Bloemfontein Stockbrokers & Portfolio Managers | Preller Walk Centre, Genl Hertzog Drive, Dan Pienaar, Bloemfontein, 9301 | PO Box 12337, Brandhof, 9324 | Tel: +27 (87) 820 4844 | Fax: +27 (86) 545 4590 | hannes.barnard@psg.co.za | psg.co.za PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.

May 2018

Monthly Newsletter

W.C. Niemann

“Oil prices have certainly become a threat for the world economy.”

– Ridrugi Rati

After April’s positive performance, most global equity markets were

on the back foot again during May as a crisis in the eurozone’s third-

largest economy, Italy, threw markets in turmoil. Italian president,

Sergio Mattarella, vetoed the anti-establishment Five Star

Movement and the far-right Leages’ choice for economy minister.

The decision disrupted plans for a coalition, raising the risk of

renewed Italian elections, potentially as early as August 2018.

Trade concerns continued to weigh on sentiment after the United

States of America slapped tariffs on steel and aluminium from the

European Union, Canada and Mexico, which again raised the

prospect of greater global tensions and the possibility of trade wars.

The MSCI World Index rose by only 0.31%, while the S&P 500

managed to gain 2.16% during the month.

Brent crude prices, which have a positive correlation with inflation

expectations, continued to rally during May and broke through the

$80 per barrel level. This was bearish for governmentment bonds,

with the US 10-year Treasury yield touching its highest levels in 7

years.

Gains in the US 10-year Treasury Yield supported the US Dollar

Index, which reached new 2018 highs during May. According to BCA

Research, this combination often spells trouble for emerging

markets, which will explain May’s 3.8% decline in the MSCI Emerging

Market Index. Locally the FTSE/JSE All Share Index nearly wiped out

April’s 5.0% gain with a 3.6% decline, as a weaker rand put pressure

on our financial and retail counters. This weakness was slightly

offset by the Resi-10 Index, which benefitted from a turnaround in

some commodity prices.

We stated in last month’s newsletter that commodities, which

include oil, still have room to grow. BCA Research expects the global

crude market to continue tightening and that increasing shale

output will not be enough to prevent oil prices from rising further.

It should be mentioned; however, that the current uptick in

inflation will only be temporary as the current economic

environment will be unable to absorb higher commodity prices

indefinitely.

MSCI World and S&P 500 Index

Positive correlation due to inflation

expectations

Source: Inet BFA

Source: Inet BFA

Brent Crude Oil vs 10 Year Treasury Yield

Source: Inet BFA

MSCI Emerging Market and JSE/FTSE All Share Index

Oil Sentiment Still Bullish

Source: BCA Research

BCA Research expects oil prices to

continue to trend higher through 2018 and

could touch $90/bbl in 2019.

Bloemfontein Stockbrokers & Portfolio Managers | Preller Walk Centre, Genl Hertzog Drive, Dan Pienaar, Bloemfontein, 9301 | PO Box 12337, Brandhof, 9324 | Tel: +27 (87) 820 4844 | Fax: +27 (86) 545 4590 | hannes.barnard@psg.co.za | psg.co.za PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.

Our “inflation scare” scenario was confirmed by BCA Research in

their latest monthy report, in which it was stated that the rise in oil

prices to date has been sufficient to take the edge off global growth

as the world has passed the point of maximum global growth

momentum. It has not been large enough to derail the expansion in

developed countries yet, but the bull run in energy prices will

eventually hit a total economic choking point and lead to a

deflationary bust.

Portfolio and Company News

Gold mining company Anglogold Ashanti reported positive

performance figures for the first quarter. Operationally the result

was reasonable, with increased production in retained operations,

improved cost performance and lower debt levels being key

highlights.

Production at retained operations improved by 6% to 773 000

ounces at an all-in sustaining cost of $1002/oz, which represents a

23% margin to the gold price received during the period.

The balance sheet has improved further as asset-sale proceeds were

applied to reduce local debt, reducing the net debt/adjusted EBITDA

ratio to 1.14 times from 1.35 at the end of 2017.

With roughly 25% of 2018 production delivered in a traditionally

weak quarter, the company remains firmly on track to meet its

annual production, cost and capital guidance. It remains our

preferred counter in the sector and a key inflation/deflation hedge

investment for our portfolios.

MTN Group reported its quarterly trading update for the first

quarter. This was a solid result led by good service revenue growth

and continued strong performance in group data revenue.

Group subscriber numbers rose 1.9% from the fourth quarter of

2017, with net additions of 4.1 million. South African service

revenue saw growth of 2.5%, supported by data and digital revenue,

which rose by 12.1% and 17.7% respectively.

South African EBITDA margin, which was supported by continued

cost efficiencies and higher service revenue, expanded to 35%. MTN

Nigeria and MTN Irancell also showed decent performance with

respective 14.4% and 15.2% increases in service revenue.

