Securities how can we help you? 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. Head Office: 5 Merchant Place, 9 Fredman Drive, Sandton 2196 | PO Box 3359, Parklands 2121 | [email protected] | www.fnbsecurities.co.za Relationship Manager: +27 11 303 5910 | Dealing Desk: +27 11 303 5930 | Toll Free Trading: 0800 256 256 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.
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