals (like a recession). Recessions
and is still almost two-thirds of economic activity in South Africa. The
are notoriously difficult to forecast. All one can do is look for warning
economy’s wage bill grew by 8.1% in the third quarter compared to
signs of overheating and build-up of imbalances. These include debt,
the same quarter last year. This increase in employee compensation
2
WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
was fairly broadly spread across sectors. Unless wage bill growth
CHART 1:
slows materially, expected inflation around 5% over the next year implies further positive real income growth.
ASSET CLASSES IN 2017, REBASED TO 100
Could Steinhoff derail this mild economic upswing? There is no indication
126
that any of the local businesses (mainly in retail) will close, leading to job losses. Importantly, there is also no sign that any of the domestic
121
banks faces a loss that threatens its viability. A healthy banking system
116
is crucial for a healthy economy. Therefore, the macroeconomic impact
111
is determined by the so-called wealth effect – households responding to a decline in their asset values by adjusting spending. It is safe to
106
say that, given its size, most equity portfolios in South Africa would
101
have had some exposure to Steinhoff. But the exposure of the typical investor or pension fund member to Steinhoff is probably in the region
96 Jan 17
of 1% to 2%, well within the range of market movements over the course of a few weeks or months. Therefore, the countrywide wealth effect is likely to be minimal. However, the market for high-end property, luxury
Feb 17
Mar 17
Apr 17
May 17
Jun 17
Jul 17
Aug 17
Sep 17
Oct 17
Nov 17
FTSE/JSE ALL SHARE INDEX
FTSE/JSE SA LISTED PROPERTY INDEX
SA ALL BOND INDEX
STEFI
Dec 17
MSCI WORLD INDEX IN RAND
vehicles and the like could certainly suffer in and around Stellenbosch,
Source: Datastream
where the company is based.
IT’S NOT ALL ABOUT STEINHOFF
CHART 2:
This is our final weekly market commentary for 2017. While the Steinhoff debacle means we are not ending the year on a high note,
SOUTH AFRICA REAL GROSS DOMESTIC PRODUCT GROWTH
the overall outlook is fairly positive globally, while locally things also appear to be on the up. We spent much of this year warning against
8
excessive pessimism, and despite political uncertainty, Cabinet reshuffles,
6
credit ratings downgrades, a technical recession and a volatile exchange rate, South African investors have generally enjoyed a good year in
4
terms of growth assets.
2
Local equities have returned 17% in 2017 despite a negative December.
0
Listed property has delivered double digit returns. With the rand–dollar exchange rate basically flat this year, the rand has not detracted from
-2
global performance from the point of view of local investors. Global
-4
equities are therefore up 20% in rand. It is only domestic bonds that have disappointed, with the return on the All Bond Index of 5.5%.
04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 17
-6 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
THE IMPORTANCE OF DIVERSIFICATION We have also tried to highlight some of the key investment lessons
QUARTER-ON-QUARTER (SEASONALLY ADJUSTED & ANNUALISED) YEAR-ON-YEAR
along the way (for ourselves as much as our readers). While the local investment community was divided over Steinhoff’s aggressive
Source: StatsSA
debt-fuelled global expansion path, even the sceptics would have been shocked by the announcement regarding accounting irregularities. Ultimately, the only defence against such an unexpected event is diversification – a diversified portfolio would suffer a knock, but not a wipe-out. This forms the basis on which we run the strategy funds for our clients: diversification across securities (so no single share can wipe out the portfolio); diversification across regions (to benefit from a larger opportunity set and hedge against currency weakness); diversification across asset managers (to benefit from different views and investment styles); and diversification across asset classes (since the future is inherently uncertain).
3
11 DECEMBER 2017
WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
EQUITIES - GLOBAL DESCRIPTION
INDEX
WEEK
MONTH-TO-DATE
YEAR-TO-DATE
1 YEAR
Global
MSCI World
US$
2 064.0
-0.24%
-0.63%
17.88%
17.74%
United States
S&P 500
US$
2 652.0
0.38%
0.15%
18.45%
18.08%
Europe
MSCI Europe
US$
1 752.0
0.11%
-1.07%
19.10%
21.58%
Britain
FTSE 100
US$
9 898.0
0.21%
0.69%
12.32%
13.47%
Germany
DAX
US$
1 441.0
