investment note - Old Mutual Wealth

0 downloads 221 Views 150KB Size Report
Dec 11, 2017 - government policy. Meanwhile, listed technology group EOH also saw its share price collapse last week fol
INVESTMENT NOTE 11 DECEMBER 2017

A DRAMATIC END TO A DRAMATIC YEAR DAVE MOHR & IZAK ODENDAAL, OLD MUTUAL MULTI-MANAGERS

11 DECEMBER 2017

WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE

particularly household debt, rising faster than incomes; accelerating wage growth and consumer inflation; large budget and current account deficits; and overvalued currencies. Unsustainably high commodity

A DRAMATIC END TO A DRAMATIC YEAR

prices are another indicator for countries like South Africa. These warning signs are largely still absent, except perhaps in China, a risk area that is constantly highlighted. The other big risk is that central banks hike interest rates quickly, perhaps spooked by ‘financial stability’ worries (to take away the punchbowl before the party gets out of hand, in the famous phrase of a former Fed chair). With Friday’s payrolls report showing 228 000 jobs created in November in the US, a Federal Reserve interest rate hike this week is a near certainty. The big question is really how quickly rates will rise next year, and how the US dollar responds. A strengthening dollar can cause havoc, putting emerging market currencies and commodities

The JSE was down sharply last week as scandal engulfed one of the

under pressure. The good news is that the Fed’s interest rate view is

biggest shares on the exchange. Steinhoff International shares plunged

based on an improving economy. The fall-out for the rest of the world

after the company’s auditors refused to sign off on its latest financial

is minimal and in such a scenario, rate hikes send a positive signal.

statements and its CEO resigned.

This was the case during the previous hiking cycle, which occurred

Before its collapse, Steinhoff was the seventh biggest company in the

against the backdrop of strong growth, and therefore had virtually no

FTSE/JSE Shareholders Weighted Index (SWIX), the benchmark widely

impact on financial markets.

used by professional investors, with a 2.3% weight. A number of other

ANOTHER POSITIVE QUARTER

listed companies closely associated with Steinhoff and Chairman

Locally, the economic outlook is also improving. The economy grew

Christo Wiese also suffered sharp declines.

faster than expected in the third quarter, with seasonally adjusted real

It is not immediately clear if outright fraud is involved, but German

gross domestic product increasing at an annual rate of 2% from the

prosecutors (the share is also listed in Frankfurt) said they are still

second quarter. The prior quarter’s growth rate was also adjusted

investigating possible accounting irregularities and fraud. Either way,

upwards from 2.5% to 2.8%. Growth for the first nine months of the

it is yet another blow to South Africa’s reputation for good corporate

year compared to the same period last year is at 1%, a run rate that

governance, coming so soon after allegations that a subsidiary of

is ahead of most forecasts.

Naspers, the biggest company on the JSE, improperly influenced

From a sector point of view, the third quarter benefited from a 44%

government policy. Meanwhile, listed technology group EOH also

jump in agriculture, a 6.6% increase in mining and a 4.3% rise in

saw its share price collapse last week following a probe by the

manufacturing. The services sectors saw slower but still positive growth

Independent Police Investigative Directorate (IPID) into subsidiaries that

of 0.3%, largely due to weak wholesale sales and declining government

do business with Government. In a country where the popular view of

spending.

big business is often very negative, also among some policymakers, these are unwelcome developments.

The post-drought rebound in agriculture - responsible for 0.9 percentage

GLOBAL MARKETS SOFTER

points of the quarter’s overall growth - is clearly not sustainable, but there are other signs that point to a more lasting but subdued upswing.

The Steinhoff debacle occurred against the backdrop of a softer patch

Private fixed investment spending grew by 4.1% in the third quarter,

for global equities. It is perfectly normal for markets to pull back after

up from an 8.4% decline in the second quarter (fixed investment by

a strong run (though it is never pleasant). The S&P 500 has been

businesses has declined in seven of the past 10 quarters).

positive every month this year, an almost unheard of feat. Whether or not December is positive, global markets are still up substantially this

Household final consumption spending rose 2.6% in the third quarter,

year, supported by a healthy economic backdrop and good earnings

with spending on durable goods (cars and furniture) contributing almost

growth.

half. Spending on these big ticket items tends to rise and fall with the economic cycle much more than on clothing and food.

In contrast to corrections, big market moves are usually shifts in perceptions about underlying fundamentals (large changes in sentiment)

Real income growth is supporting the outlook for household spending

or changes in underlying fundamentals (like a recession). Recessions

and is still almost two-thirds of economic activity in South Africa. The

are notoriously difficult to forecast. All one can do is look for warning

economy’s wage bill grew by 8.1% in the third quarter compared to

signs of overheating and build-up of imbalances. These include debt,

the same quarter last year. This increase in employee compensation

2

WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE

was fairly broadly spread across sectors. Unless wage bill growth

CHART 1:

slows materially, expected inflation around 5% over the next year implies further positive real income growth.

