South African Market:

What a month for South African investors! We had three finance ministers in four days, Fitch downgraded SA to a BBB credit rating (the lowest investment-grade rating) and Moody’s changed the outlook on SA’s credit rating to “negative” from “stable”, citing persistent low growth and a growing risk of spending targets being exceeded due to political pressure, as the main reasons behind the move.

The rand bore the brunt of all of this news losing another 7% against the US Dollar and 5% against Sterling during the month. Economists expect inflation to accelerate next year due to both rising maize prices caused by the drought, and the inflationary impact of the declining rand.

Expectations that South Africa’s annual stock market returns will begin to trend lower than the returns of the past decade came to fruition in 2015.
After reaching a peak in May, the JSE/FTSE All Share Total Return Index ended the year with a return of 5.1%, below our long term inflation expectation of 6% per annum. The Rand’s weakness did however come to the rescue of South African portfolios, as offshore exposure propped up returns in Rand terms.

Mr Van Rooyen’s brief appointment as Minister of Finance this month added considerably to the market’s volatility with financial shares losing 17%, property shares losing 12%, and the bond market losing 8%, within a few days of the appointment. Although these sectors recovered somewhat, they all ended the month substantially lower than they had started it. We will be taking a close look at the month-end reporting of the local income funds to see which funds were most impacted by the severity of the bond sell-off. Once again, resource shares continued their dramatic decline through December. Anglo American traded as low as R61 during the month from a high of R539 in 2008, a drop of 88% from its 2008 peak.

Global Markets:

We (finally) have lift off! Janet Yellen gave the markets what they had been waiting for and increased the Fed Funds Rate by 0.25% to 0.5% this month, at the same time emphasising the plan to continue to lift interest rates gradually over the next three years.

The first increase in US interest rates since 2006 had no significant short term impact on markets as this had been broadly anticipated by investors and the general sense is that Janet Yellen has done a sound job of achieving “lift off” without too much disruption to markets.

The MSCI Emerging Market index lost another 2.5% in Dollar terms during December, as a number of emerging market events continued to taint the sector. A topic close to home, credit rating downgrades, impacted Brazil as the country’s credit was downgraded to junk status by credit rating agency, Fitch, which saw Brazilian bonds trading at a yield as high as 16% in the aftermath. The ongoing weakness of the oil price continues to put the Russian economy under pressure, and the economic data coming out of China shows no sign of a recovery just yet, although the “hard landing” scenario does not appear to be playing out either.

Crude Oil ended the month trading at $37 per barrel, following indications that demand will be lower with a relatively warm winter expected in the Northern Hemisphere and supply likely to increase with the resurgence of Iranian oil exports.

A notable development in the US has been the significant redemptions experienced by High Yield Bond Funds in the second half of 2016, with some larger funds having fully shut down. The catalyst for this has been the normalisation of interest rates in the US and the China slowdown, and the expectation is that there will be more high yield bond defaults in the energy and commodity sectors in 2016. Whilst the fall out appears to be contained at the moment, we are reminded that Ben Bernanke infamously said the same about subprime mortgages in 2007.