The Weekly Focus - stanlib.com

1 Focus The Weekly A Market and Economic Update 12 March 2018 Contents Newsflash ..3 Market Comment .. 3 Other Commentators .. 4 Economic Update ..6 Rates ..8 STANLIB Money Market 8 STANLIB Enhanced Yield Fund .. 8 STANLIB Income Fund .. 8 STANLIB Extra Income Fund .. 8 STANLIB Flexible Income Fund .. 8 STANLIB Multi-Manager Absolute Income Fund .. 8 Newsflash The mighty bull market is now in its tenth year! Market Comment OFFSHORE MARKETS The mighty bull market turned 9 on Friday, 9 March, meaning it has now entered its tenth year! It is apparently the second longest in history. At this stage there is no apparent reason for it to end. Global growth remains good, while inflation remains muted - and therefore interest rates remain very low. In fact, despite the much better US jobs report on Friday (313,000 jobs created versus 205,000 expected), US wage increases fell back to year-on-year from in January. Remember that scared investors had sent bond yields soaring, triggering the -10% stock market correction.

2 The increase from January was lowered to , so even that was better. STANLIB Economist Kevin Lings said this morning he sees no signs of any overheating in the US economy and because of the lower wage growth, forecasters are now reverting to an expectation of three interest rate hikes in 2018 , rather than four. Apart from a token increase in UK interest rates last year, no other major country is raising interest rates, apart from America s neighbour, Canada. That is very unusual after nine years of economic recovery. Last week the global MSCI World Index gained + and has now recovered just over half of its recent correction. The S&P 500 Index in the US has recovered two thirds of its correction, while the technology-oriented Nasdaq an all-time record high on Friday. Bloomberg notes that half of the rally in this index since the 8th February low has come from just five shares, being Apple, Amazon, Microsoft, Alphabet (Google) and Intel.

3 They also note that cyclical shares, being shares that are more sensitive to the economy, continue to outperform defensive shares, which do better in a recession. The Nasdaq Index is now + in dollar terms in 2018 versus the + of the S&P 500 Index. The Information Technology sector in the S&P 500 Index is + in 2018 , easily the best performing sector so far (+38% in 2017), with Consumer Discretionary next on + , then Financials + and Health Care + Five sectors are still in negative territory (Real Estate , Utilities , Energy , Consumer Staples and Telecomms ). STANLIB started two new rand-based unit trusts last week, as well as matching exchange traded funds, one on the IT sector of the S&P 500 Index (possibly the first available in SA in rands)..as well as on the S&P 500 Index itself. The MSCI Emerging Markets Index has recovered about half of its recent correction. The lower increase in US wages has boosted emerging market currencies since Friday s announcement, because it implies potentially fewer interest rate hikes in the US this year - meaning less pressure on emerging markets.

4 UBS on Friday noted that it has continued upgrading earnings forecasts for emerging markets, with earnings forecast to grow by +19% in dollar terms in 2019 and +10% in 2018 . In particular there have been strong upgrades to bank earnings. China is forecast to lead the earnings parade in 2018 with +21%, then Brazil, Russia, India and Korea in a +16-21% growth range. UBS is forecasting an increase of +12% in the MSCI Emerging Markets Index by year-end from current levels. The MSCI Emerging Markets Index is + so far in 2018 in dollars. The developed market MSCI World Index is + The global listed property index has continued its broadly sideways move of the past 3-plus years (in dollars terms). LOCAL MARKETS The depressed SA Listed Property Index bounced up + last week as Resilient and NepiRock shares bounced off their lows. So far in 2018 the SA Listed Property Index has returned , then comes the JSE All Share Index with (+ last week), then Cash and finally the leading asset class in SA in 2018 , namely the All Bond Index with a highly impressive + (+ in dollars, which foreign investors will be very happy just months).

5 Even the JSE All Share Index has returned + in dollar terms, ahead of the + total return (including dividends) of the MSCI Emerging Markets Index. Last week was notable for the +9% recovery in the share price of our biggest share, Naspers, which is benefiting from the strong IT sector in the US, which is in turn helping Tencent. Naspers is now positive in rand terms in 2018 at + , but is still below its November record high of 4,090 rand. The JSE Mining Index has not yet recovered from its recent low, with the Index so far in 2018 . In particular the biggest share, BHP Billiton, is down so far this year, whereas the second biggest share, Anglo American, is + , a rather strange and marked difference. Perhaps it is BHP s oil sector that is hurting the share. Oil shares in the US are down so far this year in dollar terms. The Brent oil price is only down in 2018 . The price of iron ore has dropped some -10% in the past week, hurting both BHP and Anglos.

