much stronger dollar, which could result in a weaker rand, putting upward ... Services Providers in the Old Mutual Group
WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE 5 DECEMBER 2016
RATINGS REPRIEVE FOR SOUTH AFRICA, BUT THERE IS WORK TO BE DONE Dave Mohr & Izak Odendaal, Old Mutual Multi-Managers
DEFLATION SCARE BEHIND US
After a tense period in which the three major global ratings agencies assessed the local economy, government policy and more, South Africans can head into the festive season feeling a bit more at ease, knowing that the country has maintained its investment grade rating. The third major ratings agency, S&P Global Ratings, left the foreign currency rating unchanged at BBB- with a negative outlook. S&P cut South Africa’s local currency rating by a notch to BBB, bringing the local and foreign currency ratings closer together.
The big decline in the oil price in 2014 and 2015 contributed to the past year’s global deflation scare. In turn, this added to interest rates staying flat in the US and falling to below zero in Europe and Japan. The oil price has now rebounded again thanks to a larger-than-expected agreed production cut by the Organisation of Petroleum Exporting Countries (OPEC) of 1.2 million barrels per day (with Saudi Arabia responsible for around half of the cut). However, the challenge for OPEC has traditionally been getting members to stick to their quotas, given the incentive to cheap (i.e. produce more at the higher price). This incentive is even greater now, given that North American shale producers will also benefit from the higher price.
As was the case with Moody’s and Fitch, S&P expects economic growth to improve from very low levels over the next three years and is comfortable with government’s fiscal management. S&P also noted that South Africa’s institutions were strong (especially the judiciary) and that the South African Reserve Bank’s monetary policy is independent and credible. However, as with the other two agencies, it is concerned that crucial structural reforms will be hampered by political infighting. These reforms are needed to raise South Africa’s economic growth rate on a sustained basis and secure our investment grade rating. Fortunately, there have been a number of positive developments recently (in labour relations, energy and state-owned enterprises) and no debilitating strikes or load-shedding. But these need to be cemented and further progress is needed, especially in streamlining state-owned enterprises and finalising the mining resources act and charter.
Even at Friday’s closing price of $54 per barrel, the average oil price of 2016 is still lower than in 2015 ($43 vs $52). The SA Reserve Bank assumed an average oil price of $53 per barrel in 2017, so the latest move does not dramatically alter the local inflation or interest rate outlook. The steady rand, which is now slightly stronger against the US dollar than a year ago (despite global upheaval), helps to offset the impact of the higher oil price. There will be a 20 cents per litre petrol price cut this week. Meanwhile, credit growth remains weak, especially household borrowing, confirming that there is little demand pressure on local prices. Loans and advances only grew by 5.8% year-on-year in October, down from 8.5% growth at the start of the year. Mortgage growth is only 5.4%
RATINGS RISK REMAINS As it stands now, both Fitch and S&P rate South Africa only one notch above sub-investment (or junk) status. Both have a negative outlook, suggesting that the next ratings move is down. We can therefore experience a repeat of the recent stressful period in 2017. Faster growth is needed to avoid a downgrade in future as economic growth ultimately ensures that debt levels are sustainable.
OIL HELPED THE TRADE BALANCE The lower oil price in 2016 has been a factor behind the improving trade balance. South Africa posted a R4.4 billion trade deficit in October, but this was smaller than expected. October is typically a large deficit month as imports surge ahead of the festive season. The trade deficit for the first ten months of the year was only R14 billion, compared to R60 billion over the same period last year. Over the same comparative period, the value of oil imports fell by 17%. Therefore, a sustained rise in oil prices threatens this improvement.
Credit ratings tend to tell the market what it already knows. Looking to 2017, the bigger risk to our bond market remains US interest rate developments, rather than credit ratings. If the US Federal Reserve hikes interest rates aggressively (by more than is currently priced in) the result is likely to be a much stronger dollar, which could result in a weaker rand, putting upward pressure on local inflation and interest rates. This would be bad for bonds and the local economic growth outlook, which has recently improved.
GLOBAL GROWTH POSITIVE FOR SOUTH AFRICA The iron ore price, in contrast, rose to $80 per tonne last week, the highest level in two years. Iron ore is one of our main export items, along with coal, gold and platinum. The price recovery in iron ore is therefore most welcome. Coal prices have also increased strongly since the start of the year. However, gold and platinum prices have been under pressure.
