The Weekly Focus - stanlib.com

1 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 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.

2 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.

3 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 so far in 2018, while the Nasdaq Index is + Oil-related shares were the big gainers last week, unsurprising considering the 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 , having gained around + over the past week.

4 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 + last week to be + so far in 2018, regaining its lead, now ahead of Consumer Discretionary s + 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 Consumer Staples are the worst at 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).

5 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 is comfortably well below these levels and gradually higher short-term rates should not be problematic for equities in the short-term.

6 Local Market Comment There was a small improvement in local equities and local listed property last week, with property improving slightly to total return so far in 2018 (from -15%) and the JSE ALSI improving to (from ). The All Bond Index improved to + (from ). But obviously both equities and property continue to be very disappointing after 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.

7 Below we provide a longer-term perspective on the SA Listed Property Index, which shows an amazing return of + 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 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%.

8 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 years between 480 rand 360 rand (now 427). Other Commentators US Market Analyst, Elaine Garzarelli Garza s quants model reading rose to last week (out of a maximum of 100%) from due to the upgrade of her bullish sentiment indicator.

9 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 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.

10 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.