stanlib group

Market Opportunities Vaughan Henkel

SENATE GROUP June 2016

• Asset allocation

• Key focus areas for STANLIB

– US Payrolls

– Low return world – risk is important

– China – Bank bad debts limit stimulus

– ZAR – structurally weak

– South African Consumer – tailwind is absent

• Opportunities

– Offshore Property

– Bonds – almost but not quite

Agenda

2

Strongly Dislike Dislike Neutral Favour

Offshore Bonds SA Listed Property Offshore Equities SA Cash

SA Equities Non commodity SA Rand Hedge Stocks

Offshore Listed Property

SA Bonds Offshore Cash

Asset view Q2 2016 Risk adjusted basis

US monthly payrolls report (6 month average) – trend slowing May payrolls at 38,000, Hourly wage growth - OK

Single digit return forecasts means more defensive positioning A poorer risk-return outlook

China: The elephant in the room RMB 10-15trn (US$1.6-2.5 trn.) in next 3-5 years

Banks’ asset quality is deteriorating

Figures for commercial banks (excluding policy banks and rural credit cooperatives)

Source: CEIC, Gavekal Data/Macrobond Source: CEIC, Wind, HSBC

Breakdown of China’s bad debt

2015 - RMBtrn

ZAR History: Currency deviation from REER STANLIB forecast: R15 2016E, R16 2017E

Source: I-Net

60

70

80

90

100

110

120

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

SA revealed real effective (trade-weighted) exchange rate

Index

Fair value = 100

Over-valued

Under-valued

Rand is currently 17% under-valued on a trade-weighted basis.

31% of SA Income comes from social grants, pensions and remittances

(46% of South Africans receive social grants)

SA Consumer

Source: StatsSA

Percentage distribution of main source of household income by province, 2015

Global Property Developed Markets

2016 Q1 Sector Total Returns (US)

Source: UBS, April 2016

Peak occupancy


Historical REIT Occupancy (US)

Historical REIT lfl NOI growth (US)

Still healthy NOI growth


Commercial Real Estate Delinquency (US)


Global Premium / (Discount) to NAV


Yield spread between Listed Property and Bonds Global Property still cheap relative to bonds

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15

Spre

ad (

%)

FTSE EPRA NAREIT Developed Index and JP Morgan Global Bond Index Spread

Spread

Spread = Global Developed Property Yields less Developed Bond Yields Source: BNP Paribus Cadiz, STANLIB Research 31 March 2016

Current 2.65%

Average 1.51%

Bonds – almost time

0

100

200

300

400

500

600

700

800

900

1000

10/7/05 10/7/06 10/7/07 10/7/08 10/7/09 10/7/10 10/7/11 10/7/12 10/7/13 10/7/14 10/7/15

SA 5 Year CDS Brazil Embi+ Spread BBB Countries Sov Avg

Sovereign Spreads

Source: Stanlib, Bloomberg

0

2

4

6

8

10

12

14

16

1860

70

80

90

100

110

120

2011/04/15 2012/04/15 2013/04/15 2014/04/15 2015/04/15

EM Currency Index ZAR

Rand tracking EM Currencies


4.5

5

5.5

6

6.5

7

7.5

8

8.5

7

7.5

8

8.5

9

9.5

10

2011/04/15 2012/04/15 2013/04/15 2014/04/15 2015/04/15

ALBI Yield EM Yield

ALBI Yield vs EMBIG Yield


0

1

2

3

4

5

6

6

6.5

7

7.5

8

8.5

9

9.5

10

10.5

11

RSA 10 Year Yields US 10 Year Yields

RSA vs US 10 year yield


Evolution of GDP per capita

Source: Standard & Poor’s

Downgrade priced in long before action

Source: Nedbank

0.9

1

1.1

1.2

1.3

1.4

1.5

Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16

ZAR AUD CAD TRY BRL IDR MXN

Rand comparatively weaker than other EM currencies

South Africa Turkey

Brazil Indonesia Mexico

India Argentina

Poland

Thailand

Russia

Hungary

-6.0

-3.0

0.0

3.0

6.0

9.0

12.0

-10.0 -8.0 -6.0 -4.0 -2.0 0.0

CA

bal

ance

(%

of

GD

P)

Fiscal balance (% of GDP)

EM twin deficits comparison (%)