The US Federal Reserve (Fed) is almost certain to hike their funds rate later this month. Inflation has been rising gradually, but remains below the Fed’s 2% target. Annual US personal consumption inflation (the Fed’s preferred measure of price pressures) increased to 1.4% in October, while it was only 0.3% a year ago. Excluding the impact of volatile food and energy prices, inflation was 1.7%. Meanwhile, unemployment fell to 4.6% in November, almost the lowest level in a decade. However, despite unemployment falling and employment growth of around 1.6% per year, wages have not responded much to the tighter labour market, growing by 2.5%. Therefore, while the Fed is expected to increase interest rates, it is likely to do so gradually.
Other local economic data remains mixed, but with signs of improvement. New vehicle sales rose to 47 271 units in November. While this represents a decline of around 5 000 units compared to a year ago, it also shows an increase of similar size compared to July, which appears to have been the bottom of the cycle. The Barclays manufacturing purchasing manager’s index (PMI) increased to 48.3 points in November, but remained below the 50-neutral level for the fourth consecutive month. The local manufacturing sector is clearly
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WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE 5 DECEMBER 2016
still under pressure. However, the forward-looking components have improved. Sales have risen relative to inventories, suggesting firms will have to increase production, while the measure of expected business conditions in six months’ time has also increased above the 50-point cut-off level. An improvement in global manufacturing conditions is also positive. The JPMorgan Global Manufacturing PMI rose to the highest level in more than two years. While South Africa is not as well integrated into global value chains as it could be, faster global growth bodes well as we head into 2017. TABLE 1: SOUTH AFRICA’S SOVEREIGN CREDIT RATINGS AFTER THE LATEST REVIEWS
Foreign Currency Debt Rating S&P GLOBAL
Outlook Notches above sub-investment grade Rating Outlook
FITCH
Notches above sub-investment grade Rating
MOODY’S
Outlook Notches above sub-investment grade
Local Currency Debt
BBB-
BBB
Negative
Negative
1
2
BBB-
BBB-
Negative
Negative
1
1
Baa2
Baa2
Negative
Negative
2
2 Source: Ratings agencies
CHART 1: THE OIL PRICE IN US DOLLARS AND RAND 75
Brent crude oil Rand per barrel (RHS) Brend crude oil US Dollar per barrel
850
70
800
65
750
60 55 50 45 40
700 650 600 550
35
500
30
450
25 400 Dec 14 Feb 15 Apr 15 Jun 15 Aug15 Oct15 Dec15 Feb16 Apr16 Jun16 Aug16 Oct16 Dec16 Source: Datastream
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WEALTH INTELLIGENCE WEEKLY INDICATORS 5 DECEMBER 2016
WORST
BEST
A 10% surge in the oil price last week means a smaller petrol price cut of only 20 cents per litre this Wednesday.
South Africa retains its S&P investment grade credit rating.
EQUITIES - GLOBAL DESCRIPTION
INDEX
Global
MSCI World
US$
1 709.0
-0.70%
-0.18%
1.97%
United States
S&P 500
US$
2 192.0
-0.95%
-0.32%
6.25%
4.23%
Europe
MSCI Europe
US$
1 395.0
-0.36%
-0.29%
-9.30%
-10.86%
Britain
FTSE 100
US$
8 570.0
0.42%
0.97%
-7.81%
-11.00%
Germany
