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ISSUE NO. 1 // MARCH 2018
PEGASUS WEALTH MANAGEMENT
CONNECT MAGAZINE SOUTH AFRICA HAS SPOKEN It has been a tumultuous time of high anxiety and challenge for us all
THE WINDS OF CHANGE An editorial exploring presidencies, corruption and drought
PHOTOGRAPHED BY IAN CASTENADA
ONE YEAR OF TRUMP Ways to hedge risk through thematic investments
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THE WINDS OF CHANGE
Editorial by Pegasus Wealth Management MD, Dion Desaunois
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BUDGET 2018
Here's what you need to know...
Page 9 ONE YEAR OF TRUMP
In spite of the recent correction, equities remain in bull-market territory...
Page 17 SOUTH AFRICA HAS SPOKEN
We have already seen a significant improvement in sentiment in the period immediately following the ANC elective conference
Page 19 RANDS, BONDS STRENGTHEN ON ECONOMIC GROWTH
Positive growth boosts chances of avoiding a downgrade by ratings agencies, analysts say.
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THE WINDS OF CHANGE EDITORIAL BY DION DESAUNOIS
We welcome you to our first quarterly newsletter and trust that you find the articles of interest. POLITICS, ECONOMY AND DROUGHT
As we roll into March, we do so with a lot of hope in that the new President, Cyril Ramaphosa and his newly appointed cabinet will make a difference and the necessary changes in government will take place; that the seemingly endless corruption will be stopped, our economy will recover, PEGASUS WEALTH MANAGEMENT
our country will be taken back. In 2017 we saw many changes and much came to light about the true state of the nation, so we hope that the criminals will continue to be outed and that justice will be done. We hope that the terrible drought will end and a new water-wise way of living will be implemented, so that we are never again in such a position. We are certainly looking forward to a much better 2018 and wish all of you the very best for the year ahead.
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PEGASUS WEALTH MANAGEMENT
“Wealth is the ability to fully experience life.” ~ Henry David Thoreau
“It is our choices, that show what we truly are, far more than our abilities.” ~ J. K Rowling
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`HERE'S WHAT YOU NEED TO KNOW
BUDGET 2018 Written by Monique Vrey
(Absa)
On 16 February 2018, the Minister of Finance, Malusi Gigaba delivered the 2018 Budget Speech after much anticipation. But with so much being said in a short space of time, it’s easy to lose track of all the important announcements – and ultimately how they affect your pocket. So, to make it easier for you, we’ve summarised and simplified everything that you need to know right here in one place. Want to know a bit more about these changes? Here’s a list of some other important things you need to know: NOMADIC
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VAT increased from 14% to 15% For the first time since 1993 VAT has increased from 14% to 15%. This means that government will be able to raise an additional R36 billion in 2018/19 alone – an amount that will cover about R23 billion of the current government debt. But, they’ve done their best to shield the poorest South African households, by keeping the current zero-rated VAT on basic items such as maize meal, brown bread and rice.
No inflation adjustment for the four wealthiest income tax brackets Government will raise almost R7 billion through lower-than-inflation increases to personal income tax brackets and tax rebates. The top earners will bear the brunt of these increases – while the bottom three personal income tax brackets as well as the primary, secondary and tertiary rebates will be partially adjusted for inflation through a 3.1% increase, the top four brackets will remain unchanged.
No wealth tax, but… While there has been much speculation about the introduction of a wealth tax – which would’ve meant that wealthy people could possibly be asked to make an annual payment tax on the sum of their assets – nothing with regards to this has been announced. Minister Gigaba did however increase the ad-valorem excise duty rate on luxury goods from 7% to 9%. Estate duty will also increase from 20% to 25% for estates of R30 million or more. Page 6
Higher fuel levies The general fuel levy will increase by 22 cents per litre while the Road Accident Fund levy will rise by 30 cents per litre. This basically means that everyone – no matter which method of transport you use – will fork out more to get from point A to B.
