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April 2015
Contents
Overview
Overview
A substantially stronger than expected non-farm payrolls report in the US
proved to be a key market influencing factor in the early stages of March.
The case for growth assets
While strong employment gains have been a characteristic feature of the US
economy over the past 12 months, the most recent report (February) was
well ahead of even the most optimistic forecasts with unemployment falling to
5.5% from 5.7%. Market reaction was particularly interesting with bond yields
Technical corner
rising sharply, the US Dollar strengthening further and equity markets falling
back. All of this happened in anticipation of rising interest rates. This proved to
Monthly Economic Indicators
Monthly 1 Year %
change
change
Indicators
25 Mar 15
Rand/US$
11.85
1.6%
10.4%
Rand/GBP
17.62
-1.7%
-0.6%
Rand/EUR
12.98
-0.6%
-12.4%
USD/EUR
1.10
-2.1%
-20.7%
Gold
$1198.15
-1.2%
-8.6%
Platinum
$1149.50
-3.3%
-19.0%
Oil Price
$55.39
-11.5%
-48.3%
JSE ALSI
52313.02
-1.9%
10.4%
FTSE 100
6990.97
0.6%
5.8%
S&P500
2061.05
-2.1%
10.5%
7.73%
1.3%
-8.5%
R186 Bond
be an over-reaction with subsequent disappointing economic data releases
and dovish remarks from the US Fed largely reversing the market movements
experienced in the first half of the month. Elsewhere data out of Europe was
positive although still quite muted. Eurozone retail sales showed ongoing gains
while manufacturing conditions improved in 5 of the 8 Eurozone countries
surveyed. The news out of China however continued to reflect a softening
economic environment especially on the manufacturing front, and data out of
Japan confirmed that that economy continues to struggle.
On the local front both mining and manufacturing data disappointed.
Annual mining production declined by 4.7% in January from a 3% decline
in December, while total manufacturing output fell by 2.3% year on year.
Electricity supply constraints were likely to have had a negative influence
in these areas. Annual headline consumer inflation decelerated to 3.9% in
February from 4.4% in January. Core inflation (excluding food and energy)
1800
however remained static at 5.8%. We anticipate that CPI is currently close to
1750
its low point.
1700
Market Outlook
1650
1600
1550
Dec-13
The outlook for the domestic economic environment remains constrained
Mar-14
Jun-14
Sep-14
MSCI World Index (USD)
Dec-14
Mar-15
although a still relatively low oil price should provide relief. From an equity
Figure 1: MSCI World Index (US$)
Source: I-net Bridge.
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Directors: H Mojalefa, P Dreyer, R Jayrajh, W Meyers, V Naidoo. Company Secretary: C Low
FNB Securities (Pty) Ltd, member of the JSE and an authorised financial services provider. Part of the FirstRand Group.
market perspective while a sub- par economic growth
Why we think low yields will persist
expectation is likely to continue to prove challenging for
Interest rates are still near record lows (Figure 3) and
corporate earnings, additional consumer spending power
emanating from lower fuel bills ( although higher fuel levies
partially negate this) will prove supportive. In addition long
bond yields suggest implied risk premiums are in the fair
value range which will likely continue to prove supportive for
equity market valuations.
although the expectation is that the US Federal Reserve
(Fed) will begin raising rates later this year, it is anticipated
to be a relatively shallow hiking cycle due to the absence of
(or very low at least) inflation. Meanwhile, the Bank of Japan
(BOJ), the Bank of China (BOC) and the European Central
Bank (ECB) are unlikely to hike rates in the near term as
they continue to employ looser monetary policy in an effort
Bond yields are currently regarded as representing fair
to boost domestic demand.
value. We would not anticipate too much upward pressure
from current levels on the back of a relatively benign
inflation outlook and an unchanged short term interest rate
outlook. Relatively low bond yields and a benign short term
Low interest rates are supportive of valuations which may
result in inflated asset prices and therefore lower yields.
interest rate environment underpin the outlook for listed
14
property although return expectations are still somewhat
12
muted in this area.
10
8
While a lower fuel bill is likely to improve the trade balance,
6
the current account deficit is likely to remain fairly large
4
which together with looming power shortages and a still
2
subdued economic outlook suggest the rand will remain
0
2008
relatively fragile. Offshore investment continues to retain
2009
2010
2011
2012
ECB Main Refinancing Rate
Central Bank of China Discount rate
SA Repo Rate
investment merit.
2013
2014
Federal Funds Rate
Japan Basic Discount Rate
Figure 3: Selected Central Bank Benchmark Interest Rate Histories
Source: Bloomberg, FNB Securities
3.5
Sustained quantitative easing (QE) is another factor
3
contributing to a lower yield world. While the US recently
halted its massive QE programme, the BOJ and ECB are
2.5
just getting started. In order to maintain liquidity and support
2
1.5
Dec-13
their respective economies, the banks are engaging in largescale domestic asset buying programmes (Figure 4).
