The Weekly Focus - STANLIB

1 Focus The Weekly A Market and Economic Update 5 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 It appears that a global stock market correction may have begun. It is way overdue. It should present another buying opportunity. Market Comment OFFSHORE MARKETS As is usual, the US stock market may have started a global correction, the first correction since the MSCI World global index fell by from August to November 2016. Since the low in November 2016, the index gained a very impressive + in dollars by 23rd January 2018, with barely any pullback in one of the most sustained uptrends in history. So a pullback or correction is way overdue. Obviously no-one knows how long it may last or how much it may decline, but a normal bull-market correction seldom declines more than -7% for the S&P 500 Index (currently down from its high).

2 The correction has been sparked by the jump in bond yields, with the US 10-year yield now up from at end 2017 to today, a +17% rise in yield. Four years ago the yield touched a high of 3% and in late December 2009 it was at , so the current yield remains low compared with history. In 1987 it triggered the stock market crash by rising to the magical 10% level, much higher than the current The yield jumped on Friday after the monthly US jobs report came out better than expected at 200,000 jobs created (net), but in particular it was US wages rising by + year-on-year, the highest increase in 9 years, that caused market participants to worry that perhaps the US Fed, now under new Chairman Powell, would need to raise interest rates more than the expected three times in 2018 to ward off rising inflation. However, it is way too early to assume that a new trend is in place or that inflation will rise much from current levels.

3 Our STANLIB Economist, Kevin Lings, says typically wages would be rising by around +4% year-on-year in the strong part of the economic cycle, so is still quite low. Usually in a stock market correction, bond yields decline (prices rise) as investors sell out of shares and buy bonds. This has barely occurred yet, with the 10-year yield now at Many potential buyers are possibly waiting for the more attractive 3% level. The biggest share by market value in the world, Apple, has declined by around -11% from its high so far, back at August 2017 levels. Whereas Apple is down just over -5% so far in 2018, the US Technology sector is still up + in 2018, ahead of the + for the S&P 500 Index. The sector returned around +30% last year, easily the best sector. The MSCI Emerging Markets Index had an even more amazing run, gaining + in dollars from its most recent correction low on the 22nd of December 2016 to its peak on 23rd January 2018.

4 Firming emerging market currencies certainly played a role in this run. The rand was at to the dollar in December 2016 versus today s (+ stronger). The MSCI China Index, by far the biggest index in the MSCI Emerging Markets Index (31%), gained + from December 2016 to its high on 26th January 2018. Global listed property shares are still struggling, down around in dollar terms in 2018, having declined last week as bond yields jumped. European shares are down for a sixth day today (down ), while the Nikkei Index dropped the most in 14 months this morning ( ). The Chinese shares listed in HK dropped just , while the Hang Seng Index in HK dropped LOCAL MARKETS The JSE All Share Index is down for the 6th consecutive day today and is from its 25th January record high, so has already had a fairly substantial at October levels and similar to the lows in December. The main culprits are Naspers and the Resilient family of listed property shares.

5 Naspers peaked at 4090 rand in November and is down from that level at 3168 rand today ( after falling -2% in each of the previous two days), its lowest price since October. Some fund managers have changed their benchmark from the SWIX Index to the Capped SWIX Index, which may be affecting the share. Naspers is about 22% of the SWIX Index and is capped at 10% of the Capped SWIX Index, implying that fund managers may be selling the share to reduce it to 10% of share portfolios. Meanwhile Resilient s share price is down around -34% so far in 2018, despite good results released last week. NepiRock is down , FortressB is down -45% and Greenbay These shares have contributed strongly to pushing the SA Listed Property Index down by a substantial in 2018, back to where it was over 3 years ago. It had a similar correction between October 2015 and December 2015, falling before recovering by May 2016. The good news is that the dividend yield of the sector has shot up to , the highest in over 4 years, almost as high as current money market yields.

