It seems that investors have bought into a Trump administration with the hopes of stronger growth, rising inflation and higher interest rates. Risky assets continued their rally in December, the US dollar strengthened and capital has flowed out of emerging markets. Eurozone sovereign bonds staged a late recovery in the year as the European Central Bank committed to extending its asset repurchasing programme to at least December 2017. The rejection of the Italian Senate reform referendum failed to lead to any turmoil in either the equity or bond markets. In the US, the Federal Reserve raised interest rates by 0.25%, as widely expected, but surprised the markets by raising its forecast for the number of interest rate hikes in 2017 from two to three. Japanese equities benefitted from yen weakness, as monetary policy divergence returned to the fore.
Locally, December saw markets end the year on a positive note for SA equities as the JSE All Share returned a positive performance and local fixed income markets outperformed cash. In terms of local political events, the month was welcomingly quiet, a sharp contrast to December 2015 (Nenegate). As a result, the rand strengthened significantly against major peer currencies, which detracted slightly from some rand hedge counters, while SA only counters – particularly retailers – did fairly well over the month. Mr Price and Woolworths produced stellar performances for the month. On an economic front, SA ended the year on a slightly weaker note. The Barclays PMI fell to 46.7 in December from an index value of 48.3 in November. The deceleration was due to a general slowdown in the subcomponents. While the employment index ticked up marginally, it nonetheless remained below the neutral 50 mark, suggesting that the sector continued to shed jobs in December. Vehicle sales, a key indicator of local consumer strength also ended the year on a negative note, contracting -15.3% y/y in December from 9.7% in November. Nonetheless, despite the weakened state of SA’s economy, on the 2 December 2016, Standard & Poors (S&P) Global Ratings confirmed SA's sovereign international credit rating at BBB- (investment grade), but with a negative outlook. S&P lowered South Africa’s domestic long-term local currency rating to 'BBB' from 'BBB+'.
According to S&P, the decision to downgrade South Africa’s domestic credit risk reflects the fact that the government’s financing needs are increasing beyond previous base-case expectations. S&P (which has a negative outlook on SA and has highlighted political turmoil as a potential game-changer) warned that the risk of a downgrade will be heightened if the government fails to stick to its fiscal targets. It said it is also concerned that the independence of the National Treasury and Central Bank is being undermined.
Developed market equities (+2.29% in USD and -0.63% in ZAR) outperformed emerging market equities (-0.06% in USD and -2.91% in ZAR) in December. Developed market property gained 2.55% in USD terms, while local investors would have experienced a 0.37% loss due to the rand strengthening against the US dollar (-2.95%). Meanwhile, global bonds underperformed global equities, surrendering 0.46% in USD, while losing 3.29% in ZAR. Locally, the ALSI added 0.97% (+3.93% in USD), largely due to the strong performances by General Retailers (+8.45%), Industrials (+6.12%), the SA Listed Property Sector (+4.24%) and Financials (3.45%). In December, Resources led the laggards on the ALSI losing 3.60%. Fixed interest returns turned in a strong performance relative to its equity counterpart in December with the ALBI returning 1.57%, while preference shares bucked the trend closing 0.24% lower for the month. Year-to-date, the ALBI remains the best performing asset class (+15.42%). The longer end of the yield curve (12yrs+) was the best performing end of the yield curve in December, returning 1.73%, followed by the 7-12yr end of the yield curve (+1.43%), while the shorter end, 1-3yrs, was the worst performing end of the yield curve returning +0.76%. Cash underperformed the ALBI and the ALSI in December, returning +0.63%. Year-to-date the ALSI remains the worst performing asset class returning a meagre 2.63%.
