Focus

The Weekly

A Market and Economic Update 17 July 2017

Contents

Newsflash ..................................................3 Market Comment ...................................................................................................................... 3 Other Commentators ............................................................................................................... 5

Economic Update ......................................7

Rates ....................................................... 11 STANLIB Money Market Fund............................................................................................... 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

The global stock market has in the midst of the northern hemisphere summer, suddenly spiked up to a new record high

Market Comment The global stock market has in the midst of the northern hemisphere summer suddenly

spiked up to a new record high (see chart below), putting it an extraordinary +31.9% above

its -20% correction low last February.

I hope those poor souls who sold last February managed to get back in!

The trend looks powerful, pierced briefly only during a -5% correction between last

September and early November.

So far in 2017 the indexs total return is +12.9% in dollars, or +7.4% in rands.

Is it expensive or not? Garzarelli (see below) is now using 2018 earnings in her quants

model and based on that estimate for the US, she calculates the S&P 500 Index is now -

6.7% undervalued.

Source: I-Net Bridge

The upbeat news this morning on Chinas economy is important for sure, with factory

activity up nicely (+7.6% year-on-year) and fixed asset investment firm (+8.6%), both better

than expected. This could well be positive for commodity prices and mining shares.

We have seen a decent bounce in the iron ore price and copper is looking firm too. The

weaker dollar is positive for commodity prices.

The dollar was at 104 to the euro in early January and is now at 114.5. Thats a serious

loss of value relative to the worlds second biggest currency.

The MSCI World Index is being assisted by the weak dollar, because the 47.5% of the

MSCI World Free Index that is in other currencies is now pushing the dollar-priced index up

as those currencies translate into more dollars.

Meanwhile the MSCI Emerging Markets Index, which rose by +4.5% in dollars last week,

helped too by currency appreciation versus the dollar, appears to be breaking a 6-year

downtrend.

So far in 2017 the MSCI Emerging Markets Index has a total return of +23.4% in dollars or

+17.3% in rands. In rand terms it is at an all-time record high.

In fact the chart in rands is an amazing one to see (below), showing an annualised return

since the low in April 2003 of +16.4% per yearin rands.

The MSCI World Index has returned +13.4% per year over the same 14-year period in

rands.

Sowho said we should avoid emerging markets because we are an emerging market?

The MSCI China Index is now almost 28% of the MSCI Emerging Markets Index, whereas

the MSCI South Africa Index is 6.6%. There is some duplication with MSCI SA in that

Tencent is either the biggest or 2nd biggest share in the MSCI China Index.

Source: I-Net Bridge

Sowith inflation lower than anticipated (1.6% in the US and still low in most countries,

including only 1.5% in India and China), interest rate hikes may be delayed in the US and

elsewhere too. With growth looking quite good and interest rates still very low and

importantly with earnings growth looking good in the big countries, the stock markets still

have a decent tailwind.

Locally, our market is up +4.3% over the past two weeks. We thought the rand would

weaken, which it did for a week, but then it powered back to 13 to the dollar last week and

today. The ALSI still managed to gain +3.3% last week, even with the rand +2.7%.

There is quite a high probability that the SA Reserve Bank may cut interest rates this week,

so we have seen a bounce in depressed General Retail shares, although they are still -25%

from their levels last August, also a bounce in banks and other financials.

Last week Naspers bounced +9.6% after a -12% correction (following Tencents bounce),

Mr Price +8.7%, Standard Bank gained +5.4%, Capitec +4.8%, First Rand +4.1%, MTN

+5.1% and even Sibanye Gold +4% plus the big mining shares bounced too, with BHP

+3.7%. Anglo American is +22% from its low last month, after correcting by -33%.

SA industrial-related shares are known to do well after interest rate cuts. If the Reserve

Bank doesnt cut this week, it may do so in September.

There is no question the JSE would do better if the rand weakened. The current weak dollar

is holding back the rand-hedge shares.

The rand has been broadly trading sideways versus the dollar for the last 5 months,

probably in line with emerging markets. So technically (chart-wise) it could be forming a

base from which to weaken a bit; but no-one really knows when it may happen.

Source: I-Net Bridge

Looking at the graph above of the SA asset class returns so far in 2017, one can see how

the three risk-oriented asset classes have bounced smartly over the past few weeks, with

the red line (All Share Index) now in the lead (+7.4% total return), followed by the SA Listed

Property Index (blue line) with +5.9%, then the All Bond Indexs +5.3%...all ahead of Cashs

+4%.

The ALSI will be interesting to observe over the next month or so. Will it peak again at the

54,000-55,000 level, as it did in May and on at least three other occasions in the past three

years, or will it finally manage to break out and up? At this stage, no-one knows. It may well

need a weaker rand in order to break out.

The break-out upwards is likely to happen somewhere along the line, but just when, we

dont know.

Other Commentators US Market Analyst, Elaine Garzarelli

The trade-weighted dollars loss in value of almost -7% so far in 2017 lifts US multinational

earnings, increases the chances that commodity prices rise and boosts US exports.

Garzas quants model improved to 73% from 71% last week, remaining in bullish territory.

Some investors are worried about geopolitical risks (e.g. N Korea), stock market valuations,

Fed tightening and Trump policy uncertainties.

Garza is forecasting earnings growth of +21% in 2017 in the US and +14% next year, which

seem to be very high expectations. Her PE (price-to-earnings) model, now based on 2018

earnings, shows fair value for the S&P 500 Index of 2,628, which means the S&P 500 Index

is actually now -6.7% undervalued, no longer overvalued, as it was based on 2017

earnings.

The fundamentals supporting consumer spending, which represents two thirds of economic

growth, such as a strong job market, good income and wealth gains and high levels of

consumer confidence remain positive.

Income tax cuts next year would be an additional fuel for spending growth and it would

raise the personal savings rate.

Garza believes consumer spending will continue to be an engine of US economic growth

going forward.

Household finances have improved due to the strength of employment, real incomes, share

and mutual fund prices and home values. Household net worth is at record levels.

Rising home ownership among adults, low inventories of homes for sale, rising prices and

homebuilder optimism should lead to more construction and lift spending on durable goods.

Garza is looking for a solid pace of economic growth in the US for at least the next two

years.

She believes a US recession is years away.

BCA Research

BCA sees limited downside risks in the Chinese economy in the near-term.

The company profit cycle recovery has continued to unfold and business confidence has

improved sharply, both of which are conducive to private sector expansion.

So the case for a modest upturn in private capital spending continues to strengthen.

Also the risk of a significant housing growth slowdown due to the governments tightening

measures, a major concern amongst investors earlier this year, has abated.

Housing starts have continued to improve, which should lift real estate investment going

forward.

Meanwhile, global equities broke out of their two-month consolidation last week, to new

record highs.

A strong earnings season, upbeat guidance about the road ahead and reduced geopolitical

uncertainty have spearheaded the breakout and financial conditions have eased

substantially, falling to multi-year lows.

Leading economic indicators signal that the global econ