Sygnals - delfinfc.co.za · of President Nicolás Maduro. However, OPEC and Russia have indicated that they would consider boosting oil output by up to one million barrels a day to

Page 1 Sygnals May 2018

May 2018Sygnals“The fact is this was a horrible, one-sided deal that should have never, ever been made. It didn’t bring calm, it didn’t bring peace, and it never will.” Donald Trump, President of the United States of America


Market ReviewMay brought more volatility to investment markets as geopolitical events competed with corporate fundamentals for attention. The US withdrawal from the nuclear treaty with Iran and the imposition of stringent sanctions against Venezuela led to a surge in the oil price which hovered around US$80 a barrel before falling to US$75 a barrel, raising the spectre of higher inflation worldwide. China and the US continued their tug-of-war trade negotiations, while the on/off summit between the US and North Korea added to uncertainty. Political events in Spain and Italy brought the future of the euro into question once again.

The US government imposed new sanctions on Venezuela following the sham re-election of President Nicolás Maduro. However, OPEC and Russia have indicated that they would consider boosting oil output by up to one million barrels a day to offset the lost supply.

After the White House cancelled the proposed June 12 summit with North Korea in Singapore due to the “tremendous anger and open hostility” that Pyongyang had directed at Washington, North Korea went out of its way to sound more conciliatory.

At the same time the dissonance between investors’ bullishness on the US’s economic prospects and sagging confidence in Europe found reflection in the gap between US Treasury yields and German government bonds, which reached its widest level in three years.


Month-end brought turmoil to the markets originating in Italy and Spain. In Italy, home to arguably Europe’s most problematic banking sector, President Sergio Mattarella moved to block the formation of an anti-establishment government, while in Spain the pro-market centre-right party faced a vote of no confidence. Both have rekindled fears of the euro’s fragility. While the Italian coalition attempt collapsed, the anti-establishment parties could come back stronger if new elections are called.

Italian banks have been at the heart of the sell-off. However, the negative sentiment also hit French and Spanish banks, which have sizable exposures to Italian government debt. In Italy, yields on short-dated bonds rose by more than when the euro was fighting for survival in 2011 and 2012. This forced the Bank of Italy to warn that any new government must respect EU treaties that bind eurozone countries into strict debt and deficit limits. The weakness in Italy fed through to other eurozone periphery nations’ debt yields, including Portugal and Spain.

And finally, just as the negotiations over the US/China trade war seemed to be making headway, the Trump administration announced its intention to impose 25% tariffs on US$50 billion in imports from China to be applied soon thereafter. It also planned to announce investment restrictions intended to prevent Chinese acquisition of US technology.

The US economy continued to thrive with unemployment falling to 3.9% in April, the lowest level in the post-World War II era. A separate measure, which takes into account part-time workers who would prefer full-time jobs and workers too discouraged to look for work fell to 7.8%, the lowest level since 2001. Only sluggish wage growth provided some support for the expectation that inflation may remain constrained for longer, slowing the pace of interest rate increases. The overall economy’s expansion, at 107 months in May, became the second longest on record, trailing only the 10-year expansion of the 1990s in length.

Strong US retail sales and factory data pushed the US 10-year yield through a key level to hit 3.1%, its highest since July 2011, raising worries about higher borrowing costs for companies worldwide. The US Federal Reserve left interest rates unchanged and said it expected annual inflation to run close to its “symmetric” 2% target over the medium term.


Rising US borrowing costs and a stronger US dollar had a massive impact on emerging markets, with investors pulling money out, particularly from countries with large deficits and US dollar funding needs.

Most EM currencies experienced acute selling pressure and capital flight. EM bond funds suffered the first significant spell of outflows since 2016, as a stronger US dollar raised fears about companies’ ability to repay US dollar-denominated debt. In response, Indonesia’s central bank raised interest rates for the first time in four years, Hong Kong’s monetary authorities stepped in to prop up its currency, Argentina increased rates to a massive 40% and started engaging with the IMF regarding a bail-out, and even Turkey finally raised interest rates by 3%, to 16.75%. Other countries whose currencies came under pressure included Colombia, South Africa, India and Mexico.