Medical tax credit remains in place, but… Medical tax credits have not been abolished, but will only increase from R303 to R310 per month for the first two beneficiaries (2.3%), and from R204 to R209 per month (2.5%) for the remaining beneficiaries. “Over the next three years, below-inflation increases in medical tax credits will help government to fund the rollout of national health insurance,” the budget review stated. Government also indicated that it was concerned that certain taxpayers might be “excessively benefiting from this rebate, specifically in instances where multiple taxpayers contribute toward the medical scheme or expenses of another person. Where taxpayers carry a share of the medical scheme, contribution or medical cost, it is proposed that the medical tax credit should also be apportioned between the various contributors”. PEGASUS WEALTH MANAGEMENT
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#FreeEducation is becoming a reality
Government seems to have a plan to start funding free education, because R57 billon has been allocated to free tertiary education over the next three years. This means that students from poor and working-class families will be prioritised. “First-year students with a family income below R350 000 per annum at universities and TVET colleges in the 2018 academic year will be funded for the full cost of study. This will be rolled out in subsequent years until all years of study are covered.” Apart from this, returning NSFAS students at university will have their loans for 2018 onwards converted to bursaries.
State-owned companies will be turned around
It’s been the elephant in the room and government has announced that they will focus on reforming SOCs. This is because entities like Eskom and SAA have been a huge burden on government coffers amid allegations of mismanagement and corruption. “Some [SOCs] will require restructuring with equity investment. In the coming year, government may be required to provide financial support to several SOCs which could be done through a combination of disposing of non-core assets, strategic equity partners, or direct capital injections,” Gigaba said. Apart from these announcements, government debt is projected to stabilize in 2022/23, with an anticipated growth of 1.5% in 2018, rising to 2.1% in 2020. PEGASUS WEALTH MANAGEMENT
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ECONOMICS
ONE YEAR OF TRUMP A blogpost written by Brooks MacDonald www.brooksmacdonald.com
January marked Donald Trump’s one-year anniversary as US President. So far, his tenure has proved controversial and divisive, both domestically and abroad. His attempts to take credit for the performance of the US economy and equity market should be taken with a pinch of salt, particularly given the considerable momentum carried over from his predecessor’s term and the strength of other asset markets around the world. However, he has certainly had an effect on financial markets. Risk assets rallied strongly immediately following his election, partly because investors thought it would lead to the implementation of progrowth and business-friendly reforms. Since, speculation surrounding his policies has continued to drive rotations in performance leadership among the various industry sectors within the US equity market. NOMADIC
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In spite of the recent correction, equities remain in bull-market territory...
Equity markets remain in one of the longest bull markets in recorded history. In recent years, this has been facilitated by a ‘Goldilocks’ environment of stable, positive economic growth, a low cost of financing and subdued inflation. However, the ongoing strength of the global economy, which has narrowed the output gap, and the combination of easing fiscal policy at this stage in the cycle within the US, has resulted in many market participants questioning how long this environment will persist.
While many of his actions have attracted wide criticism, investors should focus on those with the potential to alter the investment backdrop. Some commentators argue that Trump’s unpredictability has undermined his credibility. Others have gone further, stating that his incongruous style is having an adverse impact on the US’s longer-term international standing.
While both of these statements are debatable, there is clear evidence that Trump’s domestic popularity has waned, with his approval rating having fallen to the lowest level of any US president in their first year in office (Figure 1). Fortunately, a president’s political popularity is not always commensurate with the level of investor sentiment, as has been evident over the past year. However, some of his policies are consequential for asset markets and in this article we discuss how some of these could affect the global economy and investment backdrop in the coming year.
Trump's approval rating
Figure 1: Trump has seen his approval rating decline since his inauguration as he has failed to fulfil many of his campaign promises, while also being criticised for a number of controversial actions.
Source: Thomson Reuters Datastream
Taxation Tax reforms have been highly anticipated and the market’s reaction shows they will provide a boon to investors. Trump’s administration finally managed to fulfil his promise to reform the US tax code in December. Named the “Tax Cuts and Jobs Act of 2017”, the legislation provided the first major change to the US tax system in decades. It also provided Trump with his first major legislative victory. The reforms have been a key driver of risk assets’ strong performance in early 2018, with the speed of its implementation evidently surprising some investors; this is understandable given the Republican Party’s failure to repeal and replace Obamacare earlier in 2017.