Source: I-Net - 1 January 2017
South Africa’s annual headline inflation rose again in December to 6.8% y/y, showing another slight uptick from 6.6% in November and above market expectations of 6.5%. It was the highest inflation rate since February as the cost of food and non-alcoholic beverages and housing and utilities increased at a faster pace. Main upward pressure came from food and non-alcoholic beverages (+11.7% from +11.6% in November), housing and utilities (+5.6% from +5.4%), miscellaneous goods and services (+7.6% from percent +7.5%), recreation and culture (+7.6% from +6%), restaurants and hotels (+7.1% from +6.4%), alcoholic beverages and tobacco (+5.5% from +5%) and household contents and services (+4% from +3.8%). By contrast, prices increased less for transport (+5.7% from +6.4%). On a monthly basis, consumer prices increased by 0.32% after a 0.49% rise in a previous month. Costs rose for housing and utilities (+1% after being flat in November) and rose faster for food and nonalcoholic beverages (+0.8% from +0.5%), while decreased for transport (-0.4% from +1.5%).
Sources: SA Reserve Bank, Statistics SA, I-Net, BER, Trading Economics, MorningStar, Reuters
South Africa posted a trade deficit of R1.1 billion in November from a downwardly revised deficit of R3.91 billion in October, while missing market expectations of a R0.75 billion gap. Exports jumped to R99.6 billion, boosted by higher sales of vegetable products (+20%), precious metals and stones (+20%), base metals (+11%), vehicles and transport equipment (+7%) and chemical products (+12%). Major destinations for exports were China (11.6% of total exports), the US (8.6%), Germany (7.8%), Namibia (5.7%) and Botswana (5.5%). Imports rose to R100.7 billion, as purchases went up for vehicles and transport equipment (+57%), mineral products (+20%), machinery and electronics (+7%) and prepared foodstuffs (+23%). Meanwhile imports fell for equipment components (-25%). The main sources of imports to the country were China (19.5% of total imports), Germany (11.7%), the US (7.2%), France (6%) and Saudi Arabia (4.9%).
Locally, the ALSI was up 0.97% in rand terms. Foreigners invested in SA equities would have benefitted substantially as the ALSI returned 3.93% in USD as the rand strengthened significantly against major currencies in December. The Industrials index (excluding dual-listed companies) led the gains on the ALSI, up 6.12% in ZAR. This was followed by SA Listed Property, up 4.24%. By market-cap, Mid-caps led the gains rising 4.03%. The Top 40 increased marginally by 0.53%, despite the rand strengthening significantly against major global peer 4 currencies, which intuitively would adversely affect the large rand-hedge stocks in the Top 40. Small caps continued their positive run returning 1.59% for the month.
Telecommunications was the top performing sub-sector, returning a staggering 9.22% for the month. This was followed by Technology (+2.52%). Basic Materials (-3.60%) was the worst performing sub-sector, followed by consumer services (-0.46%). The Gold Mining sub-sector continued its recent downward spiral, returning -4% in December (despite, it remaining up 30.29% on a 1 year basis) with gold miners Sibanye Gold tumbling 12.96%, Gold Fields falling 2.26% and Anglo Gold Ashanti dropping 1.78%. Other mining companies that struggled in December were Pan Africa Resources, down 21.10%, Lonmin shedding 11.70%. Diversified miners such as Anglo American (-7.97%) and BHP Billiton (-6.50%) had a tough month, breaking their previous two-month winning streak. Rand-hedge stocks in the Top 40, such as Naspers (-1.98%), British American Tobacco (-0.35%) and Compagnie Fin Richemont (-0.48%) struggled to edge out any gains over the month as the rand strengthened against major currencies. MTN (+11.46%), Mr Price (+10.00%), Steinhoff Holdings (+9.53%) and Woolworths (+9.38%) were the best performing large-cap stocks, while Anglo American Platinum (-8.51%), Shoprite Holdings (- 8.28%) and Anglo American (-7.97%) were the worst performing large-caps. The financials index rose 3.75%. This was helped by some major banking stocks in the Top 40 index, namely, Barclays Africa (+7.23%), Capitec Bank (+6.88%), RMB Holdings (+6.41%) and Firstrand (+5.29%). SA equities were sold off again in December by foreigners. They were net sellers of R3.89 billion worth of equities in December signalling a continued decrease in investor confidence in SA equities. Overall, foreigners are net sellers of R124.83 billion worth of equities in 2016.
