Wealth and Investment Management. Asset Management. Investment Report. 1st Quarter

Transcription

1 Wealth and Investment Management Asset Management Investment Report 1st Quarter 216

2 Investment report - Contents Page Summary House asset allocation. 1 Economic summary. 1 Market summary. 1 Fund performance. 1 Snapshot - Tactical positioning. 2 Markets at a glance. 3 Absa Select Equity Fund. 4 Absa Large Cap Fund. Absa Africa Equity Fund. 6 Absa Property Equity Fund. 7 Absa Balanced Fund. 8 Absa Absolute Fund. 9 Absa Money Market Fund. 1 South African asset classes Historical performance overview and projections Equities and properties Bonds and cash Returns Historical returns. 13 Projected returns and asset allocation. 13 International asset classes Historical performance overview and projections Equities and bonds. 14 Cash and currencies Emerging markets.. 16 Returns Historical returns and efficient frontier. 17 Projected returns and asset allocation.. 17 Appendix A: Key macroeconomic variables and projections Appendix B: SA equity yields, prices and returns. 19 SA cash, bond and property market returns.. 19 Glossary.. 2 The report was finalised on 14 April 216. Absa Asset Management Investment Report - 1st Quarter 216

3 Summary House asset allocation LOCAL Overweight Cash Neutral Bonds Underweight Equities Property GLOBAL Overweight Equities Underweight Bonds Economic summary Weak Chinese economic data, Brexit fears and a further ECB stimulus package set the stage for yet another quarter of extreme volatility in global equity markets. Together with the strong US dollar, these factors bothered the US Federal Reserve enough to delay its planned March rate hike. The US Fed s policy stance has however not changed and it remains on track to raise rates at least twice this year. New jobs growth in the US is reasonable and should continue to lower the unemployment rate while there are signs that inflation is starting to pick up. In SA, the budget was the main focus of the quarter as Minister Gordhan delivered a growth conscious budget that aims to cut government expenditure and stabilise the debt to GDP ratio. Investor confidence is likely to remain fragile though. GDP growth in SA has regularly been revised lower while politics will be at the forefront of investor concerns. Economic growth is likely to be well below 1% for 216, bringing with it a potential credit rating downgrade. Market summary LOCAL The declining trend in the Alsi, which began in April 21 and amounted to more than 9% by end-february 216, was substantially reversed in March, with the total return index up 3,3% for the year ended 31 March 216. The SA Listed property sector recovered strongly in the first quarter of 216, posting a return of 1,1%. For Q1 216, the all bond index total return amounted to 6,6%, although the return for the year was a disappointing -,6%. The MPC delivered two consecutive hikes of bp and 2bp over the first quarter, noting that inflation will only return to within the target range in 218. GLOBAL Equity markets began 216 on the back foot, falling by 6% in the first week of trading and continuing this trajectory before rallying aggressively to close the quarter substantially higher. In a flight to safety, the yield on 1-year US Treasury Bonds fell to 1,78% from 2,24% at the start of the year. Monetary policy in the USA is set to remain accommodative, while in Europe, the ECB remains firmly in the loosening phase of its cycle. In March, most emerging market currencies strengthened against the US dollar. Fund performances to 31 March MONTHS % Return Benchmark Median % Return Benchmark Median % Return Benchmark Median % Return Benchmark Median Absa Select Equity Absa Managed A Absa Large Cap Absa Property Equity Absa Global Value Absa Income Enhancer Absa Balanced R Absa Absolute A Absa Inflation Beater Absa Bond Absa Money Market Absa Africa Equity A Absa US Dollar Income Absa Sterling Income Absa Euro Income Note: Absa Managed Fund inception date: 26 February 21 Absa Property Equity Fund inception Date: 1 March 211 Absa Africa Equity Fund: Fully invested from 31 July YEAR (p.a.) 3 YEARS (p.a.) YEARS (p.a.) Fund Size (R million) Absa Asset Management Investment Report - 1st Quarter 216 1

4 Snapshot - Tactical positioning South Africa Asset Class Previous Current Comments Equities Underweight Underweight The SA market is looking expensive, particularly the Indi. On a risk-adjusted basis we see limited upside to current levels. At some point global rates will increase, which will impact equity markets negatively, but we note that this might be delayed due to global economic uncertainty. Bonds Neutral Moderately underweight Risk-adjusted returns look better than for equities, but there is a substantial risk of a sovereign downgrade by year end. Additionally, there are upside inflationary risks because of the weak currency, drought, and rising oil and administered prices. Cash Overweight Overweight Safe asset class, which gives optionality if markets sell off. Property Underweight Underweight Cautious on this asset class because of increasing supply of property and soft domestic economy. Also, a rising interest rate environment is negative for property. International Asset Class Previous Current Comments Equities Overweight Overweight Valuations across the globe have retracted slightly in the wake of recent market weakness. Bonds Underweight Underweight As global economic growth gains traction, albeit at a fairly tepid pace, bond yields are likely to rise going forward. Cash Underweight Underweight Interest rates in developed markets are currently close to historic lows. After the December 21 increase by the Federal Reserve, the USA policy rate is expected to be further increased by a moderate amount over the next year. Property Underweight Underweight Although the global economy is growing, the pace of growth is sub-par, making property a less favoured asset class at present, although pockets of value do exist. The risk of rising global bond rates at some stage would also impact negatively on property valuations. The views expressed are that of Absa Asset Management and are based on a 1-year forward view. See important disclaimer on back page. Absa Asset Management Investment Report - 1st Quarter 216 2