As expected, the reforms are in line with Trump’s probusiness philosophy…
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Broadly speaking, the Act’s key elements include permanent tax cuts for corporations (the corporate tax rate reduced from 35% to 21%) and temporary cuts for individuals. There are also various other intricacies, including a provision offering companies with a one-off opportunity to repatriate capital held overseas at a reduced tax rate. Trump has argued that the Act will make the US a more attractive place for businesses to locate, thereby repatriating jobs and further facilitating his ‘America First’ mantra. However, the new US corporate tax rate remains higher than many countries around the world, for example Ireland (12.5%), where large US companies such as Apple and Google operate significant parts of their businesses.
…and they should benefit the economy in the coming years.
While tax cuts are generally positively received, critics have suggested that these reforms disproportionately benefit corporations and the wealthy. Indeed, some commentators have suggested that the reforms will allow Trump to receive a larger proportional tax cut than the average middle class family. Like Obamacare, it was passed with partisan backing alone and polls show that many Americans perceive it as mainly benefitting others. Despite this, it will still benefit individuals and small businesses, raising incomes and supporting consumption growth. It could also catalyse an increase in corporate investment, thereby boosting demand and increasing productivity over the medium term. Overall, it should have a positive effect on broad economic growth in the coming years, with implications for both the inflation outlook and the Federal Reserve’s (Fed) monetary policy projections.
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However, the benefits will not be without cost, particularly over the longer term. The boost to growth should offset some of the cost, but it is estimated that the Act will add around $1.5 trillion to the nominal US government debt over the next ten years. Treasury issuance will have to increase to fund the tax cuts, notwithstanding savings in other areas, and this will have ramifications for both bond yields and, therefore, equitymarket valuations. Furthermore, the timing of this fiscal stimuli is questionable, given that the US economy is already nearing full employment.
America First Trump is also looking to boost the domestic US economy through other protectionist policies...
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The recently implemented protectionist trade policies over the remainder tax reforms support of his term. He has refused to nominate a US Trump’s ‘America First’ judge to the World Trade Organisation’s (WTO) FOUNTAIN mantra, but they provide dispute court and this has led some only a single element of his commentators to question whether it will be broader policy agenda. He able to continue as a global arbiter on trade. OF YOUTH has also criticised some of Furthermore, we believe he is preparing to make HOW SAMANTHA the US’s current trade changes to the North American Free Trade ANDREWS STAYS arrangements and been Agreement (NAFTA) between the US, Canada YOUNG AT 40 forthcoming in his desire to and Mexico. His hope is that protectionist amend or cancel them. reforms will restore lost manufacturing jobs in Increased globalisation has the industrial heartlands of the United States, widely been credited with which have a strong Republican presence. While increasing overall global his hypothesis is debatable, critics argue that output in recent decades, as employment has generally risen during it allows nations to specialise in areas where they have competitive advantages. However, HIS STRATEGY Trump has argued that it has been detrimental to the US in aggregate. His IS LIKELY TO administration points to the large US trade deficit as evidence that economic HAVE activity has moved overseas because consumers and companies prefer to buy INFLATIONARY cheap imports ahead of more expensive domestically-produced IMPLICATIONS goods.
…with little apparent periods where imports have increased, any regard for the global cancelations or phasedowns of existing trade arrangements are likely to prove negative for economy.
overall global growth. With global supply chains With Trump having abruptly optimised to reduce prices and improve withdrawn the US from the margins, any increase in tariffs or ‘on-shoring’ Trans-Pacific Partnership to higher cost countries would also likely trade pact shortly after generate inflationary pressures, which could coming into office, he is impact corporate profit margins. expected to seek to implement
As such, it is particularly important for investors to remain cognisant of their exposure to businesses and countries which could suffer from abrupt changes to international trade rules.
…but we do not believe he intends to pursue it to the point of global recession. One factor that provides us some comfort is that Trump has tempered his tough rhetoric towards China, a country he has previously labelled a “currency manipulator”. This provides encouragement that a trade war between the two dominant global economies is likely to be avoided. Despite this, there still remains a risk that trade talks will deteriorate.
The economy, inflation and policy. The US economy has strengthened Robust consumption growth has been underpinned by further employment gains, high levels of consumer confidence and a resilient Page 12
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housing market. The industrial and manufacturing sectors have also benefitted from recoveries in oil production and mining activity, while purchasing managers’ indices (PMI) are indicating further expansion as we move into 2018. Despite inflation data repeatedly having underperformed expectations in 2017, the Fed continues to assert that the factors holding it back are idiosyncratic and transitory. As such, it has continued to raise interest rates and begun reducing the size of its balance sheet.
