Kevin Lings, STANLIB Chief Economist, reviews the local and macroeconomic environment with specific focus on South Africa’s credit rating, the likelihood of an increase in interest rates and local and global growth. <link>

1. STANLIB Institutional Quarterly Focus
Q2 2016

2. Introduction
2
Len Jordaan
Head of Distribution for STANLIB Index Trackers
Close
TIAAN KOTZÉ
Chief Operating Officer: Distribution
Introduction

3. Speakers
3
KEVIN LINGS
Chief Economist
TEBOHO TSOTETSI
Portfolio Manager
Review of the local and global
macroeconomic environment
How should smart beta funds be used?

4. A Leading Investment Business
Active asset management
Multi-Manager
Passive asset management
We are a multi-specialist investment company in 10 African countries with business partners in North
America, United Kingdom, Europe, Middle East and Asia
INVESTMENTS OUR CUSTOMERS
RETAIL
More than 500 000
across Africa.
Active asset management
Multi-Manager
Passive asset management
OUR PEOPLE
31 December 2015
R579bn
(USD 37bn)
Assets under management
and administration
Active asset management
Multi-Manager
Passive asset management
RETAIL
More than 500 000 across Africa.
INSTITUTIONAL
•10 of the top 20 JSE Companies
•4 of the top 6 listed Insurers
•R60bn – Parastatals, unions etc
100+Investment professionals
With over
1200 years*
of collective investment experience
82 Raging Bull Awards
92 Morningstar Awards
Level 2 BBBEE Status
*as at 30 May 2016 4

5. Part of a Larger Group
STANLIB was founded in
2002 when Standard Bank
Asset Management and
Liberty Asset Management
joined forces.
STANLIB is fully owned by
Liberty Holdings Limited
and is a subsidiary of the
Standard Bank Group.
16 Countries in Africa
14 Years
10 Countries in Africa
AUM&A
USD37 billion
as at 31 December 2015
59 Years
AUM
USD43 billion
as at 31 December 2015
154 Years
Industrial and Commercial
Bank of China 20.1% stake
in Standard Bank Group
since 2008
20 Countries in Africa
Market Cap
USD11.8 billion
as at 31 December 2015
16 Countries in Africa
5

6. 6
KEVIN LINGS
Chief Economist
Review of the local and global
macroeconomic environment

7. Developed markets GDP annual growth rate
2,8 3,1 2,8
0,2
-3,4
3,1
1,7
1,2 1,2
1,8 1,9 1,8 2,0
3,2
-4
-3
-2
-1
0
1
2
3
4
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
%y/y
7

8. 128
130
132
134
136
138
140
142
144
146
05
06
07
08
09
10
11
12
13
14
15
16
Million
United States employment
Employment is 5.5 million above the previous peak
8

9. 85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Index
Age group 35 to 49
US employment by age
9

10. US percentage of young men (18 – 34) still living with parents
23
24
27
28
26
33
35
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
1960
1970
1980
1990
2000
2010
2014
Percentage
10

11. 80
85
90
95
100
105
110
115
120
125
130
135
140
145
150
155
160
165
170
175
180 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Index, 12-month moving average
Age group 35 to 49
US employment by age
Age group 70 and older
11

12. 1,03
1,05
1,07
1,09
1,11
1,13
1,15
1,17
1,19
1,21
1,23
1,25
1,27
1,29
1,31
1,33
1,35
1,37
1,39
2014
F
M
A
M
J
J
A
S
O
N
D
2015
F
M
A
M
J
J
A
S
O
N
D
2016
F
M
A
M
J
USD
US Dollar per Euro
-22%
12

13. -25
-20
-15
-10
-5
0
5
10
15
20
25
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
%y/y
US monthly growth in exports
13

14. -16
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
%y/y
US industrial production
14

15. US industrial production
85
90
95
100
105
110
04 05 06 07 08 09 10 11 12 13 14 15 16
Index
15

16. -0,5
-0,4
-0,3
-0,2
-0,1
0,0
0,1
0,2
0,3
0,4
0,5
0,6
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Contribution to quarterly GDP growth, %, 4 quarter moving average
US defense activity contribution to annual GDP growth
War in Iraq
War in Afghanistan
16

17. US election: Trump vs Clinton
Trump
Clinton
Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jun 2016
17

18. -40,0
-35,0
-30,0
-25,0
-20,0
-15,0
-10,0
-5,0
0,0
5,0
10,0
15,0
20,0
25,0
30,0
35,0
2014
2015
2016
2017
%y/y
US gasoline price inflation
If gasoline price
remains unchanged
at current levels
18

19. -0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
2014
2015
2016
2017
%y/y
US consumer inflation forecast
Headline inflation forecast
19

20. -6,5
-6,0
-5,5
-5,0
-4,5
-4,0
-3,5
-3,0
-2,5
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
%y/y
Euro-area real GDP growth (year-on-year)
20

