Key Market Drivers
In a year that had its fair share of unexpected outcomes including Brexit, Trump’s election victory and Italy’s referendum where a large majority of voters rejected prime minister Matteo Renzi’s constitutional reform plans, global equity markets ended the year strongly.
In the US, following Trump’s election victory equity markets recorded a series of all-time closing highs. The Dow Jones Industrial Average Index (+13.42%) and S&P 500 Index (+9.54%) both ended the year positively buoyed by renewed optimism around the new administrations agenda of fiscal stimulus in the form of infrastructure spending, tax cuts and regulatory reform.
In the UK, the FTSE 100 Index gained 14.43% thanks to a weaker pound boosting exports. Germany’s DAX added 6.7% for the year, with France’s CAC ending the year up 4.6%.
In Asia, the year started with China’s Shanghai Composite Index recording its largest sell-off since the financial crisis. Improved economic data over the year helped revive market sentiment with the Shanghai Composite regaining earlier losses to end the year down 14%. Japan posted a modest gain, with the Nikkei 225 ending the year up +0.42% while Hong Kong’s Hang Seng Index also rose a mere 0.4% for the year in what was a very volatile year for the region.
SA politics continued to dominate news headlines as tensions escalated between different factions (pro and anti-President Jacob Zuma) in the ruling ANC. News that the National Prosecuting Authority (NPA) had summoned Finance Minister Pravin Gordhan to appear in court on fraud charges and then promptly withdrew these charges as pressure mounted seemed to confirm that the charges were politically motivated. Nevertheless, all three ratings agencies (S&P Global Ratings, Moody’s and Fitch) retained SA at an investment grade rating.
In our local market, the JSE All Share Index ended the year flat at -0.10%. Having had a terrible January start, resource shares rebounded sharply, ending the year as the winner amongst the 3 major sectors. For 2016, the Resource 10 Index returned 26.44%, followed by the Financials 15 Index (-1.03%) and Industrials 25 Index (-10.41%).
The clear winner was however the rand. It gained over 11% against the USD in 2016 (yes, we opened at 15.46/$). The rand is also 13.93% stronger against the EUR and an incredible 25.76% stronger against the GBP.
In terms of commodities, oil prices rose significantly to end the year up 52.4% as an agreement by major producers to cut output took effect.
Market Returns (ZAR)
The Outlook for 2017
2016 was a disappointing year for SA equities, returns were muted and volatility was high. Valuations are more compelling and we expect a much better overall return from the JSE this year. A weaker currency (on the back of a stronger USD), more attractive market multiples and the continued improvement of commodity prices will provide a strong underpin for our local market.
South Africa faces numerous challenges in the year ahead, ranging from the need for political stability, higher economic growth, job creation and the need to create an environment to attract foreign capital.
We will be monitoring the following closely: Fed rate hikes; US economic outlook (as well as the start of the reformist Trump administration); magnitude of dollar strength, elections in Europe (Holland, France, and Germany) and the slowing Chinese economy.
Contributor: Luis Levy, Strategiq Capital