Market Solutions – December 2016

By Alexander Forbes Investments on Jan 20, 2017 in General Market and Economic Commentary The news

Global

Asset class turnaround

Global equities and bonds were up in 2016 relative to 2015, posting 8.2% and 1.6% respectively in USD terms. Global equities were favoured over global bonds despite unexpected political events in a tumultuous year, which could prove historically seminal given the surprise Brexit vote, Donald Trump’s win in the US elections and ongoing populous expressions. According to conventional wisdom bonds should have outperformed equities amid these uncertainties, but equities outperformed bonds. Evidence of a transition from monetary stimulus to fiscal stimulus in developed markets may favour equity prices as a move from deflation to reflation appears likely for 2017.

Fed hikes

After several years of accommodative monetary policy, the US Federal Reserve unanimously raised its federal funds target rate by 25 basis points, with the new rate standing at 0.75%. This rise occurred on the back of improved labour and inflation conditions during 2016, signalling the first step towards policy normalisation in the US. Inflation is expected to reach the 2% target in the medium term as the effects of historic declines in energy and import prices dissipate. The rate increase was widely expected by financial market participants and was only the second increase since the target rate was cut to near zero levels in 2008.

Local

Bonds outshine equities

Although local equities showed positive returns for the year 2.6% in ZAR terms – local bonds stole the show by outperforming equities by around 13%, which signalled that local defensive assets were preferred over aggressive assets in 2016. This outperformance took place on the back of improving political developments and expectations of stabilised local inflation. Foreign sentiment against local equities was confirmed by the considerable foreign capital outflow from equity markets – a total of around R124.8 billion cumulatively for 2016, with the fourth quarter alone seeing R28 billion in outflows. Randhedged stocks dragged down equity returns, with the worst performing sectors being real estate, personal goods and healthcare equipment. Industrial metals, general mining and precious metals were among the best performing sectors for the year.

Resources holds favour

Resources outpaced financials and industrials for the year by more than 28%, returning 34.2% in ZAR terms, despite
underperforming the latter two in December. This was similar to the performance last achieved at the end of 2009 when resources returned around 35%. This was a mammoth reversal relative to 2015 when resources returned -37%, behind financials and industrials by a minimum of around 40%. Key contributors to the 2016 performance were developed market fiscal policy transitions, the Chinese stimulus package and the cheap level that resources came off at the start of 2016. Over longer-term horizons however, the crocodile jaws still persists.

Alexander Forbes Investments

Alexander Forbes Investments

Alexander Forbes Investments was established in 1997. We are a forward-thinking and trusted global investment provider, with roots in Africa. In pursuit of certainty we set out to understand our retail and institutional clients’ circumstances and risk tolerance to set clear goals. Our adaptive investment approach, called Living*Investing allows us to maximise opportunity and minimise risk at every stage of the investment cycle.

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