6 NepiRock has been one of the most popular property shares over the past few years with its Focus on strong Easter European countries. It will report results on 20th February. What makes the fall in SA listed property shares even harder to understand - at least now that the Viceroy report has come out on Capitec rather than as rumoured on these property shares - is that the SA government 10-year bond yield remains low at , down from a recent high of in late October. Usually it is rising bond yields that drive property shares down, but not this time. So it does appear as if the SA Listed Property Index and unit trusts like the STANLIB Property Income Fund offer good value at current prices. The ALSI 40 Index is now down in 2018, the JSE Financial & Industrial Index is down , the JSE Mid-Cap Index is down and the Small-Cap Index The JSE Resources Index is now down in 2018 after a sharp fall from its 13 January high.

7 The JSE General Retailers Index that jumped sharply in December and again in January, has fallen back by amidst profit-taking, while the JSE Banks Index, which also jumped in both December and again in January, has corrected so far by -7% from record highs just over a week ago. The JSE Life Insurance Index has retreated by from its recent high, while other shares that had run hard lately are correcting too, such as Clicks, Dischem, Barlows, Imperial, Bidvest, Capitec, RMB Holdings and Sasol. Most shares are falling today. All-in-all, this JSE correction is probably a buying opportunity, but because the market may fall further over the next few days, perhaps one staggers one s buying over a few days or a week. Other Commentators US Market Analyst, Elaine Garzarelli Garza s quants model reading remains unchanged at a bullish (a level below 30% is a bearish signal). The S&P 500 Index is up +30% since the early November 2016 election day, and Garza expects corrections to be limited to 4-7% (currently ).

8 While investors are worried about rising bond yields and possibly more-than-expected Fed hikes, in the past the S&P 500 Index has rallied through rate hikes until eventually a recession is engineered by the Fed and an inverted yield curve appears. This means short-term rates are higher than long-term rates. Currently the fed funds rate is at , well below the of the 10-year bond yield, so the gap between the two implies that there would have to be another 5-6 more rate hikes of to produce an inverted yield curve, which is at least 12 months away and possibly longer. Meanwhile the US dollar trade-weighted index is down this year as analysts believe the tax reforms could widen the current account deficit. However, the lower dollar is good for US company earnings, which is good for shares. So far about 40% of companies have reported fourth quarter 2017 earnings, with 79% beating forecasts. Earnings are up an extraordinary +20% year-on-year in the fourth quarter and will likely be up +23% in calendar 2018, helped by the tax cut, global growth, a weaker dollar and higher oil prices.

9 Fair value for the S&P 500 Index is currently at 2,736 (based on a PE multiple of 18 times forecast earnings of 152 for 2018), meaning at 2,789 the S&P 500 Index is + overvalued. Shares usually rise 20-50% above fair value when Garza s quants model is as bullish as it is now. Economic data continues to be solid, including housing data. The US homeownership rate grew in 2017 for the first time in 13 years, while the US homeowner vacancy rate is at its lowest fourth-quarter reading in 18 years, suggesting that the market for rental and single-family homes is tight and the reason for the steady rise in home prices and rents. Manufacturing has revived around the world. An average of the world s six major manufacturing countries purchasing managers index (PMIs), a leading indicator, is at the best level in 7 years, when the world was recovering from the Great Recession. The US is entering a new era with US oil output above the historic ten million barrels a day for the first time in 40 years.

10 Also, Black unemployment is at a record low, while existing house sales and housing starts are at their highest levels in 10 years. With the S&P 500 Index up + in 2018, even after the latest correction of so far, Consumer Discretionary shares are doing best at + , then Financials at + , Health Care at + and IT at + Energy shares are BCA Research While the acceleration in average hourly earnings in January cements the case for continued gradual rate hikes this year, inflation is not about to spiral higher. Wage inflation remains muted and we await signs of a pickup in broader measures of consumer price inflation. The market is now fully priced for three rate hikes in 2018. History suggests that rising bond yields are not an impediment to rising share prices, as long as bond yields remain below 5% (currently ). BCA calculates fair value for the 10-year yield at 3% currently and they think the yield will likely peak at in this cycle as inflation returns to the Fed s 2% target.