ASSET CLASSES IN 2017, REBASED TO 100

Could Steinhoff derail this mild economic upswing? There is no indication

126

that any of the local businesses (mainly in retail) will close, leading to job losses. Importantly, there is also no sign that any of the domestic

121

banks faces a loss that threatens its viability. A healthy banking system

116

is crucial for a healthy economy. Therefore, the macroeconomic impact

111

is determined by the so-called wealth effect – households responding to a decline in their asset values by adjusting spending. It is safe to

106

say that, given its size, most equity portfolios in South Africa would

101

have had some exposure to Steinhoff. But the exposure of the typical investor or pension fund member to Steinhoff is probably in the region

96 Jan 17

of 1% to 2%, well within the range of market movements over the course of a few weeks or months. Therefore, the countrywide wealth effect is likely to be minimal. However, the market for high-end property, luxury

Feb 17

Mar 17

Apr 17

May 17

Jun 17

Jul 17

Aug 17

Sep 17

Oct 17

Nov 17

FTSE/JSE ALL SHARE INDEX

FTSE/JSE SA LISTED PROPERTY INDEX

SA ALL BOND INDEX

STEFI

Dec 17

MSCI WORLD INDEX IN RAND

vehicles and the like could certainly suffer in and around Stellenbosch,

Source: Datastream

where the company is based.

IT’S NOT ALL ABOUT STEINHOFF

CHART 2:

This is our final weekly market commentary for 2017. While the Steinhoff debacle means we are not ending the year on a high note,

SOUTH AFRICA REAL GROSS DOMESTIC PRODUCT GROWTH

the overall outlook is fairly positive globally, while locally things also appear to be on the up. We spent much of this year warning against

8

excessive pessimism, and despite political uncertainty, Cabinet reshuffles,

6

credit ratings downgrades, a technical recession and a volatile exchange rate, South African investors have generally enjoyed a good year in

4

terms of growth assets.

2

Local equities have returned 17% in 2017 despite a negative December.

0

Listed property has delivered double digit returns. With the rand–dollar exchange rate basically flat this year, the rand has not detracted from

-2

global performance from the point of view of local investors. Global

-4

equities are therefore up 20% in rand. It is only domestic bonds that have disappointed, with the return on the All Bond Index of 5.5%.

04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 17

-6 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3

THE IMPORTANCE OF DIVERSIFICATION We have also tried to highlight some of the key investment lessons

QUARTER-ON-QUARTER (SEASONALLY ADJUSTED & ANNUALISED) YEAR-ON-YEAR

along the way (for ourselves as much as our readers). While the local investment community was divided over Steinhoff’s aggressive

Source: StatsSA

debt-fuelled global expansion path, even the sceptics would have been shocked by the announcement regarding accounting irregularities. Ultimately, the only defence against such an unexpected event is diversification – a diversified portfolio would suffer a knock, but not a wipe-out. This forms the basis on which we run the strategy funds for our clients: diversification across securities (so no single share can wipe out the portfolio); diversification across regions (to benefit from a larger opportunity set and hedge against currency weakness); diversification across asset managers (to benefit from different views and investment styles); and diversification across asset classes (since the future is inherently uncertain).

3

11 DECEMBER 2017

WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE

EQUITIES - GLOBAL DESCRIPTION

INDEX

WEEK

MONTH-TO-DATE

YEAR-TO-DATE

1 YEAR

Global

MSCI World

US$

2 064.0

-0.24%

-0.63%

17.88%

17.74%

United States

S&P 500

US$

2 652.0

0.38%

0.15%

18.45%

18.08%

Europe

MSCI Europe

US$

1 752.0

0.11%

-1.07%

19.10%

21.58%

Britain

FTSE 100

US$

9 898.0

0.21%

0.69%

12.32%

13.47%

Germany

DAX

US$

1 441.0

0.98%

0.14%

16.60%

33.80%

Japan

Nikkei 225

US$

201.1

-0.98%

-0.57%

19.34%

21.78%

CURRENCY INDEX VALUE

Emerging Markets

MSCI Emerging Markets

US$

1 101.0

-1.34%

-1.78%

27.73%

25.26%

Brazil

MSCI Brazil

US$

1 944.0

-0.82%

-0.15%

16.27%

19.70%

China

MSCI China

US$

84.2

-2.08%

-2.99%

43.84%

38.17%

India

MSCI India

US$

580.2

0.78%

-0.48%

29.80%

27.23%

South Africa

MSCI South Africa

US$

528.0

-3.12%

-5.04%

16.30%

18.12%

EQUITIES - SOUTH AFRICA (TR UNLESS INDICATED OTHERWISE) DESCRIPTION

INDEX

WEEK

MONTH-TO-DATE

YEAR-TO-DATE

1 YEAR

All Share (Capital Only)