The eurozone slowed in the first three months of this year to an annualised growth rate of 1.7%, down from 2.7% in the fourth quarter of 2017, denting hopes of another year of strong growth. Since the start of the year, measures of output in industry and construction, as well as weaker retail sales figures, had all pointed to slower growth. Manufacturing activity slowed further in April, with the manufacturing PMI coming in at 56.2, down from the above 60 level at the start of the year. It also looks unlikely that the EU will escape the US’s aluminium and steel tariffs come 1 June. On a positive note inflation has picked up, while unemployment fell to its lowest level in more than nine years, developments that will reinforce the ECB’s belief that it is on track to meet its inflation target over the coming years. Apart from economics, political uncertainty in Spain and Italy saw bond yields rise significantly, once again putting the spotlight on the unity of the eurozone.

China reported weaker than expected investment and retail sales in April and a drop in home sales, clouding its economic outlook, even as policy makers try to navigate debt risks and defuse a heated trade row with the US. The downbeat economic news offset optimism over further foreign inflows into Chinese stocks ahead of their inclusion in the MSCI World Index on 1 June.


South Africa narrowly escaped another downgrade by the rating agency S&P, in a month which saw the rand trade in a weak R12.40 to R12.80 range relative to the US dollar. The rand fell as the narrative of rising US government bond yields and a strong US dollar hit the South African bond market, which saw large net outflows in April and May.

S&P affirmed its stable outlook on the rating and gave the new Ramaphosa administration credit for pursuing economic and social reforms. But, it signalled that it would have to see a “significant and sustained” improvement in economic growth and fiscal outcomes before it could raise its ratings. S&P also flagged the political debate over land reform without compensation as a potential risk to ratings.

On the economic front, after falling sharply in March the Absa manufacturing PMI beat expectations, rising by four points to 50.9 in April. The unemployment rate remained unchanged at 26.7% in the first quarter of 2018. However, the expanded unemployment rate, which includes discouraged workers and economically inactive citizens, rose by 0.4% to 36.7%. The unemployment rate of people between the ages of 15 and 24 years stood at 52.4%.

The Reserve Bank kept interest rates on hold at 6.5%, citing upside risks to the inflation outlook from US dollar strength and the surge in oil prices. April’s consumer price index rose to 4.5%, up from 3.8% in April.

South Africa


Venezuela

The term “death spiral” is completely justified when describing Venezuela’s oil industry. Production at the national oil company Petróleos de Venezuela SA (PdVSA) has been falling fast, while international company ConocoPhillips has taken control of Venezuela’s facilities in the Caribbean, after winning a US$2 billion legal judgment tied to Venezuela’s seizure of its assets in 2007. The Caribbean facilities were used for storage and refining processes, which blended the country’s heavy crude with lighter varieties to make it suitable for sale abroad. The issue could cut exports by as much as 500 000 barrels a day from the 1.4 million Venezuela produces. Conoco’s gambit has set off a rush by others to seize the assets that PdVSA holds outside of Venezuela, including tankers and oil cargoes.

Venezuela’s largest creditor is China which has lent PdVSA US$50 billion and a grace period on repayment of some loans. Should China demand that payments resume, the company would have to send it nearly a quarter of the oil it produces, cutting the amount of revenue it gets from exporting oil.

At the same time President Nicolás Maduro celebrated his victory in a snap election derided as a farce by the US and other countries. Maduro barred two popular opposition leaders from running, and forced others into exile. The Trump administration responded by broadening its ban on Americans buying Venezuelan debt. Venezuela’s economy is currently nearly 50% smaller than it was in 2013.

360° around the world


Argentina vs TurkeyArgentina’s peso is one of the main beneficiaries of the Turkish lira’s parlous state. The Argentine central bank tackled the peso’s decline via forex intervention and by raising interest rates to 40%, while starting talks with the IMF over the terms of financial support. The Turkish central bank, on the other hand, has for weeks been paralysed by President Recep Tayyip Erdogan’s steadfast opposition to higher interest rates, and the limited amount of reserves at its disposal. The final 3% interest rate increase was seen as too little too late.