Local fixed income markets saw steady returns over the month, with the ALBI (+1.57%) outperforming cash (+0.61%), inflation linked bonds (-0.29%) as well as Preference Shares (-0.24%). The longer end of the yield curve (12yrs+), was the best performing interest-bearing asset class, returning 1.73%, followed by 7-12yr bonds (+1.43%). The shorter end of the yield curve (1-3yrs) was the worst performer, returning +0.76%. However it was the best performer (+1.42%) over Q4 of 2016. SA listed property (a hybrid asset class) had a solid month returning 4.24% and returned 10.17% overall for 2016.
For the month, foreigners were net sellers of R15.93 billion worth of bonds and are also net sellers of R26.13 billion bonds in 2016. This suggests that foreign investors are continuing to re-allocate capital from emerging markets to developed markets in anticipation of higher inflation and interest rates in the US. In December, SA’s currency strengthened significantly against major global peers: the US dollar (-2.85%), the euro (-3.19%) and the pound sterling (-5.26%). The rand also strengthened against safe haven currency, the yen by 4.40%. For the year, the rand has strengthened (-11.46%) against the US dollar, (-25.95%) against the pound sterling, (-14.01%) against the euro and (-8.79%) against the yen.
Globally, the rally in US equities experienced after the surprise US presidential victory of Donald Trump continued in the month of December, while Eurozone sovereign bonds staged a recovery. The Euro continued to weaken against the US dollar, while commodities rallied further on the back of an additional rise in the oil price. Commodities gave up 2.67% this month, with a lot of weakness stemming from losses in precious metals. Brent Crude oil was up 9.73% and Iron Ore advanced 9.42%. Nickel lost 8.71% and Copper surrendered 4.16%, while Silver and Gold gave up 3.57% and 1.96% respectively.
On a total return basis, the global Communications Services sector was the top performing sector for the month returning 6.3% in USD, 7.5% in Pound Sterling (GBP) and 3.6% in ZAR. This was followed by the Utilities sector which returned 4.8% in USD, 5.9% in GBP and 2.1% in ZAR. The global Energy sector was the top performing sector over a one year period in USD (+27.9%), GBP (+52.6%) and ZAR (+12.9%). The worst performing global sector in December was Basic materials returning -0.2% in USD, +0.9% in GBP and -2.7% in ZAR. Furthermore, Healthcare was the worst performing global sector over a one year period returning -3.4% in USD, +15.2% in GBP and -14.8% in ZAR.
In rand terms, global developed market equities (-0.63%) outperformed emerging market equities (-2.91%) in December, albeit that both returns were negative. In USD, the MSCI Developed World Index added 2.29% and the MSCI Emerging Markets Index weakened marginally (-0.06%) for the month. Developed market property gained 2.55% in USD whereas bonds fared weaker giving up 0.46% in USD. Looking at developed markets, most major global indices yielded negative returns for the month of December in rand terms due to the rand strengthening against most major currencies. The Euro Stoxx 50 (+4.38% ZAR and +7.12% USD), the CAC 40 (+2.81% ZAR and +5.50% USD) and the DAX (+3.95% ZAR and +6.67% USD) were the top performers for the month. Meanwhile, the Canadian TSX (-1.77% ZAR and 1.36% USD), the NASDAQ (-1.76% ZAR and 1.12% USD) and the Nikkei (- 1.37% ZAR and 1.99% USD) were the worst performers for the month. In emerging markets, China’s Shanghai Composite index gave up 4.50% in its base currency and surrendered 7.62% in ZAR, and India’s Nifty Index weakened marginally by 0.07% in its base currency and lost 2.91% in ZAR, while the Brazilian Bovespa equity index gave up 2.71% in its base currency. The US dollar strengthened against both the euro (-0.66%) and the British pound (-1.40%).