All Share (Capital Index)

Rand

58 012.0

-2.42%

-2.95%

14.53%

14.78%

All Share

All Share (Total Return)

Rand

8 235.0

-2.35%

-2.88%

17.88%

18.15%

Top 40/Large Caps

Top 40

Rand

7 324.0

-2.26%

-2.95%

21.02%

21.06%

Mid Caps

Mid Cap

Rand

15 719.0

-3.61%

-3.01%

-0.58%

1.28%

Small Companies

Small Cap

Rand

20 008.0

-1.34%

-1.15%

-2.01%

-0.34%

CURRENCY INDEX VALUE

Resources

Resource 20

Rand

2 239.4

-3.10%

-3.08%

14.38%

9.09%

Industrials

Industrial 25

Rand

15 299.0

-2.41%

-3.54%

26.93%

29.11%

Financials

Financial 15

Rand

8 746.0

-1.46%

-1.09%

12.07%

13.70%

Listed Property

SA Listed Property

Rand

2 336.1

-0.92%

-1.18%

11.08%

17.39%

WEEK

MONTH-TO-DATE

YEAR-TO-DATE

1 YEAR

-0.20%

-0.20%

8.68%

5.73%

WEEK

MONTH-TO-DATE

YEAR-TO-DATE

1 YEAR

FIXED INTEREST - GLOBAL DESCRIPTION

INDEX

Global Government Bonds

Citi Group WGBI

CURRENCY INDEX VALUE US$

946.8

FIXED INTEREST - SOUTH AFRICA DESCRIPTION

INDEX

CURRENCY INDEX VALUE

All Bond

BESA ALBI

Rand

562.9

0.81%

1.16%

5.55%

5.97%

Government Bonds

BESA GOVI

Rand

561.2

0.82%

1.16%

5.62%

6.05%

Corporate Bonds

SB JSE Credit Indices

Rand

123.9

-0.63%

-0.56%

-14.28%

-20.67%

Inflation Linked Bonds

BESA CILI

Rand

243.8

1.12%

1.25%

-0.74%

0.04%

Cash

STEFI Composite

Rand

381.4

0.14%

0.15%

7.08%

7.56%

COMMODITIES DESCRIPTION

INDEX

WEEK

MONTH-TO-DATE

YEAR-TO-DATE

1 YEAR

Brent Crude Oil

Brent Crude ICE

US$

63.4

-0.52%

0.63%

11.23%

17.41%

Gold

Gold Spot

US$

1 248.0

-2.12%

-2.12%

8.43%

6.58%

Platinum

Platinum Spot

US$

885.0

-6.05%

-5.85%

-1.99%

-5.65%

CURRENCY INDEX VALUE

CURRENCIES DESCRIPTION

INDEX

WEEK

MONTH-TO-DATE

YEAR-TO-DATE

1 YEAR

ZAR/Dollar

ZAR/USD

Rand

13.65

0.40%

0.02%

0.26%

-0.11%

ZAR/Pound

ZAR/GBP

Rand

18.28

1.15%

1.53%

-8.64%

-6.13%

ZAR/Euro

ZAR/EUR

Rand

16.07

1.59%

0.66%

-10.16%

-9.85%

Dollar/Euro

USD/EUR

US$

1.18

0.85%

0.42%

-10.85%

-10.17%

Dollar/Pound

USD/GBP

US$

1.34

1.07%

0.10%

-8.11%

-5.87%

Dollar/Yen

USD/JPY

US$

0.01

0.95%

0.95%

-2.45%

-0.18%

CURRENCY INDEX VALUE

Source: I-Net, figures as at 8 December 2017

4

11 DECEMBER 2017

WEALTH INTELLIGENCE WEEKLY INVESTMENT NOTE

THE WEEK AHEAD SOUTH AFRICA •

Manufacturing production



Consumer inflation



Current account balance



Employment



Retail sales

US •

Federal Reserve interest rate decision



Job openings and labour turnover



Consumer and producer inflation

EUROPE •

European Central Bank interest rate decision



UK inflation



Germany ZEW Economic Sentiment Index



Eurozone industrial production



Bank of England interest rate decision

CHINA •

Vehicle sales



Fixed asset investment



Retail sales

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. 5