Italy

Two anti-establishment parties came within a hair’s breadth of taking over power in Italy after they finalised a coalition agreement that challenges the constraints of the euro, the EU’s strict budgetary limits, and the rules that impose losses on shareholders, bondholders and unsecured depositors in the event of government bail-outs. The upstart Five Star Movement and the hard-right League Party sealed an agreement that sought to reboot one of Europe’s most troubled economies with a mix of euro-sceptic economic policies, billions in tax cuts, the introduction of a universal basic income and stimulus spending. The pair also promised a harsh crackdown on illegal immigration. Italy’s economy is 5.5% smaller than before the crisis, making it the only Group of 7 economy not to have returned to its pre-crisis size. Both equity and bond markets fell sharply on the news, while Fitch warned that the coalition poses a risk to Italy’s credit rating. However, in a dramatic development at month end, Italy was thrown into political turmoil as Italian president Sergio Mattarella blocked the formation of a new government, on concerns that the coalition could endanger Italy’s membership in the euro. This sparked immediate calls for fresh elections. In response, the two parties came back to the negotiating table to try and form a coalition government, triggering some recovery in the battered bond market.


UKThe Bank of England indicated it could forgo planned interest rate increases if Brexit were to be “sharper” than it expects. The BoE had previously indicated that if the economy grew around 1.75% a year, it would raise its rates up to three times over coming years. The BoE now says that Brexit has already weakened economic growth by between 1.75% and 2%. UK GDP growth dropped to a paltry 0.1% in the first quarter, its lowest rate since 2012.

Israel

US’s allies in Europe and the Middle East criticised the US decision to open a new embassy in Jerusalem, and called on Israel to restrain its forces after dozens of Palestinian protesters were killed in clashes. The Trump administration defended its decision and refused to criticise Israel’s use of force, instead blaming the Palestinian group Hamas for the bloodshed.

TurkeyThe Turkish lira bore the brunt of President Recep Tayyip Erdogan’s insistence that he would not allow the interest rate to rise, if he wins next month’s election. He also indicated that he intended to take greater control of monetary policy. Investors, who to date have given Turkey the benefit of the doubt because of its strong banking system and fiscal discipline, reacted by selling Turkish bonds resulting in the lira falling to record lows. The lira has fallen almost 20% to the US dollar since the start of the year. With inflation coming in at 10.9% in April, the central bank eventually raised interest rates by 3%.

GermanyEurope’s largest economy cooled sharply in the first quarter due to a high level of labour disputes, denting hopes for another year of stellar growth rates. Germany’s annualised growth rate slowed to 1.2% from 2.5% in the fourth quarter of last year. A stronger euro and the US’s push towards greater protectionism are leaving a mark on export-dependent Germany.


SpainSpain’s main opposition parties called a parliamentary vote in an effort to oust Prime Minister Mariano Rajoy from office, a day after a court ruled that the premier’s centre-right Popular Party benefited financially from an illegal kickback scheme during the country’s property boom. The court sentenced dozens of party members to jail and ordered them to pay tens of millions of euros in fines. The party denies responsibility and says it will appeal the ruling.

JapanJapan’s economy contracted in the first three months of 2018 on the back of weak private consumption and business investment, putting the brakes on the nation’s longest growth streak in 28 years. The world’s third-largest economy shrank at an annualised pace of 0.6%, compared with revised 0.6% growth in the final quarter of 2017. The contraction was the first since the final quarter of 2015.

IranThe US’s withdrawal from the nuclear treaty with Iran sees the reimposition of sanctions against the country. However, the impact on actual oil supplies is limited. The reduction could be as little as a net 250 000 barrels a day, as the US supply this year alone has increased by 865 000 barrels and continues to rise. Higher oil prices could have unexpected benefits for both Russia and Saudi Arabia. The IMF recently estimated that the Saudis need a price of US$88 a barrel to balance their budget.

