AST year (2016) is likely to be remembered for the key political events that, although building up for a number of years, came to the fore in a profound manner. The winds of change that began during 2016 are likely to continue into 2017 and beyond. The world is suffering from a crisis in trust.
A review of asset class performance over 2016 serves as a powerful reminder that “mean reversion” in asset class pricing does occur. Losers of 2015 became the winners of 2016.
The year began with Chinese growth concerns hitting commodity prices and emerging markets in a brutal manner. January saw the Rand weaken to almost R17 to the US Dollar, while some mining shares were priced in a manner that questioned their long-term solvency.
As the year progressed, concerns regarding Chinese growth fears subsided, to be replaced by uncertainty around political regime change, notably in the developed economies of the UK and the USA as well as Brazil.
Commodities and emerging market asset classes enjoyed a strong comeback from early 2016 lows, to end the year as the best performing asset classes, with emerging market equities returning 11.6 percent in Dollars, including dividends.
Global equities continued to “climb a wall of worry”, with markets trending higher despite investor concerns about an uncertain political and economic environment, the prospect of higher interest rates, a bull market into its eighth year, and ended the year at close to their record high, returning 8.5 percent for the year in Dollars, including dividends.
The Dollar rose to its highest levels since 2003, while US long bond yields spiked sharply from mid-year levels (with bond prices declining) in anticipation of higher interest rates.
The Rand was one of the best performing emerging market currencies, strengthening by 11.7 percent relative to the US Dollar. Rand strength meant offshore investments were a headwind to returns.
Domestic bonds, which experienced a record worst year in 2015 following Nenegate last December, were the best performer of the major asset classes during 2016, returning 15.5 percent.
Domestic equities, measured by the JSE’s All-Share Index, returned a low 2.6 percent, including dividends.
A look at the performance of the All-Share Index constituents during 2015 and 2016 illustrates, with some exceptions, a similar reversal whereby the winners of 2015 were the losers of 2016 and vice-versa.
Resources were the winning equity theme last year, after underperforming the ALSI for six consecutive years.
The asset class returns of 2016 set the scene for an interesting and challenging year ahead.
Although the economy and financial markets are always marked by uncertainty, there is no doubt we live in extraordinary times with a wide range of possible – even plausible – economic and market outcomes. Appropriate risk management needs to take this into account.
With this backdrop, we are asking South Africa’s investment managers for their thoughts on the investment outlook for 2017 and beyond.
At the outset, we need to caution about the limitations of forecasting. This is partly because the complexities of today’s global economy, and the response of human behaviour to events, cannot be captured in economic models.
In a refreshingly honest self-appraisal, Andrew Haldane, chief economist of The Bank of England, recently admitted that his profession is in turmoil, having failed to foresee the 2008 global financial crisis and misjudging the impact of the Brexit vote due to the inability of economic models to cope with