5 Markets at a glance Alsi total returns All Bond total returns 4 3-yr rolling return yr rolling return 4 -yr rolling return 16 -yr rolling return %pa 2 2 % pa Money market total returns CPI and CPI food -yr rolling inflation rates yr rolling return CPI 1 -yr rolling return 9 CPI Food 9 8 % pa 8 % pa Metals and Oil Gold and Platinum Metals (2=1) natural log scale Metals $ index Brent crude oil Oil ($/barrel) natural log scale $ Gold Platinum spot (US$/oz) 6 8 Morgan Stanley world equity index All Bond index yield curve Index (nalural log scale) 2 Index 2 -yr rolling total return %pa Yield Dec 1 31 Mar Years Absa Asset Management Investment Report - 1st Quarter 216 3

6 Absa Select Equity Fund Fund comments The JSE has had a superb run in recent years, with the 1-year return on the Alsi at a very impressive 13,1% p.a., or 6,8% p.a. after allowing for inflation. For the quarter, the JSE gained 3,9%, having been down by 9% at one stage. We constantly stress the importance of investing with a longer-term perspective, and over the past years, the Absa Select Equity Fund has returned 1,6% p.a. Over the past number of years, worldwide governments and central banks have created a generally positive backdrop for risky assets by means of accommodative monetary policy. China has been the main source of new demand for commodities in recent years, meaning that softer Chinese exports and slowing infrastructure spending do remain a headwind for commodities and mining shares and related industries. The SA equity market is fairly expensive, compared to both its own history and other emerging markets and we continue to keep our equity exposures to companies where we are comfortable with future earnings prospects. Relative return contributors (1 year) Top detractors (%) Top contributors (%) -.7 Standard Bank Gr Ltd MTN Group Ltd Sabmiller Plc Bidvest Group (The) Naspers British American Tobacco Lsnpnex (Ubnpnb) Reinet Investments Sa / Dep Rc Mr.Price Group Aspen Pharmacare Hldgs Top weightings vs benchmark as at 31 March 216 Top underweight (%) Top overweight (%) Sanlam / Ord Bidvest Richemont Reinet Investments SAB AVI Steinhoff Int Hldgs N.V Tigbrands Naspers Barclays Africa Group Performance: Total returns to 31 March 216 (%) Term Absa Select Equity Benchmark Sector median Rank 1-year sector attribution Quarter /14 Fund equity year /14 Benchmark years /11 Relative return -.44 years /87 4% 3% Industry allocation compared to the Alsi at 31 March 216 Sector Relative return contribution 2% 1% % -1% -2% Managed Benchmark Relative Oil & Gas -.21 Basic Materials -.6 Industrials.8 Consumer Goods -.4 Health Care.12 Consumer Services Telecommunications.74 Technology -.44 Financials -1. Additional Other Equity -. Fund equity -.44 Absa Asset Management Investment Report - 1st Quarter 216 4

7 Absa Large Cap Fund Fund comments The fund posted a strong positive return of 3,6% for the first quarter of 216, well above the benchmark return of 1,%. Contributing positively to the performance were overweight positions in Glencor, Anglo American Platinum, Standard Bank and Steinhoff and underweight positions in Richemont, SAB and Naspers. Although the US Fed raised rates toward the end of 21, recent comments have been rather dovish with regard to further rate hikes. In the first quarter, economic news in South Africa was dominated by the drought, rand weakness and commodity price volatility. The passing of the weak rand through to rising inflation has been muted so far, although the SARB further raised interest rates by,% in January and,2% in March, in anticipation of inflationary pressures. SA GDP growth has been revised downward on a regular basis, a factor which will weigh heavily when the rating agencies revise their SA ratings in the middle of the year. Relative return contributors (1 year) Top detractors (%) Top contributors (%) -.33 Brait Sa MTN Group Ltd Datatec Ltd Mediclin Standard Bank Gr Ltd Anglo American Plc Sun Intl Ltd Reinet Investments Sa / Dep Rc Sabmiller Plc Bhp Billiton Plc Top weightings vs benchmark as at 31 March 216 Top underweight (%) Top overweight (%) Firstrand Investec Plc / Ord Anglo Standard Bank Naspers Old Mutual Richemont Steinhoff Int Hldgs N.V SAB Barclays Africa Group Performance: Total returns to 31 March 216 (%) Term Absa Large Cap Benchmark Sector median Rank 1-year sector attribution Quarter /11 Fund equity.34 1 year /1 Benchmark years /8 Relative return 2.6 years /7 4% Industry allocation compared to the FTSE/JSE Top 4 index at 31 March 216 Sector Relative return contribution 3% 2% 1% % -1% Managed Benchmark Relative Oil & Gas -.16 Basic Materials 1.3 Industrials. Consumer Goods -.27 Health Care -.11 Consumer Services -.88 Telecommunications 1.44 Technology -.34 Financials.44 Additional -.1 Fund equity 2.6 Absa Asset Management Investment Report - 1st Quarter 216

