In 2016, we started the year with shock events such as Nenegate putting South Africa as a credible investment destination on the back foot, and newly reappointed Finance Minister Pravin Gordhan faced an uphill battle with President Jacob Zuma at the World Economic Forum in Davos. In January, credit rating agency Standard & Poor’s (S&P) said we were headed for a tough year because of sluggish economic growth and the lingering threat of junk status. Contrary to most expectations, however, the rand markedly appreciated against most currencies during the year, and we also narrowly averted a sovereign credit downgrade, thanks in no small part to increased cooperation between government, labour and business.
On the international front, the shift from globalism to populism – which gave us the shock Brexit vote as well as US President Donald Trump – rattled the markets. Global equities had a torrid time, with the usual knee-jerk flight of capital to so-called safe-haven assets. While US equities recovered well, with the S&P 500 returning a double-digit 12.5%, other equity markets struggled, with the Japan TOPIX and Asia Pacific ex-Japan (APxJ) indices returning 4% and 7% respectively, and the Stoxx 600 index of European blue chip shares down 1%. The South African equity market moved sideways with a total return of only 2.6%.
SPW PORTFOLIOS: STRONG PERFORMANCE
Despite the challenging circumstances and volatile markets, our portfolios generally delivered strong performances. Four of our five model equity portfolios outperformed their respective benchmarks. Our Flexible Model portfolio returned 14%, the Shariah Equity Model portfolio delivered 21% and the best house-view Equity Model portfolio returned 5.6%. Clients with balanced portfolios saw returns of around 2% – still outperforming the benchmark. The lower returns on the balanced portfolios are the direct result of rand strength over the past year, which offset foreign currency gains and eroded overall performance.
Our stellar performer during 2016, however, was the SPW Global High Quality Fund, which has generated a 62.3% return since its launch in early 2014. Over the past year, the fund’s net asset value increased by 28.7% in GBP terms, beating both the FTSE All-Share Index and the MSCI World Index. It remains ranked in the top quartile over one year and top decile since inception.
SWEEPING GEOPOLITICAL CHANGE…
Back to the present. What can investors expect for 2017? On the geopolitical front, we’re likely to be confronted with sweeping change that will shape our world in ways previously unimagined. In Europe, the populist surge is expected to continue as voters increasingly voice their discontent with low economic growth, ineffective austerity measures and unwelcome immigration. There are real fears of a potential Eurozone break-up as right-wing populist parties gear up for further upsets in national elections in France, Germany and the Netherlands. In the UK, Prime Minister Theresa May has started divorce proceedings from Brussels and Britons can expect a turbulent 2017 as Brexit gains momentum and new trade partnerships are forged.
The million-dollar question of course, is what kind of president will Donald Trump turn out to be? His first days in office have not inspired confidence. He has already signed a host of controversial executive orders making good on his protectionist pledges, including the withdrawal of the US from the Trans-Pacific Partnership, and renegotiating NAFTA. His clampdown on refugees, especially those from Muslim-majority countries, and subsequent axing of acting Attorney General Sally Yates have set off alarm bells across the globe.
On the positive side, Trump’s assurances of corporate tax reform and individual tax cuts, and increased infrastructure spending could well boost the US economy in the short term, which will have a positive impact on markets. But his mercantilist approach may result in geopolitical and economic instability, setting off a global trade war and impacting growth prospects – especially for emerging markets such as South Africa. The global leader to watch closely is China’s Xi Jinping who, in contrast to Trump’s assault on free trade, has called for increased ‘economic globalisation’ and is actively seeking to extend his country’s influence through new trade deals.
… BUT LACKLUSTRE ECONOMIC GROWTH
What will probably not change in 2017 is the precarious state of the global economy. Although many economists have adjusted their growth outlook upwards, global GDP growth is likely to remain lacklustre. According to The Economist Intelligence Unit’s 17 January 2017 global outlook summary, it’s likely to pick up, on aggregate, to 2.5% in 2017, from an estimated 2.2% in 2016. Growth in the US has fallen to a ‘new normal’ of 2–2.5%. In Europe, it is estimated to chug along at around 1.5% and in Japan, growth is not expected to exceed 1%.
It’s not all doom and gloom, however. There may well be short-term economic growth spurts, depending on Trump’s policies in the months ahead. And the World Bank has predicted that growth in emerging markets and developing economies may improve in 2017, reflecting rising export commodity prices. We do not, however, expect any positive market surprises given the current geopolitical uncertainty and changing global landscape.
ON THE LOCAL FRONT
Back home, Time has labelled ‘a struggling South Africa’ as the ‘10th biggest risk to the world in 2017’. The magazine blames a ‘deeply unpopular’ Zuma, stating that infighting over his succession is stalling crucial economic reform in the country. It certainly does appear that the battle for the ANC leadership will be a tough, dirty war. Zuma may well pull further rabbits out of the hat as he struggles to consolidate his power base, which could send our fragile rand into yet another tailspin.
We can only hope that sanity and reason will prevail in the run-up to the ANC leadership conference, resulting in a new leader respected by all South Africans, one who will lead us out of the abyss of chronic corruption, put South Africa first and kick-start our ailing economy.
On a positive note, the increasing collaboration between government, labour and business certainly augurs well for improving South Africa’s economic prospects and renewing confidence in our country as an attractive investment destination. This growing unity – which was lacking in the past – was highlighted by the positive mood around the 60-strong Team SA at Davos this year, led this time by an upbeat Deputy President Cyril Ramaphosa.
The efforts towards building our economy by outstanding South Africans such as AngloGold Chairman Sipho Pityana, who spearheads the Save South Africa campaign and was a member of Team SA at Davos, are what South Africa now sorely needs. As Pityana says in my interview with him, it’s the vibrancy of all South Africa’s people who are working together – as government, labour or business – that will take our country forward.
We sincerely hope that the current leadership will allow committed South Africans like these to continue their efforts, in close collaboration with Treasury. In the final year of his term as ANC president, Zuma can still inflict immense damage in an attempt to protect his turf and ensure the continued influence of his cronies as the succession battle hots up.
From an investment perspective, there’s always opportunity amid uncertainty. Despite the negative geopolitical headwinds and poor economic growth prospects, investment opportunities will continue to present themselves. Let’s not beat around the bush – it will be a bumpy ride, and we won’t be taking any large bets under the circumstances. We will continue our philosophy of protecting our clients’ wealth first and foremost, and growing it where we find opportunity.