Inflationary pressures are building, but longer-term structural factors continue to provide deflationary headwinds. While inflation is expected to rise to just above the Fed’s target level of 2% (Figure 2), this could take some time. As such, our core market view remains that the current ‘Goldilocks’ low inflation, stable growth economic environment will continue in early 2018. Nevertheless, this is a consensus view that supported risk asset prices in 2017. As such, we see the possibility of inflation accelerating more quickly than expected as one of the key risks facing asset markets in 2018.
Such a situation could cause central banks to tighten monetary policy more quickly than expected, catalysing a sell-off in sovereign bond markets. In turn, this could undermine equity market valuations, cause the US dollar to strengthen and potentially destabilise the global financial system. Such events would be particularly detrimental to assets which benefitted from a weak dollar and accommodative financial conditions throughout 2017, such as commodities and emerging market equities.
US inflation expectations
Figure 2: Five-year inflation expectations jumped after Trump's election as investors anticipated the implementations of pro-growth reforms. However, they retracted as he struggled to implement the changes he had promised in his election campaign. Expectations increased slightly after it began to appear that tax reforms would be passed towards the end of 2017, but they remain relatively subdued and do not yet present a threat to the 'Goldilocks' environment.
Source: Thomson Reuters Datastream
With inflation subdued for so long a change in expectations could have larger-than-expected consequences. To provide some context on the current environment, the Fed’s projections already show that it expects to implement a further three interest rate hikes in 2018, while financial markets currently expect only two. However, there are signs that investors’ expectations are beginning to move towards the Fed’s, with inflation expectations rising and the benchmark ten-year treasury yield appearing to have recently broken out of its multi-decade downtrend. While a slight increase in the market’s expectations of the path of US interest rates could provide a short-term headwind to risk sentiment, a greater risk would be if the Fed’s central projections on inflation and rates were to rise markedly. Such a situation could occur if inflation were to begin accelerating quickly. Page 13
While economic data continues to support our Our positioning core view, it is prudent to understand the risks We expect the that Trump’s actions could have on investment Goldilocks FOUNTAIN portfolios through their potential impact on environment to persist, inflation. This is particularly true now, as the at least in the short Fed’s rate hikes and low inflation expectations OF YOUTH term, and have have caused the spread between short and H O W S Aour M Aequity N T H A long-term US government bond yields to fall to maintained A N D R E W S S T A Y S its lowest level since the global financial crisis. market exposure in YOUNG AT 40 This implies that a rise in inflation presents an early 2018. asymmetric risk to asset markets.
Despite the potential impact of the recent tax reforms on growth and inflation, the WE HAVE Fed’s manufacturing capacity utilisation rate is indicating that significant spare IDENTIFIED capacity still remains within the economy and this should act as a headwind to any WAYS TO intensification of inflationary pressures. In any case, there is a large differential between HEDGE THIS US equities’ earnings yield (around 5.4%) and that of ten-year treasuries (2.5%). RISK THROUGH Furthermore, US corporate earnings growth remains robust and will be boosted by THEMATIC the recent tax reforms. These factors should provide some support to US equities, even if INVESTMENTS treasury yields begin to rise.
However, rising inflation presents a key risk to our core thesis.
Investors can protect against the risk of accelerating inflation by gaining exposure to assets which will benefit from a steepening of the yield curve. One such asset class is financial equities, specifically banks. Traditional banks make a profit from the difference between longer-term rates, which they lend at, and the shorter-term rates at which they are able to borrow. PEGASUS WEALTH MANAGEMENT
Should this differential widen, the earnings of retail banks could increase meaningfully. We note that investment banks are also beneficiaries of the continuing financial deregulation that the Trump administration is pursuing.