Prospects remain promising as the group invested R1.7 billion in

capital expenditure during the quarter, maintaining their leading

network position. MTN is also executing on a turnaround plan,

focussed on improving customer retention and acquisition.

Past the Point of Max Growth Momentum

Source: BCA Research

Anglogold Ashanti Improved Balance Sheet

Source: AngloGold Ashanti

Anglogold Ashanti Improved Balance Sheet

Source: AngloGold Ashanti

Bloemfontein Stockbrokers & Portfolio Managers | Preller Walk Centre, Genl Hertzog Drive, Dan Pienaar, Bloemfontein, 9301 | PO Box 12337, Brandhof, 9324 | Tel: +27 (87) 820 4844 | Fax: +27 (86) 545 4590 | hannes.barnard@psg.co.za | psg.co.za PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.

MTN seems to be fairly valued on an absolute basis, trading at a

2018 forward P/E of 21.1 times, well ahead of its five-year average.

Margins, however, are on a depressed base and we feel that the

group’s plans to optimise their investment portfolio will support a

medium-term margin recovery. The share is currently underpinned

by a 2018 forward dividend yield of 4.30% and remains our

preferred counter in the telecommunications sector.

For Consideration

After South Africa’s petrol price had hit another record high in June,

a few articles - comparing our petrol price with that of other

countries - surfaced. The average global petrol price stands at

R15.04 and out of 167 countries, South Africa is the 97th

most

expensive. These kind of articles; however, are misleading as each

country’s petrol price is impacted differently by oil prices, currency

exchange rates and subsidies/levies.

At the moment it may seem that we are worse off compared to

other countries, but when looking at the various countries’ prices

compared to the brent oil price, we can see that we are all more or

less in the same boat. Since oil had bottomed out early 2016, fuel

prices have started to rise globally in conjunction with brent oil’s

rise. It is not about the absolute number, but rather about the

prices we pay relative to the early 2016 base.

Conclusion

Our “inflation-scare” scenario continues to play out, with our clients

reaping the rewards of our decision to hold commodity stocks in

their portfolios.

These rewards will not hold indefinitely. High oil prices are already

proving to be a threat for the world economy, with emerging

markets being its first victim.

South African consumers are not alone in feeling the pinch from

higher oil prices: higher fuel prices is a global occurrence as a result

of brent crude oil’s bull run since early 2016.

Photo of W.C. Niemann supplied by Volksblad. The opinions expressed in this document are

the opinions of the writer and not necessarily those of PSG and do not constitute advice.

Although the utmost care has been taken in the research and preparation of this document,

no responsibility can be taken for actions taken on information in this newsletter.

MTN Discount/Premium vs JSE Telecoms (Price/Sales Basis)

Source: PSG Wealth

Source: Inet BFA, www.eia.gov, www.gov.uk, www.fuelwatch.wa.gov.au

Global fuel prices rising

in conjunction with

Brent Crude Oil

Source: www.graniterok.com

Brent Crude Price vs US, UK, Australia and SA Fuel Prices

Bloemfontein Stockbrokers & Portfolio Managers | Preller Walk Centre, Genl Hertzog Drive, Dan Pienaar, Bloemfontein, 9301 | PO Box 12337, Brandhof, 9324 | Tel: +27 (87) 820 4844 | Fax: +27 (86) 545 4590 | hannes.barnard@psg.co.za | psg.co.za PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728.

Bibliography:

1. Biddlecombe, Henry, ‘Anchor Capital – May global markets review’ http://anchorcapital.co.za/article/?local-market-and-share-commentary-may-2018

2. Van Papendorp, et al, ‘Momentum – May Macro Research Desk’ http://www.mmiholdings.co.za/wps/wcm/connect/mmiholdings-za/058963ca-c48a-4fe7-a35c-2bf935ca1491/Economic+and+market+commentary+-+May+2018.pdf?MOD=AJPERES 3. Shellock, Dave, ‘Yield on US 10-year Treasury jumps to 7-year high’ https://www.ft.com/content/d7fad3ca-57cf-11e8-b8b2-d6ceb45fa9d0 4. McClellan, Mark, ‘BCA Research – June Research Report’ 5. Cuddihy, Claire, ‘Strong 118 cost and production performance for AngloGold’ https://www.globalminingreview.com/finance-business/09052018/strong-1q18-cost-and-production-performance-for-anglogold/ 6. Businesstech Staff Writer, ‘MTN shows marginal growth in South Africa’ https://businesstech.co.za/news/mobile/242001/mtn-shows-marginal-growth-in-south-africa/ 7. Staff Writer, ‘How Does the Petrol Price of South Africa Compare with Other Countries?’ https://www.goodthingsguy.com/opinion/petrol-prices-south-africa/