sa sa 2014 first2014 first2014 first quarterquarterquarter ......2014/03/01 · producers: kumba...

Financial Fitness Services (Pty) Ltd

SA SA SA SA 2014 First2014 First2014 First2014 First QuarterQuarterQuarterQuarter in Review in Review in Review in Review April 2014April 2014April 2014April 2014

MARKETS IN BRIEF – Q1: • The quarterly theme of Developed equities over Global Emerging Market (GEM) equities played out in

January, early February, however March saw Emerging equities recoup most of their earlier losses and end

the quarter only marginally lower. Although South Africa was tarnished with the same Emerging Market

contagion, it did not suffer half as bad as its GEM counterparts, ending the quarter with a very healthy

+4.3% total return and new record highs at quarter end.

• For SA, the equity gains were certainly not a steady upward trajectory. After 8 consecutive days of profit-

taking at the end of January and almost 6% lower off its highs, the JSE finally began to gain traction by

mid-February recouping all of January’s losses.

• The global risk-off sentiment played heavily on Global Emerging Market currencies in particular, as

global funds pulled money from the riskier, higher yielding countries and into recovering developed

markets. This rotation theme was largely in response to the taper of global liquidity, (ie the monthly

confirmation of a steady step-down of Quantitative Easing), some worrisome data points and weak

macroeconomic outlook from key emerging markets - China, Russia, Brazil and South Africa - as well as

geopolitical tensions in Russia/Ukraine.

• The Rand was a significant feature of 2013, losing over 19% of its value, one of the worst performing

emerging market currencies. This trend continued early in the quarter, the R/$ fell a further 6.8% and

touched 11.38/$ near the end of January after starting the year at 10.52/$. The ongoing talk of the

“Fragile Five” (being SA, Turkey, India, Russia, Brazil and Indonesia) and the funding of their Current

Account deficits in the absence of QE support, held these currencies to ransom and also resulted in some

knee jerk policy adjustments.

• Bond markets in general continued to underperform equity markets. Emerging Market bonds fell sharply

in January but found a trading range in February and March. Developed market bonds rallied in January

only to succumb to profit taking for the rest of the quarter.

• Other factors influencing SA markets over the quarter included local policy adjustments (SARB raised

interest rates by 0.5% at its January MPC), macroeconomic updates (local and global), ongoing strike

action particularly within the platinum sector, political rhetoric ahead of SA’s May 7th

General Elections,

the release of the Nkandla report and lastly foreign investor fund flow.

• Interestingly, foreign portfolio flows into / out of SA totalled -$2.58m in January, $1.26m in February and

$1.43m in March. This includes net purchases of equities and bonds.

SA ASSET PERFORMANCE – Q1: • The JSE All Share monthly equity returns saw January -2.4%, February +4.9% and March +1.8%.

• The All Bond Index reflected total returns of January -3.2%, February +2.4% and March +1.8%.

• Cash returned a constant 0.4% per month or 1.3% for the Quarter.

• Listed Property suffered early quarter losses, down 7.1% in January but recovered to post a respectable

1.8% for Q1.

• Regionally, South Africa once again outperformed many of its Emerging Market peers in Q1, the MSCI SA

Index gaining +4.9% in rand terms compared to the MSCI Emerging Market Index’s loss of -0.4%. See

Global Markets returns table.

Financial Fitness Services (Pty) Ltd.

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ZAR Returns (%) Mar Q1 2013

SA Equity (Alsi) 1.86 4.32 21.60

SA Bonds 1.79 0.89 0.64

SA Cash 0.46 1.31 5.18

SA Property 4.61 1.68 8.36

Global Equity -1.90 1.00 52.80

Global Bond -2.30 3.10 -3.38

Global Cash -2.10 0.60 5.18

Global Property -1.83 2.15 28.45

FX Spot Returns (%) Mar Q1 2013

Rand/USD 2.10 0.03 -23.80

Rand/GBP 2.40 -0.65 -26.46

Rand/Euro 2.30 0.15 -29.29

Asset Class Performance in Q1 (total return in ZAR)

EQUITIES – SECTOR and STYLE PERFORMANCES:

• Resources found support with the Rand’s demise following its dismal 2013 performance, rallying over

10% for the quarter. Financials added 6.1% whilst last year’s favourite, Industrials, were slow out of the

starting stalls, only 0.8%.

