The dominant feature for South African investors in 2016 was the unexpected strength in the Rand when measured against the US Dollar. Over the course of the year the Rand/Dollar exchange rate strengthened by nearly 12%. It was clear in hindsight that the extreme weakness in the exchange rate after the Zuma-led Finance Minister debacle in December 2015 was overdone and the strength in 2016 represented a recovery from a very severe negative market reaction.
While the FTSE/JSE All Share Index delivered a small 2.6% return for 2016, the bond market was up by 15.5% and the listed property sector rose by 10.2%. However, returns from offshore exposure in local portfolios were hurt by the strong Rand. Last year was thus characterised by a recovery in politically-sensitive asset classes (currencies, bonds and property) and it seems as though 2017 will be more of the same. While the impact of politics on portfolios last year was mainly as a result of South African political noise, the expectation for this year is that the major political drivers will be from offshore.
There are a number of dominant themes that have been identified as critical to the outcome of investment decisions this year. The first is new US President Trump. Markets rallied on the election of Mr Trump, who promised to focus on US job creation, tax cuts and investment in infrastructure during his campaign to be president. The London Financial Times newspaper reports that Bill Gross, the renowned bond investor and portfolio manager of the Janus Global Unconstrained Bond Fund, says that he believes the “success or failure of Trumpism” will be one of the biggest investment issues in 2017.
Brexit and the future of the European Union (EU) is another concern for Mr Gross who wonders whether the “EU can hold it together”. Elections are due to take place in France, Germany and the Netherlands in 2017, while Brexit negotiations between the United Kingdom (UK) and the EU are expected to kick off in March. The risk is that anti-establishment votes in the UK’s Brexit referendum, the US election and Italy’s referendum last year could continue during 2017’s elections.
The expectation of rising inflation is another concern that global investors have raised, specifically in the USA and the UK. Rising inflation (and interest rates) will have a negative impact on bond prices as yields rise. Bond yields, which follow interest rates, have decreased for more than 30 years. But now some investors are anticipating change, predicting an end to years of low and even negative yields.
The outlook for Emerging Markets is another factor that weighs on investors for 2017. After disappointing returns in 2014 and 2015, Emerging Markets rallied for much of last year. But following the election of Donald Trump, Emerging Markets struggled again. The big question now is what is in store for 2017. The biggest risk for this region is a sharp rally in the US Dollar or significant US-driven changes to trade agreements.
Politics and political strategy will dominate the global landscape this year, not only overseas but here in South African as well. The ANC elects a new leader late in the year. President Zuma has been very quiet of late while Cyril Ramaphosa and Nkosazana Dlamini Zuma seem to have emerged as early frontrunners for the leadership position as rumours of an imminent cabinet reshuffle persist.
It appears that in 2017 global investors will get no respite from the uncertainty that goes with major political and policy changes. If anything, the politically-driven uncertainty that emerged in 2016 will intensify this year.
Investors get scared and pessimistic as markets decline and become greedy and optimistic as markets rise – this is precisely the type of behavior that causes errors. The solution is not to focus on market movements, but rather the long-term investment goals and make sure that your portfolio is structured correctly and diversified to achieve these goals.
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