…and investment style changes. Another way to protect portfolios is to shift the investment ‘style’ of equity exposures. ‘Value’ stocks are generally short-duration assets which are cash generative, whereas ‘growth’ stocks are longer-duration assets whose valuations are predominantly based on future cash flows. As such, when rates move they will have a larger proportional impact on the valuations of growth stocks and when they rise this will favour a value style of investing over a growth style. Furthermore, certain sectors, such as technology, tend to have a higher constitution of growth companies, whereas others, such as telecoms, tend to be represented by value stocks. Given this, any rise in inflation expectations should cause rotation within equity markets, as was seen late in 2017. Page 14
Ultimately, it is sensible to balance portfolios at such times, in order to reduce risk through diversification. While there are also many external factors influencing US asset markets, investors should give due consideration to the potential impacts of the recent tax reforms and possible changes in global trade arrangements. As a result of these and other risks, we have sought to maintain balance within our clients’ portfolios so that they can perform well against a variety of market backdrops. We also believe that the risks presented by Trump’s policies support an active approach to portfolio construction. We note that trade and tax are just two areas where sudden changes can cause dramatic divergence in asset performance within equity sectors and markets; there are numerous other mechanisms through which Trump could generate asset market volatility, both domestically and overseas.
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Figure 3: There are a number of political and economic forces with the potential to fuel inflationary pressures. Through this mechanism, they could affect US monetary policy and dramatically alter the investment backdrop. This would have implications for the outlooks of many asset classes.
Source: Brooks Macdonald
Important information This article is intended for professional advisers only and is not intended for use by retail clients. While the information in this article has been prepared carefully, Brooks Macdonald gives no warranty as to the accuracy or completeness of the information. The performance indicated for each sector should not be taken as an expectation of the future returns. Investors should be aware that the price of investments and the income from them can go down as well as up and that neither is guaranteed. Past performance is not a reliable indicator for future returns. Investors may not get back the amount invested. Changes in rates of exchange may have an adverse effect on the value, price or income of an investment. Investors should be aware of the additional risks associated with funds investing in emerging or developing markets. The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis of it. This document is for the information of the recipient only and should not be reproduced, copied or made available to others.
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SOUTH AFRICA HAS SPOKEN KIRSHNI TOTARAM GLOBAL HEAD OF INSTITUTIONAL BUSINESS (INVESTEC) Over the past 9 years, South Africans have suffered a prolonged period of political and policy uncertainty. A culture of patronage and corruption has been ripping South Africa’s young democracy apart. This has been accompanied by low economic growth, very weak business and consumer confidence and a material deterioration in institutional quality and investigative capacity. While many of these factors coincided with the global economy’s slow and painful recovery from the global financial crisis, some were the direct consequence of decisions made by the political leadership of the country. It has been a tumultuous time of high anxiety and challenge for us all. We have already seen a significant improvement in sentiment in the period immediately following the ANC elective conference in December 2017, as the country looks to the new leadership to right many of the wrongs of the previous administration. On February 15, 2018, Cyril Ramaphosa was sworn in as South Africa’s president by Chief Justice Mogoeng. He was elected at a special sitting of the National Assembly, and voted for unanimously in an open poll. This follows the resignation of now former president Jacob Zuma late on Wednesday, 14 February pursuant to his recall by the ANC’s National Executive Committee, and ahead of fast-tracked preparations to Page 17
table a vote of no confidence the next day, should he have refused to resign. President Ramaphosa will deliver the delayed State of the Nation Address on Friday evening (16 February). In the coming days or weeks, it appears likely that he will reshuffle his Cabinet, and all eyes will be on the Budget Speech for 2018 which is currently scheduled for Wednesday, 21 February. After a long wait and weeks of seemingly tough negotiations, this swift conclusion paves the way for a new era in national politics. The positive sentiment experienced as a result of this change has been significant. While sentiment may not be tangible, it has a very powerful and visible impact on society, and on political and economic outcomes. The very long period during which the people of South Africa - ordinary citizens, parents, employees, employers, and business leaders alike - have viewed the current economic environment as bleak, has had a material influence on economic activity.
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Each decision not to spend, not to borrow, not to buy a durable good, not buy a new machine to replace an aging one in a factory, or start planning a capital expansion, have all undermined growth momentum, exacerbated inequality and entrenched poverty. In fact, for the five years from 2010, real GDP growth dwindled from an average of 2.6% - already weak relative to history – to just 0.9% over the past three years. And the more durable the period of
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depression, the more it has undermined the economy’s capacity to grow. Without growth, our resources with which to address the quality of life and distribution of income of those very citizens, become more and more scarce. Since the announcement of the change in the presidency, Moody’s has stated that they will be closely watching the policy impact of the change in leadership, potentially staving off a detrimental ratings downgrade at the end of the month.