• SA sectors that re-rated during Q1 included a strong recovery in Gold Miners +42.6%, followed by Fixed

Line Telecoms +20.2% and Oil & Gas +14.6%.

• On the downside, the worst performers for the quarter were Industrial Metals -10.6% (iron ore

producers: Kumba and Arcelor Mittal), Technology -6.1%, Construction and Materials -5.8%.

• In terms of capitalisation, the larger cap Top40 stocks continued to hold their ground, rising 4.7%, Small

Caps close behind on 4.6% whilst Mid-Caps lag 1.8%.

• Style indices showed a preference of Value (low PE and low PB) over Growth, whilst Quality and Earnings

Momentum lagged.

• According to Bloombergs the biggest upgrades to 2014 earnings estimates have been in Oil & Gas,

Industrial Metals, Forestry and Paper and Gold Mining. Earnings downgrades have been most prevalent

amongst the Platinum Miners, Construction, Industrial Transport and Chemicals.

• On the whole, the All Share earnings estimates have been upgraded by 2.9% over the last quarter.

• The All Share’s price-to-book ratio stood at 2.3x at quarter end, basically unchanged from the end of

December as companies continued to deliver good earnings in tandem with rising share prices. On balance

most brokers believe that SA equities are currently fully valued and maintain a Neutral stance on equities.

However, for domestic portfolios, local equities’ potential real returns are believed to be attractive

relative to other asset classes.


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GLOBAL COMPARATIVE RETURNS US$ %

DEVELOPED MARKETS Q1 EMERGING MARKETS Q1

MSCI World 1.4 MSCI Emerging Markets -0.4

Dow Jones Euro Stoxx 50 2.0 MSCI South Africa 4.9

USA S&P 500 1.8 Brazil Bovespa 2.3

USA Nasdaq 100 0.3 MSCI China -5.9

USA Dow Jones Industrial 30 -0.2 MSCI Russia -14.4

UK FTSE 100 -0.6 South Korea KOSPI 200 -1.9

German Dax 30 0.1 MSCI Turkey 4.8

French Cac 40 2.4

Japanese Nikkei 225 (not TR) -6.4

Hong Kong Hang Seng -4.6

RAND TOTAL RETURNS % Jan Feb Mar Q1

BONDS

All Bond -3.2 2.4 1.8 0.9

1-3 Years -1.2 0.9 1.0 0.7

3-7 Years -3.5 1.7 1.4 -0.5

CASH

Cash Composite 0.4 0.4 0.5 1.3

3 month NCD 0.4 0.4 0.4 1.3

12 month NCD 0.5 0.4 0.5 1.4

GLOBAL

MSCI World Index 2.3 1.5 -1.9 1.0

MSCI Emerging Markets -1.1 -0.1 1.0 0.0

MSCI South Africa -4.1 5.1 4.5 5.3

JP Morgan Global Bond Index 7.7 -2.1 -2.3 3.1

JP Morgan Cash Index 4.2 -1.5 -2.1 0.6

BONDS, PROPERTY, CASH AND GLOBAL COMPARATIVES:

• The All Bond Index (+0.9%) underperformed SA Equities (+4.3%), Listed Property (+1.8%) and SA Cash

returns (1.3%) over the quarter.


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LONGER PERIOD RETURNS % 2 years 3 years 5 years 10 years

EQUITIES

All Share 23.0 17.6 22.0 19.5

Resources 9.3 1.7 10.1 13.6

Financials 24.4 23.0 24.6 18.8

Industrials 31.6 28.0 30.8 24.7

PROPERTY

Property Unit Trusts 13.3 15.6 18.2 19.5

BONDS

All Bond 7.3 9.2 9.0 9.2

CASH

Cash 5.4 5.5 6.2 7.8

INFLATION

Headline CPI 5.3 5.5 5.2 5.8

CURRENCIES AND COMMODITIES: • After touching its worst level in more than 5 years at 11.38, the Rand stabilized in the latter part of the

quarter. A tightening bias from the SARB, better than expected trade surplus in February, and some

repatriation by local asset managers of their foreign assets helped the rand find some normalcy.

• Despite concerns that tensions in the Ukraine might disrupt energy markets, crude oil remained in a tight

trading range for most of the quarter, spot Brent fell 3.5% over the quarter. WTI did better, helped by

news that capacity will be added sooner than expected to a key pipeline between Cushing and the coast.