6 A welcome move on our market last week was the + bounce in the shares of Life Healthcare to a 10-month high. They fell last year. The sector has been very depressed for a while, partly due to struggling offshore investments (strong rand plus operational issues). Mediclinic bounced + last week to 101 rand, but is still -52% below its 210 rand record high from July 2016. Netcare fell last year, but as yet remains in its sideways trend of the past eleven months. The JSE Banks Index hit a new record high last week after Standard Bank s strong results, before pulling back on profit-taking in First Rand, which fell -10% in the week, but is up +5% so far this Monday morning. The JSE Banks Index is still + in 2018 , now on an historic dividend yield of (past 12 months), the lowest dividend yield in almost 3 years. The JSE Life Insurance Index also hit a record high last week and is + so far in 2018 . This is mostly thanks to the premium share in the sector, Discovery, which is up a highly impressive +66% in the past 14 months, since end 2016.

7 Sanlam is up +48% over the same 14 month period, also at a record high, so not too shabby either. Other Commentators US Market Analyst, Elaine Garzarelli Garza s quants model on the S&P 500 Index remains bullish at a reading of (out of a maximum 100%). A level below 30% is a bear market signal. The model s valuation indicator is ranked neutral, because the model regards the S&P 500 Index as currently at fair value (actually 1% undervalued), as opposed to many investors around the world who see the index as very expensive. Garza raised her S&P 500 Index earnings forecast to 156 from 152 for 2018 , thereby placing a fair value for the index at 2,808 (using an 18x fair PE ratio). The Index closed at 2,786 on Friday. But as she frequently notes, shares usually rise 20-50% above fair value when her quants model is bullish, as it is now. US money supply (M2) continues to rise, but at a slower rate of +4% year-on-year. Tax cuts are fuelling the largest amount of mergers in 18 years ($325 billion).

8 US corporate cash in the 4th quarter of 2017 was $ trillion, up +14% year-on-year. Garza expects advances in technology to keep high inflation at bay. For example, apps like GoodRx help consumers save money by finding the best local price for prescriptions. The combination of globalisation, technology and competition should keep inflation under control. BCA Research BCA s view is that while a major trade war is unlikely, trade tensions will persist. The Fed (via interest rate hikes) will end the economic cycle, not protectionism. So BCA s view is that the tariff issue does not signal the end of the US economic expansion or equity bull market. Investors should remain overweight global equities for now, but look to pare back exposure later this year. The backdrop of US economic growth remains solid. Global exports growth is in a persistent uptrend for the past 2 years. The surge in global growth occurs even as China s economy is poised to slow.

9 Although China s economy is decelerating (based on various leading indicators that BCA follows), BCA s view is that a repeat of the late 2015/early 2016 shock is unlikely - when it appeared initially that China was slowing sharply. The US economy and financial markets will benefit from an uptick in global growth, a large dose of fiscal policy (tax cuts and increased government spending), still accommodative monetary policy and a decline in regulation. BCA still thinks the Fed will raise rates by four times this year and another three or four times next year, pushing monetary policy into restrictive territory. So the bottom line is that Fed tightening (raising interest rates) will end the latest era of deregulation, easy monetary policy and stimulative fiscal policy, but not until early next year. Until then a favourable backdrop will persist for stocks over bonds, credit, S&P 500 earnings and oil. Stay long shares and company bonds and underweight duration, be more defensive with shorter-term bonds.

10 This forecast assumes that the trade spat does not degenerate into a trade war. If that occurs, BCA would recommend reducing exposure to risk assets sooner than early next year. Imports by the US of iron and steel and aluminium in 2017 amounted to only 2% of total US imports. If import prices rose by the full amount of the tariff increase, this would add less than to inflation. Producers would likely absorb about half the tariff increases in the form of lower profit margins. The fact that the US imports much more than it exports gives Trump a lot of leverage. Paul Hansen Director: Retail InvestingEconomic Update 1. SA GDP grew by an impressive in Q4 2017, helped enormously by agriculture, and shopping. During 2017 the SA economy grew by and GDP growth is forecast to accelerate somewhat further in 2018 and 2019. 2. US added a massive 313 000 jobs in February, well above expectations. But wage growth slowed meaningfully to , so less anxiety about inflation and interest rate hikes.