IN ORDER TO TRANSLATE THE POSITIVE PERCEPTION INTO ECONOMIC REALITY, THE NEW PRESIDENT WILL BE REQUIRED TO MAKE TOUGH DECISIONS, AND SOON, IN ORDER TO CAPITALISE ON THIS MOMENTUM.
South Africa’s push back, through our brave independent media, feisty civil society and strong judiciary has succeeded in bringing about leadership change. This change of leadership brings with it hope, and an opportunity for the government to do things better. Cyril Ramaphosa campaigned on, and was elected ANC president with, a mandate to deliver a ‘New Deal’. He has committed to dealing decisively with corruption, to implement policies that strengthen institutions and support growth and transformation. He has already made good
appointments to fragile state-owned companies and brought Parliamentary process against those individuals implicated in corruption cases. We are standing at an important juncture in South Africa’s evolution. By showing the will and ability to do the right thing for the people of South Africa, a new leadership must seize the opportunity to build confidence, restore capacity in state and economic institutions and to create an environment in which the incredibly resilient people of South Africa can get back to building the future our country so richly deserves.
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RAND, BONDS STRENGTHEN ON ECONOMIC GROWTH AN ARTICLE WRITTEN FOR MONEYWEB BY REUTERS
Positive growth boosts chances of avoiding a downgrade by ratings agencies, analysts say. South Africa’s rand and government bonds firmed on Tuesday after data showed the economy expanded more than expected at the end of last year, while stocks also ended the session higher as food company Tiger Brands recovered from three-month lows. The rand was up 0.7% at 11.75 per dollar at 15:18 GMT, having touched a session high of 11.71. In fixed income, the yield for the benchmark government bond fell by 9.5 basis points to 8.11%, reflecting firmer bond prices. “South African fourth-quarter GDP figures were better than even our own above-consensus forecast,” Capital Economics Africa economist John Ashbourne said in a note. “We expect that the economy will retain momentum in the coming quarters and beat consensus expectations in 2018.” Helped by growth in farming and trade, the economy expanded by 3.1% in the last three months of 2017, beating market expectations of a 1.8% expansion after 2.3% growth in the third quarter.
Economists said the positive growth boosted South Africa’s chances of avoiding a potentially debilitating credit rating downgrade by Moody’s this month. Moody’s – the only major agency that still ranks South African debt as investment grade – is due to publish its rating decision this month after placing the country on review for a downgrade. S&P Global Ratings and Fitch already rate South African debt as “junk”. A downgrade to sub-investment grade by Moody’s could see South African debt lose its place in Citi’s World Government Bond Index, the biggest of the global benchmarks and tracked by $2 trillion to $3 trillion of funds. On the stock market, the Top-40 index rose 2.4% to 52,257 points while the broader all-share index finished 2.3% up at 59,242. Tiger Brands’ shares rose 2.5% to R403, having hit a three-month low on Monday after it recalled products produced by its Enterprise unit after the source of a listeria outbreak that has killed 180 people was traced to its manufacturing facility. Page 19
M A R K E T
C O M M E N T A R Y *
PROTECTIONISM AND 'TRADE WARS'
P
*Adapted
Source: Brooks MacDonald
Notable events
Global equities made gains, supported by news that the new US steel and aluminium tariffs would exclude imports from Canada and Mexico.
Hawkish European Central Bank (ECB) report downplayed by President Draghi
As expected, the ECB elected to keep its monetary policy stance unchanged, but decided unanimously to retract its explicit pledge to increase asset purchases if required. The decision was supported by increased growth expectations and lower uncertainty regarding the path for inflation. The official growth forecast was revised up slightly for 2018 to 2.4%, as a result of “strong and broad-based momentum” seen across a wide range economic data released so far this year. By contrast, the Governing Committee made downward revisions to its 2019 headline inflation projection, from 1.5% to 1.4%, while expectations for this year were left unchanged at 1.4%. The medium term projection for inflation is expected to remain below ECB’s inflation target of 2%, reaching 1.7% by the end of 2020.