• Spot Gold erased Q4’s losses, rising 6.5% after seeing demand from emerging market buyers concerned

by currency risk which lent support to bullion.

• Base metal, iron ore, tumbled 14% for the quarter, hitting a 17 month low of $104.7/tonne on March 10th

before staging a late rally. Higher Chinese port inventory levels and concerns around credit tightening in

China weighed on the market.

• The LME (London Metals Exchange) of base metals fell 5.3% with copper leading the downside as prices

fell in response to concerns about the credit-financed inventory levels and negative reads from the

Chinese economy.


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CURRENCIES COMMODITIES

SA SA SA SA Macro and Monetary PMacro and Monetary PMacro and Monetary PMacro and Monetary Policyolicyolicyolicy

ECONOMIC GROWTH: • We kicked off the New Year with a sombre outlook on the local economy after the SA Reserve Bank

consecutively downgraded growth estimates at nearly every monetary policy meeting during 2013.

We received confirmation that the South African economy grew at just 1.9% in 2013, well below

beginning of the year expectations.

• GDP growth estimates have been revised down by 0.2% to 2.6% for 2014 and 3.1% in 2015.

SA’S GDP Growth improves slightly in Q4, notwithstanding a poor economic year for the country


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INTEREST RATES: • Largely in response to the dramatic move in the Rand over the latter part of 2013 and into January,

the impact of this on inflation, as well as concerns surrounding the funding of SA’s burgeoning Current

Account Deficit, the SA Reserve Bank raised its repo rate by 50bps to 5.5% in January.

• The hike also followed on the heels of sharp interest rate hikes in Turkey, Brazil, India and other

emerging markets, and did help to stabilise sentiment towards SA – the Rand subsequently gained

3.3% in February and a further 2.1% in March.

• In its subsequent meeting in March, the SARB kept rates on hold at 5.5%, but its statement retained a

modest tightening bias in the face of an extended inflation target breach and global rate

normalisation. In its statement, the MPC expressed its awareness that too slow a pace of tightening

could undermine inflation expectations and might require more aggressive tightening in future, yet a

fine balance was required to minimize the impact on economic activity.

• Most economists expect a further rate hike at the next MPC meeting in May, ranging from 25bps to

50bps, depending to some extent on the Rand’s gyrations.

INFLATION: • The inflation outlook for 2014 was raised to 6.3%

year on year with an inflation peak at 6.6% in the

fourth quarter, well above the Bank’s upper target

limit of 6.0%. Projections for 2015 were marginally

better with a full year average of 5.8% y/y (from 6%

previously). The Reserve Bank views risks to the

inflation outlook still biased to the upside and an

inflation target breach is now expected until the

second quarter of 2015.

TRADE BALANCE AND CURRENT ACCOUNT: • SA’s trade balance in February improved to + R1.7 billion from a deficit of R17 billion in January, due

to seasonal effects and higher export volumes, which benefitted from increased Euro area demand

and a competitiveness boost from the rand depreciation since mid-2013.

• The weaker currency aided larger trade receipts and offset price declines in key commodities. With

export volumes now growing faster than import volumes and assuming no sharp slowdown in the

Chinese economy, the main challenge to a gradual external rebalancing this year comes from the

ongoing strike action at the 3 major platinum producers.

• Until now, the platinum producers have been able to meet export demand through inventories,

however going forward once depleted, the impact on the trade balance as well as current account

and economic growth could begin to become significant. And should labour unrest spill over into

the other mining sectors, which up until now have been unaffected, the potential damage to GDP

would be severe.


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SA’s Current Account Deficit improves to 5% of GDP in response to the weaker Rand

PURCHASERS MANAGERS INDEX (PMI): • SA’s measure of Production activity fell in March to 50.3 from 51.7 in February. The drop in headline

PMI is traced back to a sharp drop in new sales orders to below 50, which may be indirectly related to

the mining strike. However, current output – as captured by business activity – actually rose to 51

(from 48.4), purchasing commitments were also a bit more solid and expected business conditions

relatively steadfast.


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PRIVATE SECTOR CREDIT EXTENSION (PSCE): • Private sector credit extension rose to 8.7% year on year in February from 8.2% in January. M3 Money

Supply slowed to 5.9% year on year in February from 6.4% in January.