8 Absa Africa Equity Fund Fund comments The first quarter of 216 saw a wide dispersion of returns between African (ex-sa) equity markets. In USD terms, the Egyptian Index dropped,4%, the Nigerian All Share shed 11,%, Kenya rallied 2%, while Morocco advanced 7,7%. The key driver of underperformance in the first quarter was the fund s underweight positioning in Morocco (1% versus 17% in the benchmark) where capital controls prohibit domestic investors from investing offshore, creating a hothouse effect reflected in the free-float index trading at 29x earnings at the end of March. Cyclical headwinds are pervasive across the continent and will continue for the better part of 216 with resource exporters like South Africa, Nigeria and Zambia enduring the brunt of the pain of adjustment. We see the seeds of an investment-led economic boom over the medium term, as well as one of the most compelling long-term emerging consumer themes on the continent. The fund is well positioned to participate in targeted growth sectors such as power, healthcare, consumer goods and finance. Regional/sectoral split as at 31 March 216 R egio n/ Secto r B o tswana Egypt Kenya M o ro cco M auritius N igeria T unisia T anzania Senegal Relative sector weightings as at 31 March 216 So uth A frica Uganda Z ambia Z imbabwe Financials 2.% 11.8% 9.%.9% 2.% 7.2%.%.%.%.%.%.%.% Consumer Staples.% 13.1% 7.%.%.%.%.% 3.%.%.%.%.% 2.2% Telecommunication Services.%.%.9%.%.%.%.%.% 4.4%.%.%.%.% M aterials.%.% 1.3%.%.%.%.%.%.%.%.%.%.% Industrials.%.%.%.%.%.%.%.%.%.%.%.%.% Energy.%.%.%.%.% 2.1%.%.%.%.%.%.%.% Health Care.% 3.6%.%.%.%.%.%.%.%.%.%.%.% Utilities.%.%.%.%.%.%.%.%.%.%.3%.%.% Information Technology.%.%.%.%.%.%.%.%.%.%.%.%.% Other.%.%.%.%.%.%.%.%.%.%.%.%.% Cash.1% 3.1% 2.6%.%.%.8%.%.%.% 11.1%.%.%.% Grand Total 2.6% 31.6% 26.8%.9% 2.% 1.1%.% 3.% 4.4% 11.1%.3%.%.% Top underweights (%) Top overweights (%) -.89 Energy Cash Telecommunication Services Consumer Staples Materials Utilities Financials Health Care Performance: Total returns to 31 March 216 (%) Term Absa Africa Equity A Benchmark Sector median Rank Quarter / 1 year / Regional contribution to quarter performance (%) Uganda Botswana Senegal Morocco Tanzania Kenya Zambia Zimbabwe Nigeria Egypt Absa Asset Management Investment Report - 1st Quarter 216 6

9 Absa Property Equity Fund Fund comments The fund delivered a total return of 7,99% for the first quarter of 216, outperforming the median manager by 1,66%. The SA listed property sector recovered in the first quarter of 216 from the sell-off in December 21 post the Nene-gate saga and delivered a solid return of 1,1%, outperforming equities (3,9%), bonds (6,6%) and cash (1,7%). Over a longer period, listed property has also proven to be one of the best asset classes, returning 16,4% p.a. over the past 1 years. As global markets digest the change in U.S. monetary policy and economic news points through the rate hiking cycle, global markets are expected to be characterised by unprecedented volatility. Relative return contributors (1 year) Top detractors (%) Top contributors (%) -.6 Investec Australia Property Fu Fortress Income Fund Ltd B Arrowhead Properties Limited A Growthpoint Properties Texton Capprop (Cpf) Vukile Property Fund Attacq Limited Rockcastle Global Real Estate New Europe Property Investment Top weightings vs benchmark as at 31 March 216 Top underweight (%) Top overweight (%) Investec Property Vukile Attacq Limited / Ord SA Corp Fortress Income Fund Ltd / Lin Fortressb Redefine Arrowhead Properties Lim A Growthpoint Props Delta Property Fund Limited / Performance: Total returns to 31 March 216 (%) Term Absa Property Equity A Benchmark Sector median Rank Quarter /38 1 year /33 3 years /23 Absa Asset Management Investment Report - 1st Quarter 216 7