President Draghi was keen to emphasise that there were no further changes to the ECB’s current accommodative policy stance and that it continues to expect key interest rates to remain at current levels until it ends its asset purchase programme, at least. The ECB is widely expected to provide more precise guidance on the future path of interest rates over the next three meetings. Despite the relatively optimistic view on economic growth, the latest set of purchasing managers' indices (PMIs) indicate a slight consolidation, albeit at elevated levels. February’s final composite PMI was revised down by 0.4 points to 57.1, falling from January's peak to a four-month low. The total composite decline of 1.6 points was primarily driven by the services sector, as well as a slight moderation in manufacturing. In terms of countries, the consolidation in services was broad based with only Spain surprising to the upside and improving over the month. Positively, firms remain optimistic, with business expectations virtually unchanged from January's eight-month high.
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M A R K E T
C O M M E N T A R Y *
PROTECTIONISM AND 'TRADE WARS' *Adapted
Source: Brooks MacDonald
The continued strength of demand, bright outlook and elevated input prices compared to the historical average, imply that firms could soon begin to pass such costs on to their consumers, providing further nearterm inflation pressure.
UK service PMIs point to modest rebound, while production data slows
Service sector activity rebounded in February driven by an acceleration in new business activity. The headline services PMI rose to 54.5 from 53.0, ahead of expectations for a slight pickup to 53.3. Business-to-business sales were helped by the strong global economic backdrop, while consumer-facing service providers said competitive pricing helped support sales against a backdrop of stretched household finances, which remain a constraint on domestic demand. The overall composite PMI rebounded from its January lows, rising to 54.5 from 53.5, once again ahead of expectations for a more moderate recovery to 53.6. The pickup was driven primarily by services as the manufacturing PMI remained relatively stable, edging just 0.1 points lower to 55.2.
While the forward looking PMIs indicated further expansion, the latest production data pointed to a moderation in pace of output growth. Manufacturing production rose just 0.1% month-on-month (MoM) causing the annual rate to drop to 2.70% and suggesting that the robust 1.3% quarterly rise recorded in the fourth quarter of 2017 won’t be repeated this year. Construction output also fell, with the 3.4% monthly drop leaving the sector in recession at the start of the year and the annual rate at -3.90%. However, overall industrial production did recover, rising 1.3% for the month, albeit attributable to temporary distortions such as the unwinding of the drag caused by the closure of the Forties oil pipeline in December, and was smaller than the 1.5% that the consensus had expected. The UK trade deficit also continued to widen, as weakness in the goods trade balance remained persistent and net imports rose 0.7% MoM.
W
US data continues to improve, but wage growth remains subdued
The ISM non-manufacturing index decreased slightly to 59.5 from 59.9, but the moderation was less than the 0.9 point fall expected.
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M A R K E T
C O M M E N T A R Y *
PROTECTIONISM AND 'TRADE WARS' *Adapted
Source: Brooks MacDonald
Underlying details suggest that a solid rate of activity remains in place in the services sector, with business activity up 3.0 points and the new orders index gaining 2.1 points. Overall, the report reflects robust sentiment in the services sector and suggests strong first quarter activity. Non-farm payrolls rose by 313k in February, well above consensus expectations for a 205k gain, driven by broad-based improvements across the private sector. The unemployment rate held steady at 4.1% as the labour force participation rate rose 0.3%, to 63.0%. Average hourly earnings rose modestly by 0.1% MoM to 2.6% year-onyear (YoY), albeit below expectations for a yearly rise to 2.8%. However the latest Beige Book appeared to suggest that remuneration momentum is building. Wage growth was reported to have “picked up to a moderate pace” with employers also expanding benefit packages in response to tight labour market conditions. Despite the headline wage growth miss, prices remain on an upward trajectory and the risks for wages and inflation remain skewed to the upside.
M
Overall, solid employment growth, combined with an increase in hours worked bodes well for income growth and subsequently household spending; this which should support economic growth. The market implied probability of four interest rate increases this year rose following the jobs report and currently stands at c.30%. It’s worth noting that the Federal Reserve (Fed) is yet to signal its intention to implement a fourth hike this year and the Fed fund futures market is suggesting that the Fed is falling behind the curve on inflation.