The The The The Global Quarter in Review Global Quarter in Review Global Quarter in Review Global Quarter in Review (with thanks Nic Spicer, PMX UK)(with thanks Nic Spicer, PMX UK)(with thanks Nic Spicer, PMX UK)(with thanks Nic Spicer, PMX UK)

GLOBAL MARKETS IN BRIEF: • Wobbles caused by uncertainty over just when central banks will raise rates, geopolitical uncertainty in

the Ukraine combined with broadly improving world economies lead to mixed market performance over

the quarter.

• Bonds performed strongly, making up for their poor performance towards the end of 2013 whilst equity

markets were range bound although Japanese equities floundered but European and Pacific ex Japan

equities performed strongly.

Equity Benchmark Returns Q1 Bond Benchmark Returns Q1 Year to date, total returns in US$ % Year to date, total returns in US$%

QUARTER COMMENT: • 1Q 2014 was a positive quarter for bonds, but a mixed one for equities.

• Emerging market worries set the tone for January (specifically political turmoil in Thailand and Turkey as

well as a sudden devaluation of the Argentinian Peso), although the worries weren’t confined to EM stock

markets as developed equities sold off as well. The US Federal Reserve’s decision at the end of January to

continue the tapering of its quantitative easing program, from $75 billion in January to $65 billion

beginning in February, did little to comfort markets although surprisingly had no real effect on bond

markets which recovered strongly from their December lows as investors sought safety.

• Most major equity indices picked up over February buoyed by ongoing signs of economic recovery, with

the notable exception of Japan which fell on news that 4Q 2013 growth was less positive than expected.

Despite generally positive markets, sentiment remained fragile as the deteriorating political situation in

Ukraine caused some market wobbles during the month.

• March was a very mixed month. Despite escalating tensions over Russia’s effective annexation of the

Crimean Peninsula dominating the news (and speculation that interest rates in the US might rise quicker

than expected), it was emerging markets that were the star performers from an asset class point of view,

buoyed by hopes that China may take steps to stimulate its economy. In fact, the Ukrainian situation


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seemed to take more steam out the performance of DM equities than EM equities, with the UK the worst

performing region for the month despite generally positive economic news, particularly with regards to

falling inflation. Japanese markets experienced worries that the sales tax increase from 5% to 8% on 1

April would dent the economic recovery

MONETARY POLICY: • Leading developed market central banks continued to maintain their extremely easy monetary policy

throughout 1Q 2014, hoping to stimulate global growth. The policy of Forward Guidance was also

continued by many of the major central banks, although there was some dilution of the idea from the BoE

and FED.

• Janet Yellen was sworn in as the Chair of the Federal Reserve Board of Governors on 3 February, replacing

Ben Bernanke and becoming the first woman to hold the position. The US Federal Reserve kept its key

interest rate target at 0.25% and in March announced the third round of tapering of its bond buying

program (quantitative easing*) from $65 billion to $55 billion per month with a further $5bn reduction in

both Treasury and mortgage-backed security purchases. There were market jitters as Yellen seemed to

suggest in mid-March that rates might go up earlier than expected, possibly as soon as April 2015 although

she later issued more dovish comments which reassured markets. The explicit link to the unemployment

rate of 6.5% before beginning to consider rate rises was dropped in favour of a broader range of

indicators.

• The ECB maintained its main policy rate at 0.25%, with Mario Draghi, President of the European Central

Bank, active mostly in making assurances that the bank’s policymakers will do all necessary to support the

region’s recovery in the face of deflation fears stoked by extremely low inflation numbers.

• The Bank of England maintained the bank rate at 0.5%. During a quarter of further positive data, the Bank

overhauled its forward guidance. Last year it said it would only consider interest rate hikes when

unemployment fell to 7 percent but as unemployment quickly approaches that level it has broadened the

focus of guidance towards a wider assessment of spare capacity (slack in the economy). The BoE did state

that the first rate hike could come sooner than previously guided, in the second quarter of next year but

with inflation falling there is less incentive to raise early.

• The Bank of Japan, under Haruhiko Kuroda, maintained its key interest rate close to zero and its massive

quantitative easing program (60-70 trillion yen of government bonds a year or about $50-$60

billion/month) in efforts to meet an inflation target of 2%.