10 Absa Balanced Fund Fund comments Weak Chinese economic data, Brexit fears and a disappointing ECB stimulus package resulted in another quarter of extreme volatility in global markets. Emerging Market equities (+,4%) outperformed their developed market peers (-1,%), driven predominantly by higher US dollar commodity prices. After falling 1% in the first three weeks of January, the SWIX All Share ended the quarter up,9% in ZAR. Bonds (+6,6%) performed better and were significantly less volatile but Property (+1,1%) was the best performing asset class by far. Economic growth in SA is likely to be well below 1% for 216, bringing with it a potential credit rating downgrade. The fund remains cautiously positioned given the current environment, with equity exposure focused on companies with strong balance sheets and favourable future earnings prospects. Gross return contributors (1 year) Asset allocation as at 31 March Domestic equity Domestic bonds Domestic equity Domestic bonds 42.9% 17.8% International equity Domestic cash Domestic cash International equity International money market 13.1% 16.7% 9.% International cash Total 1% Top weightings vs benchmark as at 31 March 216 Top underweight (%) Top overweight (%) Steinhoff Intl Hld Nv Standard Bank Gp Bhpbill British American Tobacco Richemont(Cie Fin) Tigbrands Naspers New Europe Property Investments Plc Sabmiller Plc SA Corp Performance: Total returns to 31 March 216 (%) Term Absa Balanced R Benchmark Sector median Rank Quarter /79 1 year /68 3 years /1 years /4 4% Industry allocation compared to the Alsi at 31 March 216 Bond comparison to the All Bond index at 31 March 216 3% Inflation Linked Bonds 2% 1-3 Yr Sector 1% % -1% -2% Managed Benchmark Relative 3-7 Yr Sector 7-12 Yr Sector 12+ Yr Sector Difference All Bond Index Fund -6% -4% -2% % 2% 4% 6% 8% Absa Asset Management Investment Report - 1st Quarter 216 8

11 Absa Absolute Fund Fund comments Despite a challenging year for the equity and bond markets, the Fund has returned 4,9% over the past year and 9,9% p.a. over the past years. CPI inflation has been running at 7,% over the past year and,8% p.a. over the past years. Although the US is likely to hike interest rates further during the next 12 months, global interest rates are not expected to increase rapidly. Against this backdrop of low yields, valuation levels of global markets are on the high side. There are various country-specific risks being faced by South Africa as a result of an expected sovereign credit review, trade and budget deficits, poor economic growth and general political uncertainty. Our equity exposure continues to be focused on stocks that are trading at parity (or at a discount) with the market at large, yet have higher earnings and dividend yields, strong business franchises and balance sheets, and better visibility of cashflows. Gross return contributors (1 year) Asset allocation as at 31 March Domestic equity.2 Domestic cash Domestic equity Domestic bonds 29.7% 46.%.29 International equity Domestic cash 2.% 3.1 International cash International equity International money market 3.2% 17.7% Domestic bonds Total 99% Top weightings vs Alsi as at 31 March 216 Top underweight (%) Top overweight (%) BHPBil Growthpoint Props Steinhoff Int Hldgs N.V Intu Properties Richemont Redefine SAB Emira Naspers Spar Group Limited Performance: Total returns to 31 March 216 (%) Term Quarter /133 1 year /12 3 years /9 years /7 Fund generated negative returns Since inception Periods % Any quarter 7/11 6% Any 6 months Absa Absolute A Any 1-year rolling period Any 2-year rolling period (ann.) Any 3-year rolling period (ann.) CPI+4% Sector median Rank To 31 March 216 /17 % /11 % /89 % /77 % Cumulative performance to 31 March 216 Absa Absolute Fund CPI CPI + 4% Source: Morningstar; All figures are net (after fees) Absa Asset Management Investment Report - 1st Quarter 216 9

12 Absa Money Market Fund Fund comments The South African Reserve Bank (SARB) raised the repo rate by 2 basis points at the Monetary Policy meeting in March. This after they had raised the rate by basis points in January amidst rising inflation concerns. CPI printed at 7,% from 6,2% y/y, driven largely by higher food prices, somewhat vindicating the SARB s decision. Local political uncertainty, threat of a ratings downgrade, risk of higher oil prices and escalating food prices all contribute to South Africa s rising inflation risks. The rand remained volatile over the quarter, oscillating between 14,72 and 16,3 against the US dollar, while the money market yield curve adjusted higher over the quarter on the back of the interest rate increases. The fund continues to be actively managed. The relatively high percentage of floating rate notes in the fund should be beneficial in the rising interest rate environment. Duration allocation Cash 7.3% Performance: Total returns to 31 March 216 (%) - 3 months 62.63% Term Absa Money Market Benchmark Sector median Rank Quarter / months 4.8% 1 year /28 3 years / months 12.23% years / months 13.96% Issuer exposures at 31 March 216 Nedcor P-1.za, 22.2% Standard Bank P-1.za, 19.89% Investec P-1.za, 19.36% Absa P-1.za, 24.82% Firstrand P-1.za, 9.9% Cumulative performance to 31 March 216 Absa Money Market Fund STeFI Composite Source: Morningstar; All figures are net (after fees) Absa Asset Management Investment Report - 1st Quarter 216 1