China reduces growth target as exports recover despite tariff concerns
China’s Premier Li Keqiang presented the country’s 2018 strategy at the opening day of the National People’s Congress, signalling a higher tolerance for slower growth and tighter fiscal policy in a bid to reform the debt-ladened economy. The official 2018 growth target was reduced to “around 6.5%” from “around 6.5%, or higher if possible in practice” in 2017, while the budget fiscal deficit target was lowered to 2.6% of GDP, from 3.0% in 2017, signalling the government’s intent to bring local debt under control.
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M A R K E T
C O M M E N T A R Y *
PROTECTIONISM AND 'TRADE WARS' *Adapted
Source: Brooks MacDonald
At present, it is unclear where the government will tighten its expenditure, but it has pledged stronger support for the ‘new’ economy. The government also indicated that a targeted urban unemployment rate of “under 5.5%” was realistic as the economy transitions and develops, while oldeconomy ‘zombie companies’ are allowed to fall away. The government made further steps to open up the economy to further foreign ownership, while also improving regulations on shadow banking, internet finance and financial holding companies. The intricacies of the current work plan still need to be discussed by the representatives, but the proposal prioritises reform and transition to the ‘new’ value-add economy. The intention is to provide a more secure foundation for the country’s longer-term economic success.
with clarity as it suggests continuity of the current regime and its policies. Meanwhile, Chinese exports recovered in February. The combined January-February export data, which removes single-month volatility due to the timing of Chinese New Year, rose to 22.9% YoY from 9.9% in the fourth quarter 2017. With import growth at 22.0%, net exports are expected to remain an important contributor to GDP growth for at least the first quarter of 2018. Beyond the first half of the year, rising US-China trade tensions could exert some downward pressure on China’s export outlook; however, with advancements from both sides indicating the potential for a work around, the overall impact should be less than initially feared.
China also elected to remove its two-term presidential limit, clearing the way for President Xi Jinping to remain in office indefinitely. This should provide markets PEGASUS WEALTH MANAGEMENT
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TIME OFF A TRAVEL AND LEISURE INSERT
PEGASUS WEALTH MANAGEMENT
Ramaphoria Inaugural Lunch Special Moroccan Mint Green Tea Lamb Loin RECIPE FROM KITCHEN.NINE.COM.AU
COOKING TIME: >60 MINUTES
SERVES: 4
INGREDIENTS
METHOD
1 Lamb Tenderloin 5 Tea Bags of Moroccan Mint Green Tea 100g Cauliflower ½ Litre Milk 5g Onion (chopped) 50g Butter 1 Kabocha (Squash) 1 Tablespoon Honey 200ml Vegetable Stock ½ Teaspoon Chopped Parsley 100ml Lamb Jus 3 Pieces Semi Sundried Tomato 1 Sprig Thyme
Marinate lamb loin with tea and season it. Roll it in a cling film and vacuum pack it. Cook in a warm water bath for 45 minutes at 54°C. Saute onion in butter, add milk and cauliflower. Cook till tender. Blend it in to a smooth puree and season it. Cut pumpkin in square baton. Cook it like a fondant and glaze it with honey and butter glaze. Season it and finish with chopped parsley. Chop sun-dried tomato, add lamb jus and flavour with thyme. Page 25
FUN FACTS: MANHATTAN In 1609 Peter Minuit bought Manhattan for $24 worth of beads (around $1,050 in modern-day money), from the Lenape Indians. Nestled halfway between Sixth and Seventh Avenues lies a semihidden pedestrian walkway called 6½ Avenue. At 12:01pm on September 16th, 1920, a horse-drawn carriage parked in front of the J.P. Morgan Building exploded. 30 people died instantly and the culprits were never found. Alfred Ely Beach secretly built an underground railroad under City Hall's noses — stretching below Broadway from Warren Street to Murray Street — then unveiled it to the city's surprise. Robert Moses championed a plan to connect the Lincoln Tunnel and the Queens-Midtown Tunnel with a six-lane superhighway rising 100 feet above the streets from Eighth Avenue to First Avenue along 30th Street. The plan was popular at first, but by the 1960s, the city had turned against Moses and his plans to smash down vasts swaths of Manhattan to make it easier for people from Long Island to drive to New Jersey.
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