• Certain EM Reserve Banks again raised rates. Having tightened in 4Q 2013. The Reserve Bank of India

unexpectedly raised rates again at the end of January by 0.25% to 8.00%.

GLOBAL ECONOMIES:

UNITED STATES

• US economic data was weaker than expected over the quarter, although this was thought mostly to be

due to an exceptionally bad winter. In February, US economic growth for the fourth quarter of 2013 was

revised down from 3.2% to 2.4% annualised, with weaker than expected consumer expenditure the main

reason. Sentiment was boosted during the quarter, though, by encouraging consumer confidence data

and signs that confidence in the manufacturing sector was also ticking up. Unemployment figures

remained steady at 6.7% for the last few months whilst US inflation was at 1.1% in March, falling from

higher prints of 1.5% in January and 1.6% in February.


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EUROZONE

• Data coming out of Europe confirmed the region’s recovery appears to be gaining momentum, in both the

core and periphery. Ukraine and continued unease over the region’s falling inflation rate (and attendant

fears of deflation) were wrinkles in the positive growth news. Growth for 4Q 2013 was a quarterly rate* of

0.3%, up from 0.1% for the previous quarter.

• The Eurozone’s rate of unemployment remained high, broadly stable in February at 11.9% whilst inflation

fell to 0.5% in March, down from 0.7% in February – far, far below the ECB’s target of just under 2%.

UK

• Over the quarter the UK experienced reasonably positive economic data, although the Bank of England did

warn that the recovery is not yet “balanced and sustainable”. Unemployment continued falling, down to

7.2% in the three months to January. The Office for National Statistics (ONS) did moderate its estimate of

2013 growth from 1.9% to 1.8%, but this still remains the fastest growth rate in developed Europe. UK

Inflation continued to fall, reaching 1.7% p.a. in February, below the 2% target of the BoE.

JAPAN

• Japan struggled during the quarter, with a batch of disappointing data being released and with concerns

that the impending introduction of an increase in the sales tax from 5% to 8% will stunt consumer

demand. Growth over the last quarter of 2013 was disappointing at just 1% annualised and Japan’s

leaders cut their estimate for economic growth during 2013 from 1% to 0.7%. On the positive side,

Japanese inflation was 1.5% in February, not too distant from the Japanese Central Bank’s target of 2%.

Japanese unemployment was 3.6% in February.

EMERGING MARKETS

• Emerging markets had a tough start to the year with political turmoil in Thailand and Turkey and an

extremely sharp selloff in the Argentinian Peso as well as continuing worries of capital flight due to US

tapering. Most recovered well in February though, the exception being Russia which suffered heightened

volatility over tensions with Ukraine.

• Brazil returned to growth in the final quarter of 2013, expanding at a quarterly rate of 0.7% vs a

contraction of 0.5% during the 3rd quarter. Over 2013 as a whole the economy grew 2.3%, slow for an

emerging economy. Inflation eased to 5.6% after aggressive action by the central bank in raising rates.

• India’s economic expansion slowed slightly over the last three months of 2013, growing an annualised rate

of 4.7% during the period, compared to 4.8% the previous quarter.

• China’s currency, the renminbi fell heavily against the US dollar over the quarter and the People’s Bank of

China was active in the Repo market to manage liquidity. The People’s Bank of China had to intervene to

manage excess liquidity in the market during the quarter.


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The The The The Globe in ChartsGlobe in ChartsGlobe in ChartsGlobe in Charts

Global Indices Q1 10yr Bond Yields Q1

Global GDP Growth Global Inflation

Glossary of Financial Terms

• Monetary Policy: The decisions central banks make to influence the supply of money in an economy, primarily the setting of

base rates in the economy, but also through certain extraordinary measures such as quantitative easing.

• Quantitative easing: Quantitative easing refers to expansionary efforts by central banks to help increase the supply of money in

the economy.

Financial Fitness (Pty) Ltd is an Authorised Financial Services Provider in South Africa. The information contained is given for information

purposes only and is not intended to constitute financial, legal, tax, investment or other professional advice and should not be relied upon

as such. Investments can go down as well as up and past performance is not a guide to the future.

Data sourced from Bloomberg, Thomson Reuters Datastream, SARB, Deutsche Bank, JP Morgan, Sanlam Glacier, Laurium Capital,

Prudential Portfolio Managers and SA dailies

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