2016 has not been an easy year for fund managers in South Africa. Over the past 8 years, markets have been in a full swing bull market and have been producing returns which clients are now expecting to be the norm. Markets first recovered from oversold levels in 2008 and fueled by cheap money chasing yield with investors unable to invest in bonds given the low or even negative yields. This however will not be the case going forward as we have seen with markets peaking in 2015 and have since then, been running relatively flat over these past 2.5 years. Global growth is a concern which is playing over in all investors’ minds. The IMF/ World Bank released comments that global growth remains weak and has been trending sideways. Weak growth results in a ripple effects which can be seen in company earnings, consumer confidence and this all flows through into consumer spending. While there have been some green shoots, we are a far way from being out of the woods.
We have seen a number of themes play out, including, 1) Cheaper Oil, 2) Stronger Rand, 3) Lots of volatility and 4) FED rate decisions.
1) Cheaper Oil
June 2014 saw the beginning of the collapse in the oil price. The cause of this was largely as a result of over supply into the market pushing prices further down. In the US, Shale companies started coming online and adding production. This quickly turned into a battle of supple between these shale companies and OPEC. Due to the large production capacity of OPEC, they kept flooding the market as they were not willing to lose market share to the US. As the supply increased, the price of oil radically reduced from $114/bbl to the low of $29/bbl seen in January 2016. At these low levels, US Shale companies were forced to stop producing as their breakeven costs were higher these selling costs. With the now slowdown in supply, the oil price gradually recovered and reached a resistance level of $50/bbl where it has been trading for majority of the year. After recent meetings held in Vienna, OPEC announced its deal to cut output by 1.2 million barrels a day which caused the oil price to jump over 10%. The outlook for oil appears to be more bullish with many analyst projecting prices between $70 and $80/bbl for 2017.
2) Stronger Rand
The rand started the year at rather unfortunate levels against major currencies. The firing of finance minister Nhlanhla Nene in December 2015 was the catalyst that accelerated this depreciation. With foreign interests pulling money from SA at alarming rates, the rand depreciated further to R16.77 from R15.47 in the beginning of the year. As seen in the past, the rand is a fundamentally weak currency and on average depreciates at a rate of 7-10% per annum. This is a great area for fund managers to generate returns and hence many fund managers use this offshore currency allocation to generate alpha for South African investors. In 2016 however, this has not been the case. The large amounts of panic seen in the beginning of the year was a large overreaction to the news that was released. After market participants had time to digest the news and once Pravin Gordhan had been reappointed as Finance Minister, calmness had been regained in South Africa. Although there were many challenges faced, the Rand managed to hold its ground and appreciated 12.18% year to date. Managers that held any kind of offshore exposure would have suffered due to this strengthening. The Rand has been trading in a channel between R14.60 and R13.42/$. Looking forward, the general market consensus is that the Rand will trade in this range for the next 1-2 years and thereafter, to continue its 7% depreciation path.
If there ever was a year for volatility, 2016 was that year. The two main events that shocked the world were Brexit and the US presidential election where Donald Trump surprised markets and won. There appears to be shift as people are going against the norm and are voting for change. Europe in particular has seen a significant rise in the far right and in recent days we saw further evidence of change with Italian PM Matteo Renzi resign after his constitutional referendum failed. Events like these create enormous amounts of volatility in the market place. It is often better to take a cautious approach ahead of these situations with a plan as the events pan out. As markets sell off aggressively, this present opportunity to deploy cash into the market and buy at a discount.
4) Federal Reserve decisions
Market participants have now priced in a 100% rate hike which did in fact happen at the December 14th meeting, the last meeting for the year. The Federal Funds rate was increased by 25bps and the outlook for 2017 is that there will be another three projected hikes. The main focus of this meeting will be the FED’s forecasts for 2017. Market participants are waiting in anticipation to determine their positioning for 2017. As mentioned earlier, markets have been trending sideways for the past 2.5 years. The FED released their statement on the 14th December and with unemployment rates decreasing and the economy growing, there is some positivity to come and confidence that the economy will progress forward.