The Weekly Focus - STANLIB

1 Focus The Weekly A Market and Economic Update 19 February 2018 Contents Newsflash ..3 Market Comment .. 3 Other Commentators .. 5 Economic Update ..7 Rates .. 12 STANLIB Money Market 12 STANLIB Enhanced Yield Fund .. 12 STANLIB Income Fund .. 12 STANLIB Extra Income Fund .. 12 STANLIB Flexible Income Fund .. 12 STANLIB Multi-Manager Absolute Income Fund .. 12 Newsflash The SA market outperformed last week as the rand gained + against the dollar, + against the euro and pound and + against the Aussie dollar, boosted by politics for the first time since the December ANC Elective Conference Market Comment LOCAL MARKETS Boosted by politics for the first time since the December elections, the SA market outperformed last week as the rand gained + against the dollar, + against the euro and pound and + against the Aussie dollar. The JSE All Share Index gained + in rands last week, or + in dollar terms!

2 It is now around below its record high of 25th January. The All Bond Index sparkled too, gaining + in rands or + in dollar terms, almost at a record high in dollar terms, back at the previous high of over six years ago. It is at a new record high in rand terms, because it includes interest income in its price. The All Bond Index is now leading the pack of SA asset classes in 2018, with a rand return of + in the first seven weeks of 2018. This is because the yield of our bonds has fallen sharply, with the 2026 maturity R186 bond yield down from at end 2017 to this morning, which is the lowest yield (highest bond price) in over years. This is great for foreign investors of course, because this translates into +12% in dollars, possibly the best return of any market so far in 2018. The All Share Index has returned -1% so far in rands in 2018, including dividends, or + in dollars.

3 The SA Listed Property Index would usually be doing well on the back of lower SA bond yields, but sadly has been very negatively impacted by the huge knock taken by the Resilient group of companies so far this year, on the back of some highly critical reports. The SA Listed Property Index has tumbled -18% from its recent high on 29th December and is almost back at its low reached on the 6th of February. This is almost entirely due to the huge knocks suffered by Resilient (-50%), NepiRock (-50%) and Fortress B (-57%). Greenbay has fallen -52%, but is much smaller. Resilient and Fortress B share prices are both back where they were over 3 years ago. Resilient is now trading on an historic dividend yield of , which is a 10-year high (and has a dividend still sitting in its price), while Fortress B is on an historic dividend yield of The SA Listed Property Index is now trading on an historic dividend yield of 7%, the highest in almost six years.

4 It is even higher than our STANLIB Money Market s yield, so looks attractive purely from a yield point of view. At this stage, STANLIB is still looking for growth of around 8% in dividends over the next 12 months. On the local stock market, Naspers, which had fallen by -27%, jumped +14% last week, although it is down at 11am this Monday morning. Despite the strong rand, the JSE Mining Index bounced from its recent correction low, helped by Anglo American bouncing from 270 rand to 287 rand, assisted today by the first dividend in eight years from subsidiary Anglo American Platinum, after it reported a net profit of in 2017 (up from R700m in 2016). The weaker US dollar, coupled with global economic strength, has helped the prices of iron ore and copper rise, amongst others, also gold. The price of palladium, used in the exhausts of petrol engines, jumped +50% in dollars in 2017, before correcting and now picking up again.

5 Investors in many local equity funds and also most local balanced funds are frustrated because they are struggling to see appreciation in their funds over the past six or so months. Why? The strong rand and various cross currents are two major factors. The strong rand is causing havoc, affecting the rand value of the 25% or so that is invested offshore in their particular fund (both equity and balanced funds). Plus the strong rand is causing havoc on the big offshore companies that trade on the JSE and comprise part of the top 10 shares of most local equity portfolios. We re talking about British American Tobacco, now down from its recent high in November and at a year low. Its stable mate, Reinet, is -33% from its high in May 2016 and is trading where it was 4 years ago. Richemont is -19% since early November and is trading where it was 4 years ago.