13 South African asset classes SA equities The declining trend in the Alsi, which commenced in April 21 and had amounted to more than 9% by end-february 216, was substantially reversed in March. Measured as at 31 March 216, the Alsi total return index was up 6% on the previous month although year-on-year the increase was much more subdued at 3,3%. Only two of the major JSE equity sectors registered positive returns for the year ended 31 March 216, namely Consumer Goods (24,4% y/y) and Consumer Services (6,7%). The biggest declines over the same period were recorded by Resources (-2,3% y/y), Telecommunications (-19,4%) and Healthcare (-1,%). Other sectors posting negative returns included Industrials (-3,%), and Financials (-1,1%). On a valuation basis measured in terms of historical PE ratios, the most expensive sector was Consumer Services (43,1x), followed by Resources (42,2x), Healthcare (33,7x) and Consumer Goods (26,8x). Financials and Industrials were the cheapest sectors with PE ratios of 11,3x and 13,7x respectively. The PE ratio of the overall index stood at 21,x at the end of March 216, up on February s 19,6x and significantly higher than the average valuation level of 1x over the past 2-odd years since 199, making the market quite expensive. High valuations are even more of a concern when seen against the backdrop of falling earnings growth numbers which measured -14,% y/y in March. % months in time period Distribution of SA equity returns (January 2 to March 216) Monthly returns (%) Historical PE ratios of FTSE/JSE sectors Last 1 years As at: 31 Mar 216 Index: Jan 2= All Share Financials Resources 2 Industrials Price indices %pa Alsi total returns 3-yr rolling return 4 -yr rolling return SA property Real Estate Investment Trusts (REIT) retained their top spot in terms of returns achieved over periods in excess of five years. However, a below-inflation rate of return was achieved over the past year while the category return for the first quarter of 216 amounted to -4,1% (not annualised) despite a significant improvement in price levels during March. A depreciation of about 2% in the rand over the past 12 months, has fuelled inflation in South Africa, putting pressure on consumers and compounding risks that tenants may struggle to pay rent. To compensate for risks associated with currency weakness, property companies have accelerated their offshore expansion. Offshore earnings now account for 36% of the income of the 21-member FTSE/JSE South Africa Listed Property Index, compared to less than 1% five years ago, according to some estimates. Despite solid earnings growth for the industry, the rally in these shares has moved them back to fully valued territory. The risks of a weaker currency, higher bond yields (possibly associated with a credit rating downgrade) and higher short-term interest rates, are likely to weigh on the property market, although South African REITs are conservatively geared and well-hedged, allowing them to withstand some headwinds. % months in time period Distribution of SA listed property market returns (January 2 to March 216) Monthly returns (%) %pa SA listed property index returns 3-yr rolling return 1-yr rolling return Price/earnings ratio SA listed property index PE DY Dividend yield Jan 2 = 1 SA listed property index vs. Alsi Listed property index Alsi Absa Asset Management Investment Report - 1st Quarter

14 South African asset classes SA bonds After rising by 1bp to 9,8% following the changes in finance minister in mid-december last year, the yield on the all-bond index had eased to around 9% at the end of the first quarter of this year. For the first quarter of 216, the all bond index total return amounted to 6,6%, although the return for the year was disappointing at -,6%. For the past five years, nominal bond returns have averaged 7,8% per year, amounting to a real return of around 2,2% p.a. The South African Budget presented in February by Finance Minister Gordhan, envisages fiscal consolidation over the next three years to stabilise the ratio of government debt to GDP, despite a substantial downward revision in GDP growth projections. The 216/217 National Budget aims for a cumulative tightening in fiscal policy of around 1% of GDP over the next three years relative to last October's Medium-Term Budget Policy Statement. However, unspecified tax measures proposed for later years as well as ambitious plans to contain the public wage bill and a weak economic outlook pose fairly formidable implementation risks. Although our base forecast is for nominal bond yields to range between 8,% and 9,% in 216, a drop in South Africa s credit risk rating to sub-investment grade status could well entail a rise in real bond yields to around 3,%. This would be some 1bp higher than the current real bond yield. However, the accompanying movement of inflation will be all-important. If inflation peaks at around 8 to 8,% during the current cycle, nominal bond yields could conceivably rise to between 11% and 12% following a ratings downgrade. % months in time period Distribution of SA bond returns (January 2 to March 216) Monthly returns (%) % pa Bond yields 12 R23 ( ) 11 R186 ( /26/27) % +1 standard deviation average -8-1 standard deviation SA cash Real yield gap* *Real long bond yield (R186) (using CPI) minus earnings yield on equity % pa All Bond total returns 2 3-yr rolling return -yr rolling return 1 1 According to the SA Reserve Bank s Monetary Policy Committee s (MPC) latest statement, concerns remain over the weak growth outlook, particularly amid negative business and consumer confidence. The growth challenges facing the economy are further compounded by the deteriorating outlook for global growth as recently highlighted by Christine Lagarde, the managing director of the IMF. Although the latest inflation forecast of the Reserve Bank has improved somewhat, the MPC remains concerned that the inflation breach of the upper target (6%) could be more protracted than initially thought. Food price pressures, caused predominantly by the drought and the weak rand, have intensified and remain a significant upside risk to inflation. The MPC recognises the fact that demand pressures on inflation remain subdued and that indications are for household consumption expenditure to remain constrained. The committee nevertheless regards the recent increase in core inflation and its expected upward trend as being indicative of broader inflation pressures and possible second-round effects. Given the upside risks to the inflation outlook, the MPC decided to increase the repurchase rate by 2 basis points to 7% per annum, with the prime overdraft rate rising to 1,% p.a. Further increases in interest rates between to 12 basis points are likely during the current cycle. % months in time period Distribution of SA money market returns (January 2 to March 216) Monthly returns (%) % NCD yield curve and implied forward rates NCD rates Implied 3 month rates Tenor in months % Prime and NCD rates Prime 3 month NCD 12 month NCD 4 % pa STeFI Index total returns 11 3-yr rolling return 1 -yr rolling return Absa Asset Management Investment Report - 1st Quarter