0.98%
0.14%
16.60%
33.80%
Japan
Nikkei 225
US$
201.1
-0.98%
-0.57%
19.34%
21.78%
CURRENCY INDEX VALUE
Emerging Markets
MSCI Emerging Markets
US$
1 101.0
-1.34%
-1.78%
27.73%
25.26%
Brazil
MSCI Brazil
US$
1 944.0
-0.82%
-0.15%
16.27%
19.70%
China
MSCI China
US$
84.2
-2.08%
-2.99%
43.84%
38.17%
India
MSCI India
US$
580.2
0.78%
-0.48%
29.80%
27.23%
South Africa
MSCI South Africa
US$
528.0
-3.12%
-5.04%
16.30%
18.12%
EQUITIES - SOUTH AFRICA (TR UNLESS INDICATED OTHERWISE) DESCRIPTION
INDEX
WEEK
MONTH-TO-DATE
YEAR-TO-DATE
1 YEAR
All Share (Capital Only)
All Share (Capital Index)
Rand
58 012.0
-2.42%
-2.95%
14.53%
14.78%
All Share
All Share (Total Return)
Rand
8 235.0
-2.35%
-2.88%
17.88%
18.15%
Top 40/Large Caps
Top 40
Rand
7 324.0
-2.26%
-2.95%
21.02%
21.06%
Mid Caps
Mid Cap
Rand
15 719.0
-3.61%
-3.01%
-0.58%
1.28%
Small Companies
Small Cap
Rand
20 008.0
-1.34%
-1.15%
-2.01%
-0.34%
CURRENCY INDEX VALUE
Resources
Resource 20
Rand
2 239.4
-3.10%
-3.08%
14.38%
9.09%
Industrials
Industrial 25
Rand
15 299.0
-2.41%
-3.54%
26.93%
29.11%
Financials
Financial 15
Rand
8 746.0
-1.46%
-1.09%
12.07%
13.70%
Listed Property
SA Listed Property
Rand
2 336.1
-0.92%
-1.18%
11.08%
17.39%
WEEK
MONTH-TO-DATE
YEAR-TO-DATE
1 YEAR
-0.20%
-0.20%
8.68%
5.73%
WEEK
MONTH-TO-DATE
YEAR-TO-DATE
1 YEAR
FIXED INTEREST - GLOBAL DESCRIPTION
INDEX
Global Government Bonds
Citi Group WGBI
CURRENCY INDEX VALUE US$
946.8
FIXED INTEREST - SOUTH AFRICA DESCRIPTION
INDEX
CURRENCY INDEX VALUE
All Bond
BESA ALBI
Rand
562.9
0.81%
1.16%
5.55%
5.97%
Government Bonds
BESA GOVI
Rand
561.2
0.82%
1.16%
5.62%
6.05%
Corporate Bonds
SB JSE Credit Indices
Rand
123.9
-0.63%
-0.56%
-14.28%
-20.67%
Inflation Linked Bonds
BESA CILI
Rand
243.8
1.12%
1.25%
-0.74%
0.04%
Cash
STEFI Composite
Rand
381.4
0.14%
0.15%
7.08%
7.56%
COMMODITIES DESCRIPTION
INDEX
WEEK
MONTH-TO-DATE
YEAR-TO-DATE
1 YEAR
Brent Crude Oil
Brent Crude ICE
US$
63.4
-0.52%
0.63%
11.23%
17.41%
Gold
Gold Spot
US$
1 248.0
-2.12%
-2.12%
8.43%
6.58%
Platinum
Platinum Spot
US$
885.0
-6.05%
-5.85%
-1.99%
-5.65%
CURRENCY INDEX VALUE
CURRENCIES DESCRIPTION
INDEX
WEEK
MONTH-TO-DATE
YEAR-TO-DATE
1 YEAR
ZAR/Dollar
ZAR/USD
Rand
13.65
0.40%
0.02%
0.26%
-0.11%
ZAR/Pound
ZAR/GBP
Rand
18.28
1.15%
1.53%
-8.64%
-6.13%
ZAR/Euro
ZAR/EUR
Rand
16.07
1.59%
0.66%
-10.16%
-9.85%
Dollar/Euro
USD/EUR
US$
1.18
0.85%
0.42%
-10.85%
-10.17%
Dollar/Pound
USD/GBP
US$
1.34
1.07%
0.10%
-8.11%
-5.87%
Dollar/Yen
USD/JPY
US$
0.01
0.95%
0.95%
-2.45%
-0.18%
CURRENCY INDEX VALUE
Source: I-Net, figures as at 8 December 2017
4
11 DECEMBER 2017
WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE
THE WEEK AHEAD SOUTH AFRICA •
Manufacturing production
•
Consumer inflation
•
Current account balance
•
Employment
•
Retail sales
US •
Federal Reserve interest rate decision
•
Job openings and labour turnover
•
Consumer and producer inflation
EUROPE •
European Central Bank interest rate decision
•
UK inflation
•
Germany ZEW Economic Sentiment Index
•
Eurozone industrial production
•
Bank of England interest rate decision
CHINA •
Vehicle sales
•
Fixed asset investment
•
Retail sales
The Old Mutual Wealth Investment Note is published on a weekly basis to keep our clients and financial planners informed of what is happening in financial markets and the economy and to share our insights. Markets are often very volatile in the short term and similarly, economic data releases or central bank actions may cause concerns for investors. This does not mean that investors should take action based on the most recent events. It is better to be disciplined and remain invested in well-diversified portfolios that are designed to achieve long-term objectives. Our Strategy Funds are actively managed, with asset allocation changes based on valuations and in anticipation of future real returns, and not in response to the most recent market noise. The future is always uncertain and that is why our Strategy Funds are diversified and managed with a long-term focus.
Old Mutual Wealth is brought to you through several authorised Financial Services Providers in the Old Mutual Group who make up the elite service offering. This document is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any information contained herein. Old Mutual Wealth and its directors, officers and employees shall not be responsible and disclaims all liability for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of or which may be attributable, directly or indirectly, to the use of, or reliance upon any information contained in this document. 5