DAX
US$
1 023.0
-0.97%
-0.58%
4.47%
-5.10%
Japan
Nikkei 225
US$
162.2
0.25%
14.41%
14.41%
0.03%
Emerging Markets
MSCI Emerging Markets
US$
858.0
0.23%
-0.58%
8.47%
4.00%
Brazil
MSCI Brazil
US$
1 564.0
-4.69%
-6.24%
52.73%
39.52%
China
MSCI China
US$
61.0
0.33%
-0.11%
2.94%
-0.16%
India
MSCI India
US$
446.2
1.30%
-0.18%
-1.72%
-1.28%
South Africa
MSCI South Africa
US$
424.0
-1.85%
-1.62%
7.61%
-3.20%
CURRENCY INDEX VALUE
WEEK
MONTH-TO-DATE
YEAR-TO-DATE
1 YEAR -0.06%
EQUITIES - SOUTH AFRICA (TR UNLESS INDICATED OTHERWISE) CURRENCY INDEX VALUE DESCRIPTION INDEX
WEEK
All Share (Capital Only)
All Share (Capital Index)
Rand
49 256.0
-2.84%
-1.90%
-3.05%
-4.42%
All Share
All Share (Total Return)
Rand
6 788.0
-2.72%
-1.89%
-0.50%
-1.86%
MONTH-TO-DATE
YEAR-TO-DATE
1 YEAR
TOP 40/Large Caps
Top 40
Rand
5 900.0
-3.02%
-1.99%
-4.28%
-5.07%
Mid Caps
Mid Cap
Rand
14 948.0
-2.03%
-1.65%
19.71%
15.22%
Small Companies
Small Cap
Rand
19 798.0
-0.34%
-1.50%
17.17%
8.48%
Resources
Resource 20
Rand
2 002.8
-3.11%
-1.52%
30.66%
26.81%
Industrials
Industrial 25
Rand
11 570.0
-3.32%
-2.27%
-12.21%
-12.01%
Financials
Financial 15
Rand
7 428.0
-1.81%
-1.75%
-1.75%
-7.15%
Listed Property
SA Listed Property
Rand
1 985.9
-0.86%
-1.59%
4.08%
-1.49%
FIXED INTEREST - GLOBAL DESCRIPTION INDEX Global Government Bonds
Citi Group WGBI
FIXED INTEREST - SOUTH AFRICA DESCRIPTION INDEX
CURRENCY INDEX VALUE US$
893.7
CURRENCY INDEX VALUE
WEEK
MONTH-TO-DATE
0.78%
WEEK
0.00%
MONTH-TO-DATE
YEAR-TO-DATE 2.67%
YEAR-TO-DATE
1 YEAR 3.50%
1 YEAR
All Bond
BESA ALBI
Rand
524.7
0.34%
-0.10%
12.58%
Government Bonds
BESA GOVI
Rand
522.6
0.34%
-0.10%
12.14%
6.33% 6.37%
Corporate Bonds
SB JSE Credit Indices
Rand
155.4
0.13%
-0.08%
-15.39%
-17.50%
Inflation Linked Bonds
BESA CILI
Rand
246.9
-0.17%
0.00%
6.75%
4.61%
Cash
STEFI Composite
Rand
354.2
0.14%
0.04%
6.78%
7.33%
COMMODITIES DESCRIPTION
INDEX
Brent Crude Oil
Brent Crude ICE
US$
53.9
14.55%
3.73%
49.83%
22.59%
Gold
Gold Spot
US$
1 172.0
-1.01%
-0.17%
10.36%
9.64%
Platinum
Platinum Spot
US$
916.0
0.88%
0.44%
5.17%
9.18%
CURRENCY INDEX VALUE
WEEK
MONTH-TO-DATE
YEAR-TO-DATE
1 YEAR
CURRENCIES DESCRIPTION
INDEX
ZAR/Dollar
ZAR/USD
Rand
13.79
2.22%
2.15%
12.59%
4.54%
ZAR/Pound
ZAR/GBP
Rand
17.36
0.23%
1.50%
32.66%
25.40%
ZAR/Euro
ZAR/EUR
Rand
14.73
1.43%
1.29%
15.35%
3.47%
Dollar/Euro
USD/EUR
US$
1.07
-0.93%
-1.03%
2.15%
-0.93%
Dollar/Pound
USD/GBP
US$
1.27
-2.02%
-1.82%
16.24%
18.60%
Dollar/Yen
USD/JPY
US$
0.01
0.00%
-1.14%
-5.68%
-7.95%
CURRENCY INDEX VALUE
WEEK
MONTH-TO-DATE
Source: I-Net, figures as at 5 December 2016
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YEAR-TO-DATE
1 YEAR
WEALTH INTELLIGENCE WEEKLY THE WEEK AHEAD 5 DECEMBER 2016
SOUTH AFRICA •
Third quarter gross domestic product
•
Standard Bank private sector purchasing managers’ index (PMI)
•
Mining and manufacturing production
•
SA Reserve Bank Quarterly Bulletin
US •
Factory orders
•
Trade balance
•
ISM non-manufacturing index
•
Job openings and labour turnover
EUROPE •
European Central Bank interest rate decision
•
Eurozone services PMI
•
Eurozone retail sales
CHINA •
Foreign exchange reserves
•
Trade balance
•
Inflation
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.
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