15 South African asset classes Returns : SA portfolio Historical returns Measured over the year to 31 March 216, AltX listed securities outperformed most other financial asset classes with a return of 2,9%. Threemonth money market returns delivered the second best performance coming in at 6,% p.a., while the return on Real Estate Investment Trusts amounted to 4,7%. The Alsi return over the past year amounted to only 3,2%, while a negative nominal return of -,6% was recorded by the allbond index. Optimised balanced portfolios that had a maximum weighting in cash, industrials and listed property, would have recorded returns of around 2,6% for the past 12 months. With the benefit of hindsight, over the past year unconstrained optimised portfolios would have included cash and industrial shares. Historical asset and portfolio returns for period ended March fixed % allocation over the period¹ Past 1 years Past years Asset class Return Ex post Return Ex post Return %p.a. optimum %p.a. optimum %p.a. allocation allocation Cash Bonds JSE Financials (J8) JSE Industrials (J27) JSE Resources (J28) JSE Listed Property (J23) Total Optimisation performed within constraints. (See last two columns of forecast table on this page) Past year Ex post optimum allocation Projected returns and asset allocation South Africa s sovereign credit risk ratings reached a peak during before the major ratings agencies started with downgrades in late 212 and early 213. S&P and Moody s again downgraded South Africa s risk rating in early 21, while Fitch followed suit late in 21. Currently the Moody s rating is still a notch above both Fitch s BBB foreign currency credit rating (with a stable outlook) and Standard & Poor s BBB foreign currency credit rating (with a negative outlook). Moody s is shortly expected to adjust its rating downward to one notch above junk status. Even though South Africa s fiscal ratios are projected to improve, government spending, taxes, deficits and debt ratios are not the only numbers that are of concern to ratings agencies. Indeed, drawing on international research over many years, it appears as though fiscal deficit and debt numbers are often of limited value in explaining sovereign risk rating adjustments. Fiscal policy is but one aspect of a host of policy measures and indicator projections which ratings agencies analyse to arrive at a country-specific credit rating. Statistically, studies have indicated that GDP per capita tends to explain as much as 8% of the changes in credit ratings agencies assessments of countries. Unfortunately, the movement of this indicator does not bode well for South Africa s future credit rating. International evidence suggests that if South Africa s credit risk rating is lowered to junk status by one or more of the ratings agencies, a rise in real bond yields to around 3,% can be expected. Depending on the ruling and expected inflation rates at the time, this could entail an increase of between 1 and 3bp in nominal bond yields. A steep increase in bond yields will most likely take place over a number of months rather than in one fell swoop. Since 1998, 8% of quarterly changes in SA bond yields have ranged between -8bp and +6bp. A quarterly bond yield change in excess of 1bp is certainly not impossible, but would be regarded as an outlier. A 22 study by the World Bank suggests that ratings agencies act pro-cyclically downgrading countries in bad times and upgrading them in good times. In this sense, ratings agencies may add instability to the financial markets of emerging economies. The results may explain why it was found that the effects of upgrades and downgrades did not appear to be big in economic terms, though they were statistically significant. Ratings agencies decisions usually have the effect of reinforcing investors expectations with limited informative effect. A balanced portfolio is expected to deliver an annualised return of about 8,6% p.a. over a 3-year period, commencing in April 216. Forecast asset returns and suggested portfolio mix 1 3 Years Constraints Asset class Return 2 Asset Minimum Maximum % p.a. weighting(%) % % Cash Bonds JSE Financials JSE Industrials JSE Resources Property Total Optimisation performed within the constraints 2 Annual returns Absa Asset Management Investment Report - 1st Quarter

