South African Market:

If returning from a relaxing summer break and heading straight into a global stock market correction wasn’t sufficient to jolt us back into reality, South African’s also had to cope with the indignity of England’s Barmy Army singing about the Rand’s demise at the New Year’s Newlands Cricket Test!

At WellsFaber our view is that Rand weakness beyond R16.50 to the USD in January, was overdone in the short term, but few of the asset managers we speak to are betting on a material strengthening of the currency over the long term, given the current economic and political setting.

The good news about January’s stock market correction is that pockets of value are beginning to creep back into shares, and we have found some asset managers adding to their exposure to financial counters, a sector which has been particularly hard-hit since “Nene-gate”.

Once again, the MPC raised interest rates this month, this time by 0.5% citing inflation concerns, as the impact of the Rand’s depreciation and higher food prices are expected to take hold. In its latest statement the MPC indicated that inflation will breach the SARBs upper band of 6% saying “the latest inflation forecast of the Bank shows a marked deterioration. Having averaged 4.6% in 2015, inflation is now expected to average 6.8% in 2016 and 7.0% in 2017.” Inflation above 6% is not good news for retired clients, however we take comfort in the fact that the funds WellsFaber selects for clients that are particularly sensitive to inflation contain assets that hedge against inflation such as exposure to foreign currency assets and inflation linked bonds.

A consequence of the rising interest rates in South Africa has been a sell-off of listed property shares for a second consecutive month, meaning that the South African Property Index is now down more than 8% since the beginning of December. A conversation with a long standing property investment manager put the sell-off into perspective explaining that the reason for the sell-off is that although our local property companies are well hedged and therefore not materially impacted by short to medium term interest rate hikes, the weak economic environment means that the growth in rental income is expected to slow from growing at a rate of 12-14% that we experienced in 2015.

Global Markets:

Both developed and emerging markets fell substantially (in Dollar terms) during January. Investors’ fear has been driven by concern around the ongoing slow-down in China’s GDP growth. China released an annual GDP growth figure of 6.9% for 2015 – its lowest annual growth rate in two and a half decades. Adding to the global negative sentiment was the oil price, which investors see as a proxy for global growth, trading as low as $28 per barrel, before snapping back above $30 shortly before the end of the month.

Fears of entrenched ultra-low inflation, or even deflation, in the Eurozone prompted ECB Governor, Mario Draghi to announce that the ECB would review stimulus measures at the next rate-setting meeting in March. This provided markets with some much needed optimism towards the end of the month taking markets off their lows.

There is rising speculation that the US may not hike rates again in 2016. Investors have dusted off the phrase “one-and-done”, last used in 1997 when the Fed stopped hiking rates after one rate hike due to the onset of the Asian Crisis. It is too early to know what the outcome might be, but at this point in time the US interest rate markets are pricing in a 42% chance of no rate hikes in 2016.

Finally, the price of gold benefitted from concerns about Chinese growth during January, as its status as a safe haven asset was reinforced, and the gold price, followed by gold shares, spiked sharply. Major commodity prices however remained muted in line with the global growth story.