21. %y/y
Germany, France and Italy GDP growth
-8,0
-7,0
-6,0
-5,0
-4,0
-3,0
-2,0
-1,0
0,0
1,0
2,0
3,0
4,0
5,0
6,0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Germany
Italy
France
21

22. 80
82
84
86
88
90
92
94
96
98
100
102
104
106
108
110
112
114
2005
1006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Index Q1 2005 = 100
Euro-Area GDP Index (Real) vs Greece Real GDP Index
Greece GDP
Euro-area GDP
22

23. 44
46
48
50
52
54
56
2015
Nov
Dec
2016
Feb
Mar
Apr
May
Jun
Percentage
Remain
Leave
Remain/Leave UK opinion poll
23

24. Emerging markets GDP annual growth rate
7,5
7,2
8,1
8,6
5,8
3,0
7,4
6,3
5,3
4,9 4,6
4,0 3,7 4,0
2
3
4
5
6
7
8
9
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
%y/y
24

25. -2
0
2
4
6
8
10
12
14
16
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
2017/18
%, y/y, real terms
India public sector fixed investment spending
25

26. China rebalancing needed
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
% of total China GDP
Fixed investment activity
Consumer activity
26

27. -12,0
-10,0
-8,0
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
%y/y
Russia real GDP growth (year-on-year)
27

28. -6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
%y/y
Brazil GDP growth
28

29. South Africa real GDP growth year-on-year
-3
-2
-1
0
1
2
3
4
5
6
7
8
05 06 07 08 09 10 11 12 13 14 15 16
%y/y
29

30. SA manufacturing production
-17
-15
-13
-11
-9
-7
-5
-3
-1
1
3
5
7
05 06 07 08 09 10 11 12 13 14 15 16
%y/y, 12-month moving average
The combination of:
Agriculture
Mining
Manufacturing
Construction
Electricity, and water in recession
30

31. -3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
%, y/y, 4-quarter moving average, real
Consumer income
Consumer spending
South Africa consumer spending vs disposable income
31

32. South Africa’s credit rating by S&P
0
1
2
3
4
5
6
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Credit rating
SA international credit rating
BB
BB+
BBB-
BBB
BBB+
A-
Investment grade cut-off
32

33. S&P credit rating of South Africa
Positives
• Strong institutions
• Independent central bank
• National Treasury’s resolve to
reduce fiscal deficits
• Improved electricity production
Concerns
• Weak economic growth
• Lack of social cohesion
• Rising government debt
• Funding public corporations
• Reliance on portfolio flows
33

34. SA government gross loan debt as % of GDP
10
15
20
25
30
35
40
45
50
55
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
%
34

35. SA government net domestic long-term bonds issued
-20
0
20
40
60
80
100
120
140
160
89/90
90/91
91/92
92/93
93/94
94/95
95/96
96/97
97/98
98/99
99/00
00/01
01/02
02/03
03/04
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12
12/13
13/14
14/15
15/16
16/17
17/18
18/19
Rbn Fiscal years
35

36. South Africa real GDP growth year-on-year
-3
-2
-1
0
1
2
3
4
5
6
7
8
05 06 07 08 09 10 11 12 13 14 15 16
%y/y
36

37. Index, 2000 = 100
South Africa government salary payments vs consumer inflation
90
130
170
210
250
290
330
370
410
450
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
SA consumer inflation
Government salary payments
37

38. South Africa manufacturing activity vs retail activity
90
100
110
120
130
140
150
160
170
180
190
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Index
SA retail activity
SA manufacturing activity
SA economic growth has been consumption based, rather than production based
38

39. -20
-15
-10
-5
0
5
10
15
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
%q/q, 4-quarter moving average annualised
Growth in fixed investment spending by private sector
39

40. South Africa Corporate Deposits
250
270
290
310
330
350
370
390
410
430
450
470
490
510
530
550
570
590
610
630
650
670
690
710
730
750
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
R billion
40

41. SA government’s five new initiatives to boost SA economy
1. Joint private and public sector fund for small business support. It will be
established with roughly 50:50 contributions by the partners.
2. Model used for renewable Independent Power Producers to be extended to
coal and gas.
3. Expand government and private sector co-investment in infrastructure.
(Also explore the possibility of private sector investment in state-owned
companies).
4. Exploring appropriate mechanisms to strengthen state-owned.
5. Credit ratings work-stream will identify potential areas of reforms and
interventions to avert further credit rating downgrades. 41

42. Conclusion
• Global growth remains disappointing and below trend
• US economy is still struggling to gain momentum
• Growth in world trade has slowed, hurting emerging markets
• Brazil and Russia in recession, but China is moving ahead with its economic transition
• SA is on the cusp of a recession, hurt by drought and lower commodity prices
• SA retail sales have held-up well, but at risk of slowing
• SA is facing further credit rating downgrades, but foreign capital has been moving back into
emerging markets
• SA business sector needs to a boost in confidence and encouragement to invest
• SA policy officials (treasury and SARB) appear determined to avoid further
economic deterioration
42

43. 43