STANLIB Weekly Focus

STANLIB keeps you in touch with the latest investment news:

Weekly Performance Update (14/06/2013) 
Weekly Focus (10/06/2013) 

Market Comment

• The ongoing correction in our bond market, with the 13 year R186 RSA bond yield jumping from 6.6%  a month ago to over 8% today, is hurting industrial shares, probably because of the relationship between earnings yields and bond yields  -  which hits industrial share more, especially SA Inc  rand-based shares.
  
• Last week, the big declines came from Aspen  -9.4% in the week (up 5% today), Invicta  - 8.2%, Truworths  - 8%, Firstrand   - 7.6%, Wilson Bayly Homes  - 7.5%, RMB  - 7.3%, Bidvest  - 7.2%, Clover  - 6.8%, Imperial  - 6.6%, Nampak  - 6.6%, MTN  - 6.3%, Coronation Fund Managers  - 6%, Woolies  - 5.9%, Clicks  - 5.5%, Spar  - 5.4%, Foschini  - 5.2%, Tiger Brands  - 4.8%, Nedbank  - 4.8%, Reunert   - 4.8% etc.
  
• The gainers included a strong bounce from listed property shares (up 4.4% in the week) and a few bombed out shares like African Bank - up 12.2%, JD Group - up 10.4%, Telkom - up 7.2% and the best of the lot, Brait, on excellent results, up 14% to a high for the year.
  
• The 10 year RSA 2023 bond yield has gone up to 7.6% this morning, the highest since last June, which implies that the STANLIB Bond Fund’s unit price has declined around 7.5% in the past month (see chart in main report)
  
• The chart indicates that - hopefully - we’re close to the end of the sharp correction, which has hurt all bond-related investments, including the STANLIB Income Fund, which seems to have lost about 0.5%, which make sense given that its modified duration, or sensitivity to changes in bond yields, is approximately 0.5. 
  
• The STANLIB Aggressive Income Fund has declined by around 4.7% and the 5 STANLIB Risk-profiled funds are down between 2.5% and 2.8%.
  
• Yields have shot up to the same level as last June, before the rate cut, while the bond fund’s unit price has declined to last July’s price level.
  
• The trend-line on the bond yield from the 10.8% peak during the Lehman Bros-led stock market crash in 2008 shows that the jump in yields is hopefully now hitting resistance - and therefore hopefully is about to peter out.

The Conundrum of a stronger US/Global Economy being “bad” news

• The world has never been through all the quantitative easing that we’re now witnessing.
  
• So it has been an eye opener watching the reaction of bond markets - as well as other interest sensitive markets like listed property - over the past few weeks, in response to Ben Bernanke’s comment about tapering back the US Fed’s bond buying, or quantitative easing program.
  
• Just as the Eurozone’s central bank chief, Mario Draghi’s simple “we’ll do whatever it takes” comment a year ago galvanized markets on the upside, so Bernanke’s comment about “tapering” had the reverse effect, sending bond yields up sharply and hurting share prices.
  
• The irony is that a stronger economy is good for the world, including for company profits and therefore share prices.  However, markets are undergoing an adjustment as they digest the implications of a cutting back in the bond buying (quantitative easing program), which is that bond yields are likely to rise or normalize, at least a bit, from unduly depressed levels.
  
• Last Friday the US jobs report showing 175,000 new jobs in May, which was a bit better than expected, but not strong enough to cause the Fed to curtail its bond buying program, so it was good for markets.   Employment is key for when QE will be tapered off.
Other Commentators

Other Commentators

• BCA Research’s Chen Zhao notes that in the post-war period, the average duration of a cyclical bull market is 48 months, with a total price gain of 148% in dollars. The current bull market has run for 51 months with a total price increase of 140%, leading some to predict that the bull market is near its end.
  
• However, cyclical bear markets (that follow bull markets) usually happen because of a pending recession.  The recession in turn happens because central banks have raised interest rates (monetary tightening) to curb excessive spending and inflation.
  