16 International asset classes International equities Equity markets began 216 on the back foot, falling by 6% in the first week of trading. The sell-off continued with the S&P falling another % before bottoming out in early February. However, global concerns subsided and in a sharp about-turn, stock markets rallied aggressively to close the quarter substantially higher. In dollar terms, for March, equity market prices (as per the MSCI indices) were 6,7% higher in the US, 9,9% up in Germany, 4,3% higher in the UK and 3,9% up in Japan. The big winners on the turnaround were emerging markets and commodity-based equities. Emerging market inflows rose by unprecedented amounts towards the end of the quarter. The MSCI Emerging Markets Index rose by more than 1% from its early February low. The MSCI Emerging Markets Index has tracked the movements in the broad trade-weighted dollar closely in the past. In 21, market participants demonstrated concern that a rising dollar would pose a risk to emerging markets by making their dollar-denominated debt costlier. The converse of this argument applied to the latter part of the first quarter of 216 with the weaker dollar helping to explain the new-found strength in emerging equity markets. % months in time period Distribution of world equity returns (January 2 to March 216) Monthly returns (%) Index: Jan 2=1 Equity price indices USA UK Japan Germany MSCI Source: I-Net Bridge PE ratios USA UK Japan Germany MSCI Source: Bloomberg %pa World equity total returns (USD) 3-yr rolling return -yr rolling return International bonds One of the striking elements of the first quarter was the expansion of negative rate policies by several global central banks. This sent the value of developed country sovereign debt with a negative yield up to about $7,6 trillion, representing almost a third of sovereign debt, according to a Financial Times calculation. This compares with $3, trillion, or 1,7%, of total sovereign debt at the end of 21. A flight to safety caused the yield on 1-year US Treasury Bonds to drop to 1,78% from 2,24% at the beginning of the year. This drop provided a major tailwind to bond funds, with the long government and long-term bond open-end fund categories each rising by more than 6% in the quarter. High-yield bond funds, which came under tremendous pressure at the end of 21, stabilised and rose more than 2% in the first quarter. Emerging market borrowers raised more than $73 billion on global bond markets in the first quarter of 216. This was almost a fifth below the levels of a year ago, but refinancing needs and improving market conditions could boost issuance in the months ahead. During the first quarter of 216, governments sold hard currency bonds worth around $3 billion, while corporate issuance amounted to some $44 billion. % months in time period Distribution of world bond returns (January 2 to March 216) Monthly returns (%) % 1-year government bond yields 6 UK Germany USA Japan % Yield spreads with USA (US yield - foreign yield) UK Germany Japan -2 %pa World bond returns (USD) 3y rolling return yr rolling return - Absa Asset Management Investment Report - 1st Quarter

17 International asset classes International cash The Fed ushered in a new era of monetary policy in December 21, after seven years of record-low interest rates. The move was symbolically important, but monetary policy is set to remain very accommodative and the domestic economy will be able to withstand a gradual increase in borrowing costs. This was confirmed by the dovish tone of the FOMC when it decided to hold rates steady at,2-,% at its 16 March meeting, pointing to global economic conditions and low inflation in its decision. US growth will most likely be steady while inflation could accelerate, permitting the Fed to further increase rates later in 216. This will gradually curb consumer spending growth. However, if inflation remains below target, the central bank will move even slower, and if the economy stutters, the Fed will pause. In Europe, the ECB remains firmly in the loosening phase of its cycle. In March it reduced its deposit rate from -,3% to -,4%, increased the monthly size of its quantitative easing (QE) payments by 2bn, added investment grade non-bank corporate debt to the QE programme, cut its policy rate to zero and introduced more measures to encourage bank lending. This was a fairly aggressive package of measures which caused the euro to rise against the dollar in response. However, a persistently strong euro will hamper the ECB's efforts to increase the rate of inflation to 2%. % months in time period Distribution of USD cash returns (January 2 to March 216) Monthly returns (%) % Short-term rates (call) UK Euro USA -1 % UK Euro USA Deposit rates Tenor in months %pa 3-year rolling risk-free returns (local currencies) 6 UK Euro USA Japan Currencies Most emerging-market currencies strengthened against the US dollar in March. The rand rose by some 8% against the yen and dollar, 6,3% against the yuan and 3,3% against the euro. The appreciation of emerging market currencies with the ruble and real strengthening even more than the rand can be seen as part of a broad rally in risky assets. It is difficult to make the case that the rally reflects a change in the outlook for emerging markets, which remains decidedly negative. Rather, it appears to have been driven by markets scaling back their projections of Federal Reserve interest rate rises. The expectation of increasing yield support was an important factor in the accumulation of long positions on the dollar since mid-214. As market positioning became increasingly stretched, it left the dollar vulnerable, particularly against emerging-market currencies, which had been under heavy selling pressure for many months. The European Central Bank (ECB) would like a weaker euro given persistent deflationary pressures, which are now also present in Germany, the strongest large economy in the currency bloc. But with monetary policy already extremely accommodative, it is questionable whether any further easing by the ECB will have much impact on the euro, which derives structural support from a large current account surplus. EUR,GBP,CHF GBP CHF USD vs other currencies EUR JPY R/$ exchange rate JPY EUR,GBP,CHF index: 2= GBP CHF ZAR vs other currencies EUR JPY Real and nominal effective rand exchange rates Nominal Real JPY Absa Asset Management Investment Report - 1st Quarter 216 1