The impact on Iran is more significant. European firms have started to pull back their investment commitments in Iran, oil companies are halting projects, shippers of Iranian oil are ceasing to facilitate oil trades, and insurance companies are considering reducing or stopping their underwriting of Iran’s shipments. Previously Iran, which is the world’s fifth-largest oil exporter and the holder of the second-largest gas reserves in the world, was seen as a huge investment opportunity. In the meantime the Trump administration has escalated its demands, putting Tehran on notice that any new nuclear deal would require it to stop enriching all uranium, and halt its support for militant groups in the region. The US also demanded that Iran withdraw all its forces from Syria, end its support for militant groups like Hezbollah in Lebanon, stop sending arms to the Houthi militia in Yemen, release all US citizens, and cease its threats to destroy Israel. Iran has refused all demands.


China vs USA

President Donald Trump threw China’s telecommunications giant ZTE Corp a lifeline, a month after ZTE was hit with an order banning US companies from selling components to the Chinese business, with the US blaming the firm for evading US sanctions against Iran and North Korea. The US has also accused ZTE and its larger rival Huawei Technologies of being a national security threat. ZTE relies on billions of dollars in component imports from US tech companies, such as Qualcomm and Intel Corp. In exchange, China agreed to buy about US$50 billion more of US goods and services, far short of the US’s goal. Just as it appeared that China might be winning the war and escaping the bulk of threatened US tariffs while giving up almost nothing of substance, the Trump administration announced that it is moving ahead with 25% tariffs on US$50 billion in Chinese imports. To date, China has shrewdly exploited Trump’s weak points: hopes for a breakthrough with North Korea, a low threshold for political pain in Republican farm states, and a readiness to play China’s game of using legal proceedings as a commercial bargaining chip.

The US is hoping to force China to cut its trade imbalance by US$200 billion by the end of 2020, slash tariffs on American products and agree not to retaliate against US actions. The US also wants China to immediately stop providing subsidies and other assistance for advanced technologies outlined in the government’s “Made in China 2025” plan, which aims to position China as dominant in high-tech industries including robotics, aerospace and computer chips. In response, China demanded that the Trump administration end its investigation into allegations that China forces US companies to transfer technology to Chinese partners, and to cease its threats to impose tariffs on as much as US$150 billion worth of Chinese goods.


Sygnia Fourth Industrial Revolution Global Equity FundThe Sygnia Fourth Industrial Revolution GE Fund delivered on its promise in 2016 and 2017 of providing exposure to the exciting sectors of the fourth industrial revolution, returning 41.8% in its first full year to October 2017. The fund also comfortably beat its benchmark, the S&P500 Net Total Return Index, which had a comparable return of 28.9%. However, since this period, the returns have been negatively affected by the strengthening of the rand/dollar exchange rate, as the rand has appreciated 10.6% from R14.17 to R12.67 to the dollar, reminding investors that returns do not come risk free, or without volatility. The fact that the fund remains ranked 3rd out of 49 funds in the Global Equity – General ASISA category for its since inception return to the end of May 2018, highlights that it is well suited for investors with a high risk tolerance, but also for investors who are comfortable with higher levels of volatility.

Some notable changes in the fund over the last couple of months have been the rise of 3D Systems, Bruker Corp and Garmin Ltd, to form the Top 3 holdings of the fund at the end of May 2018. 3D Systems is a company that engineers, manufactures and sells 3D printing products and services globally. Bruker Corp manufactures and distributes scientific instruments and diagnostic solutions globally. Garmin Ltd provides navigation, communication and information devices for automotive, mobile, wireless, outdoor recreation, marine, aviation and OEM applications.

The Sygnia Fourth Industrial Revolution GE Fund is still the best fund, in our opinion, to access exposure to global companies at the forefront of the New Economy industries. We expect it to deliver market beating returns as these companies and industries mature over the medium- to long-term, but that this would come with higher volatility than traditional global equity funds.

Fund profile


SygniaCoin - A new cryptocurrency trading platform

Sygnia announced its plans to launch a cryptocurrency trading platform in the fourth quarter of 2018. It will be the first cryptocurrency platform in South Africa backed by an established financial services company. The focus of the exchange will be to move beyond simple trading of cryptocurrencies, to launch innovative products using a quasi-ETF structure, known as “initial coin offerings”.

