South African Market:
We wish you and your families all the best for 2017 and hope that this finds you determinedly sticking to those New Year’s resolutions. As we accelerate into the second month of 2017, we really are beginning to wonder what is “fake news” and what is not!? The following, we can assure you, is indeed, real!
The primary themes that determined the fate of investment performance in Rand terms last year were (i) the rebound in resource shares (ii) the strength of the Rand (iii) the rally in bonds post Nenegate (iv) the rally in emerging markets, and (v) the strong performance of “value” as an investment style. A number of fund managers that did underperform relative to the market in 2016 were those with a high offshore exposure and/or no exposure to resource shares and/or a low bond exposure. Those that strongly outperformed were managers with a “value” investment philosophy such as RECM, PSG and Aylett & Company, which typically included exposure to resource companies and/or cyclical companies. Having been through a few tough years in terms of performance, “value” is an investment style that is once again outperforming.
The question is will these same themes continue to drive markets in 2017? So far the answer is a resounding “yes”. In January resource shares returned 10.7%, SA bonds 1.3%, emerging markets 5.4% (in USD) and the Rand continued to strengthen against the Dollar. The All share Index is up an impressive 4.3% so far in 2017.
As we have pointed out in past reports, the All Share Index has now traded sideways for close to three years. In fact, it has not beaten inflation for two consecutive calendar years. This is in fact the second time in the last two decades that the local share market failed to beat local inflation for two consecutive calendar years. Whilst tedious, this is not all bad, as whilst stock market performance has been flat over the period, company earnings have continued to grow. This means that some value has slowly come back into the South African market at current prices which provides an “underpin” of sorts to domestic share prices.
On the political front, we expect to once again step tentatively through the year, hoping to avoid any political land mines that may send the Rand into free fall. The rumours of a cabinet reshuffle are currently doing the rounds and are being felt by markets, and no doubt this will continue.
Economically, the domestic outlook remains pedestrian with the SARB already having reduced its growth forecast for 2017 to 1.1%. The January inflation release of 6.8%, surprised the market as it was markedly above expectations. None the less, the MPC left the repo rate unchanged at 7%, not wanting to stifle a struggling economy.
Please note that the dates for the next rating announcements from ratings agency S&P are 2 June 2017 and 24 November 2017. The ANC elective conference is to be held in December 2017. Brace yourself for a lot of market chatter leading up to these announcements.
Global Market:
“The Trump Bump!” is how the media are describing the spectacular rally in the US stock markets since the US election.
If Trump’s infrastructure and tax policies are implemented, markets expect US economic growth to accelerate. The expectation is that they will deliver higher after tax profits for companies, inflationary pressure, quickly rising interest rates and a strong dollar. Happy days indeed for investors in the US! On the other hand, if Trump’s protectionist rhetoric – “We have a $500 billion deficit with China … We can’t continue to allow China to rape our country … It’s the greatest theft in the history of the world” – is implemented, it is widely expected to be bad for global growth, especially if it results in a trade war between China and America.
The staggering 10% rally in the S&P 500 since the election on 6th November 2016 seems to imply that markets currently hold the former view. However markets have moved on conjecture so far. There is no delivery track record on which to pass judgement. If we add a potential foreign policy rollercoaster ride to the mix, the only word to describe the investment climate is “uncertain”.
The good news for offshore portfolios, is that the “Trump Bump” helped the MSCI World Index deliver a 15% return in US Dollars in the last 12 months. Although this came unexpectedly, it once again reinforces our view that diversification (a spread of investment markets, currencies and styles) is paramount when managing risk and performance in uncertain times.
In Europe, 2017 brings with it the Dutch general election and the French presidential election, both of which will be held in the first half of 2017. Following these, in the second half of the year, is the German general election. The outcomes of these elections could well lead to referendums on membership of the EU.
The after effects of Brexit continued to weigh on the British Pound as it hit a 32‐year low of $1.21 against the Dollar this month, after Theresa May signalled that the UK will fully break out of the EU’s common market. Against the Rand, the Pound reached its lowest point since the Brexit vote at R16.46.
We look forward to keeping you informed of developments throughout what will be an interesting and exciting 2017, and to continue offering you support in all aspects of your financial lives.
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