Source: Standard Bank Research

Brazil

Bulgaria China

Chile

Colombia

Croatia

Czech Republic

Hungary

India Indonesia

Mexico

Panama

Peru

Philippines Romania

Russia

South Africa Thailand

Turkey

0

2

4

6

8

10

12

14

16

AA

- (s

tab

le)

BB

B+

(sta

ble

)

BB

B+

(neg

ativ

e)

BB

B (

po

sitv

e)

BB

B (

stab

le)

BB

B (

neg

ativ

e)

BB

B-

(po

siti

ve)

BB

B-

(sta

ble

)

BB

B-

(neg

ativ

e)

BB

+ (p

osi

tive

)

BB

+ (s

tab

le)

BB

+ (

neg

ativ

e)

BB

(p

osi

tve)

BB

(st

able

)

BB

(n

egat

ive)

%

EM yield comparison (%)

Source: Standard Bank Research

9% 10% 13% 14% 22%

29% 36% 36% 36% 32% 14%

16% 18% 18%

18% 17%

17% 15% 15% 18%

10% 13%

14% 12%

14% 12%

14% 9% 9% 8% 45%

46% 44% 40%

36% 33% 25%

29% 29% 31%

23% 14% 12% 16% 10% 10% 8% 11% 11% 11%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% of total Foreign Banks Insurers Pension funds Other

Global search for yield due to low DM interest rates

Source: ABSA, Treasury

Foreign Holdings of Local Bonds Still Relatively High

Appendix

US 10-year real return is at its long-term average

Source: Bloomberg, STANLIB Research

-10%

-5%

0%

5%

10%

15%

-10%

-5%

0%

5%

10%

15%

1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

S&P500 10yr Rolling Real Return

US S&P 500 Return – Q2 2016 in US$ Various methods: 10-20% overvalued on average

Source: I-Net Bridge, STANLIB Research

SA 10-year real return at average

-10%

-5%

0%

5%

10%

15%

-10%

-5%

0%

5%

10%

15%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

ALSI 10yr Rolling Real Return

South African corrections: ZAR weakens 10% on average over 9.5 months

Source: STANLIB

Start Date End Date Comment Move ALSI PE

ALSI Capital

return - over the

prior year Recession

Yield Curve

(SA 10 year -

3m T bill)

01 Feb 1960 28 Apr 1961 March 1960 - Sharpeville -30.0% 11.76 -

30 Apr 1969 29 Oct 1971 Nifty fifty collapse and Bretton Woods -58.1% 25.64 66.5% 1.8

02 Jul 1973 30 Nov 1973 1973 Oil crisis -25.8% 15.63 35.8% 4.9

01 Apr 1974 30 Sep 1976 US Inflation post Oil crisis -37.6% 14.93 38.3% Yes 3.4

31 Oct 1980 30 Jun 1982 US Recession via Volcker -36.5% 9.09 82.4% Yes 5.7

31 Aug 1987 29 Feb 1988 Asian Crisis -42.6% 14.71 67.6% 6.2

02 Apr 1990 31 Jan 1991 Recession -19.0% 10.87 28.6% Yes -1.6

01 Jun 1992 30 Oct 1992 ERM crisis in European Monetary union -18.0% 13.89 19.8% Yes 1.9

07 Aug 1997 12 Jan 1998 Asian Crisis -27.9% 17.24 13.0% -0.6

20 Apr 1998 11 Sep 1998 Russian crisis -41.8% 17.24 6.0% -0.2

17 Jan 2000 17 Apr 2000 IT bubble bursts -27.6% 17.78 66.6% 3.2

22 May 2001 21 Sep 2001 911 and ZAR collapse -23.0% 11.97 22.8% 1.4

22 May 2002 25 Apr 2003 Unifer/ Consumer loan crisis -34.6% 13.25 23.6% 0.5

11 May 2006 13 Jun 2006 -16.7% 16.71 68.3% 0.8

11 Oct 2007 23 Jan 2008 GFC -20.0% 15.09 33.9% -1.4

22 May 2008 20 Nov 2008 GFC continued -45.4% 15.45 9.1% Yes -0.9

06 Jan 2009 03 Mar 2009 GFC continued -20.5% 9.45 -25.7% Yes -3.3

Current environment: PE is 22x, Yield curve is 2.6%, ALSI 12m return is 3%

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