Apple embraces self-driving cars

Apple has partnered with Volkswagen to transform its T6 Transporter vans into self-driving employee shuttles. The chassis, frame and wheels will remain unchanged, but the new shuttles will have electric batteries, computers and other sensors. Although the car will be able to navigate autonomously, Apple will have two humans at the helm of each car, one behind the wheel to take over if needed, and one in the passenger seat to evaluate performance metrics.

4th Industrial Revolution corner


The Marshall Islands embrace cryptocurrency

The Marshall Islands decided to drop the US dollar as its official legal tender in favour of sovereign cryptocurrency. The country will issue an ICO later this year with a projected 24 million coin cap. Because the Marshall Islands is a member of the United Nations, global banks will have to support its new cryptocurrency when available.

Blockchain technology turns commercialHSBC has completed the world’s first commercially viable trade-finance transaction using blockchain, opening the door to mass adoption of the technology in the US$9 trillion market for trade finance. The UK-based bank said the blockchain trade, which processed a letter of credit for US food and agricultural group Cargill, had shown the platform was ready to be commercially adopted across the industry.


Find out more about our funds: www.sygnia.co.za/

DISCLAIMER: All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an adviser or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. We endeavour to provide accurate and timely information but we make no representation or warranty, express or implied, with respect to the correctness, accuracy or completeness of the information and opinions. We do not undertake to update, modify or amend the information on a frequent basis or to advise any person if such information subsequently becomes inaccurate. Any representation or opinion is provided for information purposes only.

The figures and values are calculated by FTSE International Limited (‘FTSE’) in conjunction with the JSE Limited (‘JSE’) in accordance with standard criteria. Figures and values quoted are the proprietary information of FTSE and the JSE. All copyright subsisting in the Figures and values vests in FTSE and the JSE jointly. The data was obtained from I-Net Bridge.

1 month 3 months 6 months 1 year 2 years 3 years 5 years

J203T FTSE/JSE All Share Index -3.5% -2.5% -4.7% 8.0% 5.1% 5.4% 9.2%

J200T FTSE/JSE Top 40 Index -3.1% -1.9% -5.3% 8.6% 4.7% 5.4% 8.9%

J210T FTSE/JSE Resources 10 Index 4.7% 13.0% 10.2% 31.8% 16.0% 1.5% -0.8%

J211T FTSE/JSE Industrials 25 Index -5.1% -5.3% -12.7% -0.6% 0.6% 5.0% 11.0%

J212T FTSE/JSE Financials 15 Index -6.7% -7.4% 4.4% 17.8% 9.7% 4.6% 12.0%

J403T FTSE/JSE SWIx Index -4.7% -5.6% -7.5% 4.5% 3.7% 4.5% 9.6%

J433T FTSE/JSE Capped SWIx Index -5.3% -5.3% -5.6% 3.6% 2.7% 3.6% 9.0%

J303T FTSE/JSE CAPI Index -3.7% -2.0% -3.1% 7.8% 4.8% 5.4% 9.2%

J253T FTSE/JSE SA Listed Property Index -5.9% 0.3% -15.1% -6.5% -1.5% 2.0% 8.4%

ALBI JSE All Bond Composite Index -2.0% -0.6% 11.1% 10.4% 11.9% 8.1% 7.3%

STeFI STeFI Index 0.6% 1.8% 3.6% 7.4% 7.5% 7.3% 6.7%

MSCI World Index In SA Rands 2.5% 7.2% -5.3% 8.4% 2.5% 9.2% 14.6%

Rand/US Dollar Exchange Rate 1.9% 7.7% -7.0% -2.9% -10.0% 1.5% 4.7%

Rand/Euro Exchange Rate -1.3% 3.2% -8.2% 1.0% -7.8% 3.6% 2.5%

Headline CPI 0.8% 1.9% 2.8% 4.5% 4.9% 5.4% 5.3%

PPI 1.0% 0.6% 1.9% 4.4% 4.5% 5.4% 5.6%

Key indicators

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Sygnals - delfinfc.co.za · of President Nicolás Maduro. However, OPEC and Russia have indicated that they would consider boosting oil output by up to one million barrels a day to