• Chen says that after two recessions in the past decade, the economic and financial excesses in the private sector (including the dotcom bubble of 2000 and the housing bubble of 2006) have  been cleaned up, reducing the odds of another immediate recession.
  
• Chen thinks the Fed will likely keep short-term interest rates at zero until 2015.  After that the risk of an equity bear market and an economic recession could escalate.
  *US market analyst, Elaine Garzarelli, says her proprietary stock market indicator composite declined last week to 68% from 80% the previous week, but remains bullish.
  
• Although there were some downgrades (Bloomberg Financial Conditions Index and junk bond ratio), the number of bullish investment advisors declined sharply from 52% to 46%, which is positive for markets (contrarian sign), indicating there is more cash on the sidelines to further fuel a share price rally.
  
• Garza echoes what Chen was saying, that a Fed tightening is very far into the distant future and the S&P 500 Index peaks have historically been preceded by higher interest rates.
  
• She does not expect a Fed tapering later in 2013 to affect growth because a huge and still expanding global easing cycle has created over 400 stimulative initiatives in the world, housing has recovered, consumer confidence is on an upside breakout and there is no inflation - or deflation.
  

Snippets of Info

• Turkey’s stock market fell 10.5% on Wednesday last week - the biggest fall in a decade amidst continuing clashes between demonstrators and police.  It is now -17% in the past 2 weeks.
  
• However, the market was due for a fall, notes the Financial Times, having hit all-time record high 2 weeks ago.
  
• Turkey’s economic story is a great one.  Per capital income has more than doubled in a decade; inflation has been tamed; a strong economy  has emerged from the ruins of the country’s financial crisis in 2000-01.   Its political stability has been remarkable.
  
• In the past 10 years the Istanbul stock market has risen 9 times, while Brazil’s stock market is up just 1.5 times in that period.  The main action has been privatization and public spending.
  
• UBS’s Donald Reid says it is sad to hear that the easiest and arguably most cost effective solution to solving South Africa’s electricity crisis lies in the flick of a switch at BHP Billiton’s Southern Africa Aluminum smelters. These smelters consume roughly 2000MW of electricity which is 5-6% of the grid capacity. As a comparison the latest reported estimated cost for the construction of the Medupi plant is at around R125bil and Medupi is estimated to generate 4,800MW of power at full capacity. With the extra 2000MW, according to Eskom, there would be no electricity crisis in South Africa. As it stands, load shedding risks are high and will remain so for at least the next two years.
  
• In terms of new build cost that 2000MW is worth around R50bil. Surely given that these smelters are hardly significant in BHP’s life and loss making a compromise between the government and BHP Billiton can be reached? Even an outright purchase of these businesses by the government would make sense in the greater interest of South Africa.
• In our main report, we show a piece on Google striking its first renewable energy deal in Africa with a $12m investment in a new solar power project in SA.

Economic Weekly

• Locally last week, the RMB/BER Business Confidence index fell to 48.0 in Q2 2013, down 4 index point from the Q1 2013 level of 52.0.
  
• Offshore, in May 2013, the US unemployment rate edged higher to 7.6%, from 7.5% in April 2013.
  
• The US Federal Reserve released the Q1 2013 update of the US household balance sheet on Thursday last week. In Q1 2013 US household net wealth rose by $3.0 trillion to a record high of $70.349 trillion which was boosted by a further surge in the value of financial assets. In addition, the household debt servicing cost fell further and is now at its lowest level since the data started in 1980.
  
• The Japanese economy grew at a faster pace than originally reported in Q1 2013. The revisions indicated that gross domestic product rose by 4.1%y/y in the first three months of the year.
  
• In the emerging markets, the Chinese National Bureau of Statistics reported that China's annual consumer inflation slowed in May, suggesting that the world's second-largest economy could be weakening.
  
our main report, we show a piece on Google striking its first renewable energy deal in Africa with a $12m investment