18 Emerging markets India is likely to again be the fastest-growing large economy in the world this year, although this partly reflects its relative isolation from global supply chains. The lack of reforms, especially those pertaining to the goods and services tax and land acquisition processes, meant that the government chose to deliver a populist budget for the fiscal year 216/217, which saw fiscal consolidation plans delayed. In the absence of economic reforms, domestic investment growth by private companies will remain sluggish, causing strong pressure on the government to keep expenditure on infrastructure high. Growth is likely to average 7,3% p.a. during , driven mostly by an expansion of the services sector. China's growth rate is expected to slow throughout the forecast period, from 6,% in 216 to 4,3% by 22 as the economy matures, moving away from public investment and towards private consumption. Most of this slowdown will be concentrated in investment, especially that related to housing construction. Household consumption, supported by rising incomes, should hold up better, while government spending is expected to continue expanding rapidly. Although net exports will still make a positive contribution to GDP growth throughout the period, this will mostly reflect sedate domestic demand rather than a strong export performance. Russia is expected to endure another year of economic contraction, amounting to around -1,3%, in 216, with economic recovery delayed until the second half of the year. In response to the further decline in oil prices in late 21 and early 216, the government plans to cut spending by 1% compared to its initial budget. Brazil s growth rate forecasts are also being revised downwards with -3,7% currently predicted for 216. Inflation has remained sticky at above 1% since October last year, but the Central Bank has not raised rates as monetary policy is constrained by the deteriorating fiscal situation. Some monetary tightening may occur later in 216, but the key to Brazil's emergence from its current economic crisis is a more concerted effort at fiscal tightening, which is needed to stem the current loss of confidence. 3 Equity price indices 3 Emerging market equity price indices Index: Jan 2= Index: Jan 2= USA UK Japan Germany MSCI BRL CNY INR PLN RUB TRY THB ZAR Index (nalural log scale) 12 6 Morgan Stanley world equity index and Emerging markets indices MSCI Emerging markets 3 %pa 3-year rolling bond returns (USD) 2 World 2 Emerging markets Absa Asset Management Investment Report - 1st Quarter

19 International asset classes Returns: International portfolio Returns and efficient frontier Considering a 12-month historical view, equity returns were disappointing, although some markets saw a slight recovery towards the end of the last quarter. Bond performance was better, particularly in Japan, where yen strength undoubtedly helped. In USD terms, the best returns were provided by Japanese bonds. Historical asset and portfolio returns for periods ended March Constrained optimisation (Based on fixed allocation over the period - USD-terms) Past 1 years Past years Past year Minimum Maximum Return Ex post op- Return Ex post op- Return Ex post op- holding holding p.a. timum mix p.a. timum mix p.a. timum mix % % Equity Japan -.2 % 4.3 % -6.8 % 7 Europe 2.7 1% 2.7 1% -8. 1% 1 2 UK 2. 6% 2.3 6% % 6 18 USA 7. 42% %.9 16% Bonds Japan 3.3 % -2.6 % % 6 Germany 4.4 8% 1.2 7%.2 2% 7 2 UK 4. % %.3 % 14 USA % % % 8 24 Cash Japan -.2 % -7.4 % -.4 % 3 Euro. 2% -. 2%.3 2% 2 1 UK.4 2% % -.1 2% 2 1 USA 1. 2%.1 2%.1 1% 2 12 Overall portfolio return.1 1% 6.4 1% 1.3 1% 1 Efficient frontier of global asset portfolio (Last years; Base currency: USD) US equity 1 Return US bonds UK bonds Japanese equity European equity German bonds UK equity US cash UK cash Japanese bonds - European cash Japanese cash -1 Risk (Std Dev) Forecast asset returns (in US dollar terms) and suggested portfolio mix 1 3 years Minimum Maximum Return Asset holding holding % p.a. weighting(%) % % Equity Japan Europe UK USA Bonds Japan Europe UK USA Cash Japan.1 3 Euro UK USA Overall portfolio return Optimisation performed within the constraints Absa Asset Management Investment Report - 1st Quarter

20 APPENDIX A Key macroeconomic variables and projections* As at 31 December International real output (GDP % ) USA Japan UK International inflation (CPI % ) USA Japan UK Commodity prices Oil price ($/barrel, N.S. Brent) Gold price ($/oz) Exchange rates USD/EUR USD/GBP YEN/USD ZAR/USD ZAR/EUR ZAR/GBP Interest rates (%) USA long bond yield Japan long bond yield UK long bond yield SA prime rate SA long bond yield SA monetary variables (% ) M3 money supply Private sector credit SA inflation rates (%) CPI headline CPI food SA balance of payments Current account (% of GDP) SA expenditure on real GDP (% ) Final consumption by households Final consumption by government Fixed capital formation Gross domestic product * Figures are to the period end Absa Asset Management Investment Report - 1st Quarter

21 APPENDIX B SA equity yields, prices and returns* Forecast (year ended 31 As at 31 December December) Industrial index (J27) Dividend growth (%) Earnings growth (%) Dividend yield (%) Earnings yield (%) PE ratio Index Annual return (%) Financial index (J8) Dividend growth (%) Earnings growth (%) Dividend yield (%) Earnings yield (%) PE ratio Index Annual return (%) Resources index (J28) Dividend growth (%) Earnings growth (%) Dividend yield (%) Earnings yield (%) PE ratio Index Annual return (%) Alsi (J23) Dividend growth (%) Earnings growth (%) Dividend yield (%) Earnings yield (%) PE ratio Index Annual return (%) * Figures are to the period end SA cash, bond and property returns* Money market Annual return (%) Bond market Long bond yield (%) 1 All Bond index (BESA): Clean Price Income Total return index (ALBI) Annual return (%) Forecast (year ended 31 As at 31 December December) Listed Property market Price index (J23) Dividend yield (%) Dividend growth (%) Annual return (%) * Returns are calculated to period end 1 Source for historical long bond yield: South African Reserve Bank Quarterly Bulletin: Code RB23M