6 Anheuser Busch Inbev is down a whopping -37% from May 2016. What a pity we lost SAB from our market. The strong rand is also hurting Aspen, with all its offshore operations; also various property companies like NepiRock, as well as Intu, Capital & Counties and Hammerson. Others with substantial offshore operations include Mediclinic, Netcare, Mondi, MTN, Trencor, Woolies in Australia and of course Sasol and all the mining companies who sell their minerals for dollars. Many South Africans are secretly hoping for a weaker rand to boost the values of their equity and balanced portfolios. Of course the happier bottom line is that the stronger rand means that all our local assets, including our homes, money markets/income funds, the bulk of our pension funds and retirement annuities etc. have all risen in global terms over the past two years.

7 After all, the rand is essentially the share price of our country. So we re better off in global terms than we were when the rand was at 17 to the dollar in early 2016. One needs to appreciate that factor. Also the big bank shares have risen to record highs in strong rand terms, as have certain other specific shares like Shoprite, AVI, Bidvest, Clicks, Dis-Chem, Hudaco, RMB Holdings, Spar Group (despite offshore investments), Discovery (despite offshore businesses) and the big retailers have had fantastic appreciation of late, including Truworths, Mr Price and Foschini. The cross-currents that have hurt portfolios of course refer to the disaster that is Steinhoff International, at least so far, to a much lesser extent the attack on Capitec and of course recent highly critical reports on the Resilient Group. Hopefully the big fall in the Resilient group shares is now finally abating as some value emerges, including dividend yields and as Resilient management responds positively to the harsh criticism meted out to them.

8 SBG Securities, the stockbroker in the Standard Bank Group, notes this morning that foreign ownership of the JSE, including the dual-listed shares, rose to in January from in December 2016. Within the SA industry groups, Consumer Services, which includes Retailers and Media (Naspers), has the highest foreign ownership at in January 2018, up from in December 2016. Dis-Chem (+ ) and Pick n Pay (+ ) saw the largest increases in foreign ownership within the Retailers in Q4 2017, while Naspers showed an increase of Foreign ownership of SA Financials rose to in January from 24% in December 2016. OFFSHORE MARKETS The US stock market led the global bounce-back from the recent sharp correction, as US shares gained for six consecutive days, led by technology shares. Today is a holiday in the US (Presidents Day). The US S&P 500 Index gained + from its recent low and is now from its record high in January.

9 The tech-laden Nasdaq gained + from its low to be from its record high. The MSCI World Index is from its peak, while the MSCI Emerging Markets Index is from its recent peak. The chart below of the rand to the dollar shows the rand gaining from 17 to the dollar two years ago to the current , back at early 2015 levels. So, where to now? I have no idea, other than that the current trend remains firmly intact. Source: I-Net Bridge Other Commentators US Market Analyst, Elaine Garzarelli Garza s quantitative model actually rose by two points last week to (out of a maximum of 100%), due to the upgrade of her sentiment indicator, as the number of bullish US investment advisors fell to because of the correction. Corrections in bull markets are fairly common and Garza continues to recommend buying on dips. Fourth quarter US earnings estimates continue to rise, now pointing to impressive +20% year-on-year gains.

10 Garza then expects first quarter 2018 earnings to be up +24% year-on-year. She calculates fair value for the S&P 500 Index at 2,736, slightly higher than the current 2,732 level, although shares normally rise 20-50% above fair value when her quants model is as bullish as it is now. US monetary policy is still very easy, despite all the interest rate hikes to-date, with the Fed Funds rate at only and the US balance sheet still over $4 trillion. The European Central Bank s interest rate is still zero and its balance sheet is over $5 trillion. Corporate cash in the US is now over $ trillion and this cash will likely go to buybacks, dividends, wage increases and capex. Most recently, Cisco will repatriate $67 billion of its foreign cash holdings to the US this quarter and spend $44 billion of it on share buybacks and dividends. Historically, shares rally as US bond yields rise, since a rising bond yield reflects an improving economy.