Global Markets:
If you are reading this, then you have endured Black Friday, the worst month of Springbok rugby ever, two of the dreaded downgrade announcements (with one still to come), and the end to a deplorable US election.
To quote Warren Buffet, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” Once again the forecasters not only got the election result wrong, but also the expected market reaction. Contrary to forecasts, markets reacted positively to the Trump presidency. Presumably this was because Trump announced that the US can look forward to massive spend on infrastructure under his term. The result was a US Dollar that reached its strongest in nearly a year; the Dow Jones, the S&P 500, the Nasdaq Composite and the Russell 2000®, setting record highs and a sharp sell-off in US Treasuries, due to anticipated inflation. Ten year Treasury rates are now 2.4%, up from a yield of 1.8% last month. Investors sold off emerging markets and moved money into the US markets. The upshot is that the MSCI World Index, which tracks the performance of developed markets was up 1.3% for the month. Emerging markets which have been posting consecutive monthly gains for some time now, saw a reversal of fortunes, losing -4.7%.
This once again reminds us that attempting to position a portfolio for a short term future event is a fool’s errand. We cannot know the future, and so we must navigate the uncertainty with prudence, and a long term outlook. Anything else will result in bad investment decisions and potentially bad investment results. So whilst this month has certainly been interesting, these short term moves do not elicit a knee jerk response from us.
The next point of investor interest on the US calendar is the meeting of the US Federal Reserve Bank in December. Having released robust economic data in November expectations are for an increase in interest rates. This should support the strength of the US Dollar and the sell off in emerging markets in the short term.
Turning to Brexit, the United Kingdom’s GDP grew 0.5% in Q3 versus the prior quarter. Notwithstanding popular reports, UK growth appears to be holding up for now. Perhaps this is a result of the benefit the falling Pound has provided in the wake of the vote. Suffice to say, what Brexit will “look like” is utterly uncertain, and the UK has a long and winding road ahead of it.
Finally we note that the Oil price remains below $50 a barrel.
South African Market:
The month kicked off with the release of the state capture report, hastily followed by the surprise discovery of a shebeen in Saxonwold. It ended with members of the ANC’s National Executive Committee stepping up and asking President Zuma to resign.
Against this backdrop Fitch and Moody’s released their South African rating reviews. Moody’s kept its rating unchanged at Baa2 with a Negative Outlook, whilst Fitch kept their rating unchanged at BBB-, but cut the outlook from Stable to Negative. No prizes for guessing what the main concerns stated by the ratings agencies were. They included increasing political risk, standards of governance and policy-making (among others).
Notwithstanding the domestic shenanigans, it was the outcome of the US election that had the largest impact on our markets this month. Within a week of the Trump result, the Rand had weakened by 9% against the US Dollar and local equities sold off by 2% and bonds by 3%. All three recouped some of their initial losses ending the month down 4%, -1.8% and -0.6% respectively. How Trump’s term will affect South Africa and its trading partners remains to be seen with much speculation that it will be negative for emerging markets.
Although the All Share Index was down -0.6%, this performance is masked somewhat by the fact that industrial shares were down 3.9% offset by resource shares which were up 6.1%. Fund managers with no exposure to resources have had a tough time this year as resources have been the main driver of performance returning around 31% to the end of November. Over the same period Industrial shares have lost 10.3%. Financial shares have been flat.
The SARB left the repo rate unchanged at this month’s MPC meeting. In his statement, Reserve Bank Governor, Lesetja Kganyago said that the pause in increasing interest rates will continue as long as inflation continues to remain in the target range of 3% to 6%. The longer this continues the more certainty we will have that we have reached the end of the upward interest rate cycle. One risk to this is the Trump presidency. A strong dollar would imply a weaker Rand and higher inflation.
We would like to take this opportunity to wish all the readers of our monthly market update a restful break over the holiday period and all the best for 2017. We look forward to connecting with you again on 1 February 2017.
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