Market opportunities 07 June 2016 presentation to the Senate Group.

1. Market Opportunities
Vaughan Henkel
SENATE GROUP
June 2016

2. • 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

3. 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

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

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

6. 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

7. ZAR History: Currency deviation from REER
STANLIB forecast: R15 2016E, R16 2017E
Source: I-Net

8. 60
70
80
90
100
110
120 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
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.

9. 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

10. Global Property
Developed Markets

11. 2016 Q1 Sector Total Returns (US)
Source: UBS, April 2016

12. Peak occupancy
Source: UBS, April 2016
Historical REIT Occupancy (US)

13. Historical REIT lfl NOI growth (US)
Still healthy NOI growth
Source: UBS, April 2016

14. Commercial Real Estate Delinquency (US)
Source: UBS, April 2016

15. Global Premium / (Discount) to NAV
Source: UBS, April 2016

16. 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
Spread(%)
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%

17. Bonds –
almost time

18. 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

19. 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
Source: Stanlib, Bloomberg

20. 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
Source: Stanlib, Bloomberg

21. 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
Source: Stanlib, Bloomberg

22. Evolution of GDP per capita
Source: Standard & Poor’s

23. Downgrade priced in long before action
Source: Nedbank

24. 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

25. South Africa Turkey
Brazil
IndonesiaMexico
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
CAbalance(%ofGDP)
Fiscal balance (% of GDP)
EM twin deficits comparison (%)
Source: Standard Bank Research

26. Brazil
Bulgaria
China
Chile
Colombia
Croatia
Czech Republic
Hungary
India Indonesia
Mexico
Panama
Peru
Philippines
Romania
Russia
South AfricaThailand
Turkey
0
2
4
6
8
10
12
14
16
AA-(stable)
BBB+(stable)
BBB+(negative)
BBB(positve)
BBB(stable)
BBB(negative)
BBB-(positive)
BBB-(stable)
BBB-(negative)
BB+(positive)
BB+(stable)
BB+(negative)
BB(positve)
BB(stable)
BB(negative)
%
EM yield comparison (%)
Source: Standard Bank Research

27. 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

28. Appendix

29. 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

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

31. 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

32. 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%

33. Thank you