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
US Generic 10 Year Government Bond Yield
Figure 2: US Generic 10 Year Government Bond Yield
Source: I-net Bridge
The higher demand for these assets may push up prices
and therefore result in lower yields.
600
Mark Appleton, Chief Investment Officer ([email protected]).
500
400
300
The case for growth assets
Following a particularly strong run in growth assets over
200
100
0
2008
2009
2010
2011
the last six years, many market commentators are now
Fed Total Assets (USD mn)
predicting lower, depressed returns, especially over the
ECB (EUR mn)
short to medium term. While we do not necessarily disagree
(returns may be lower), we are still inclined to prefer growth
assets against the current macro-economic backdrop. The
reason for this is that we find ourselves in a low-yield world
with depressed interest rates and excess savings.
2
2012
2013
2014
2015
BOJ Total Assets (JPY bn)
Figure 4: Selected Central Bank Total Assets (rebased to 2008, local currencies)
Source: Bloomberg, FNB Securities
Finally, we believe that the global savings glut is alive and
well. The global savings glut refers to a tendency by certain
countries to save more than they consume. Its origins lie in
years of current account surpluses enjoyed in the largest
What does this mean for growth assets and SA Inc?
Asian economies. These surplusses were recycled into
Low interest rates and low yields are supportive of growth
the investable universe given these countries’ consumers’
low propensity to consume. Large ‘western’ economies
assets (Figure 7). Lower yields in larger economies are also
supportive of the carry trade to emerging markets. Equities
meanwhile have sustained current account deficits for a
therefore remain the asset class of choice and emerging
prolonged period of time which have been financed by
market assets may benefit from a continued search for yield.
sizable portfolio flows from Asian surplus economies.
Amongst the emerging market players with developed,
Figures 5 & 6 show that the current account divergence
is set to continue and that global savings are expected to
continue rising.
liquid, and deep markets, South Africa is usually classed
with Russia, Brazil, India, and China – two of which are
currently facing significant headwinds. As a consequence,
we feel a little less anxious over portfolio flows, the current
The continued high demand for savings vehicles may push
up prices and will therefore result in lower yields.
account deficit, and the rand – although risks to all three of
these metrics remain to the downside.
2500
27
4.5
26
4
2000
25
24
3
1500
23
22
21
3.5
2.5
2
1000
1980
1985
1990
1995
2000
2005
2010
1.5
2015
500
2008
Gross World Savings (% of GDP)
IMF Forecast
Linear (Gross World Savings (% of GDP))
2010
S&P 500
2011
2012
2013
2014
2015
1
US Generic Ten Year Bond Yield
Figure 8: S&P 500 versus USGB10
Source: Bloomberg, BCA Research, FNB Securities
Figure 5: Gross World Savings as a % of GDP
Source: IMF, BCA Research, FNB Securities
600
By Chantal Marx, Investment Analyst ([email protected]) & Mark
400
Appleton.
200
US$ Billions
2009
0
-200
Technical corner by Mark
Huxter
-400
-600
-800
1992
1997
2002
2007
2012
2017
MTN
UK & US
China & Japan
UK & US (IMF Est)
China & Japan (IMF Est)
From a technical perspective MTN is starting to find support
at the 20000 level with money flows neutral, MACD having
Figure 6: Current Account Balances 10 Year Moving Average
Source: IMF, BCA Research, FNB Securities
turned positive and De Mark starting to turn. The RSI
however, is still trending lower. The entry level for a long
1000
800
trade is at 20000 with a tight stop loss at 18700. Profit
600
taking levels for conservative traders will be at 21400 while
aggressive traders can look at 22000.
400
200
From a fundamental perspective we stay cautious on the
0
Nigerian macro fundamentals and Naira cross rate volatility.
-200
-400
2008
MTN still benefits from ongoing data demand and net
2009
2010
2011
2012
2013
US Portfolio Flows (US$ bn, rolling 12 months)
Figure 7: US Portfolio Flows
Source: Bloomberg, FNB Securities
2014
population growth in Nigeria, that can support mid-single
digit revenue growth. On a 6.5% dividend yield, the MTN
share price is well supported at current levels, but we would
look to take profits at 25000. A tecnical graph is included on
Page 4.
3
Figure 9: MTN Technical Overview
Source Iress
Contact us
FNB Securities Office: 0860 001 652
Toll free trading: 0800 256 256
Relationship manager:+27 11 303 5910
Dealing desk:
Website:
+27 11 303 5930
www.fnbsecurities.co.za
Disclaimer: The information and opinions contained in this document are recorded and expressed in good faith and in relance on sources believed to be credible.
However no representation, warranty, undertaking or guarantee of whatever nature is made or given concerning the accuracy and/or completeness of such information
and/or the correctness of such opinions. FNB Securities will not accept any responsibility for any investment decisions based on the information and opinions contained
in this document.
FNB Securities (Pty) Ltd (Reg no: 1996/011732/07), a member of the JSE and an authorised financial services provider. Part of the FirstRand Group.