2016, the year that was

2016 was a tumultuous year in many respects, with the asset management industry facing a number of headwinds due to increased geopolitical uncertainty and unpredictable shock events such as Brexit in June and Trump voted in as US president-elect in November. In South Africa too, the year began stumbling out of the political starting blocks with three successive finance ministers at the end of 2015 setting the pace of events for the ensuing year.

Global equities, particularly, faced one of their worst years, with investors rattled by these global political events. Generally, the global macro-economy has remained muted with lowered return expectations across all asset classes, meaning that many fund members could find themselves at the mercy of poor returns from their retirement savings.

Says Azola Zuma, Chief Executive of Sanlam Investment Management, “Throughout 2016, legislation, geopolitics, fragile global growth and systemic changes in the financial services sector have made it very difficult to allocate capital. Asset managers and trustees have been compelled to fundamentally adjust their asset allocation considerations, to take on more risk and explore alternative markets and asset classes in the search for yield.”

We share some of the highlights of the year with you…

South Africa

Locally, the South African political arena – including surprise municipal elections outcomes – has been as eventful as ever. Minister Gordhan’s Mini-Budget Speech in October showed fiscal slippage with the outlook for the South African economy remaining glum, worsened by increasing debt. The most worrying data came from the SA Reserve Bank (SARB), as it revised its growth forecast for 2016 down to 0%. With this zero-growth outlook, the SARB decided once again to keep rates on hold at 7% in both July and November, despite drought-induced inflation figures.
Meanwhile, the political environment remains worrisome; with less than obvious efforts being directed towards the implementation of the country’s growth plan.

Economy and ratings debacle

For some months South Africa has waited tensely for rating agencies decisions on a downgrade, particularly Standard and Poor’s, whose negative outlook implied a high risk of a downgrade. The most recent decisions to leave South Africa’s sovereign credit rating unchanged was a welcome reprieve, providing an extended window to rebuild confidence in the country and improve its economic prospects before the next ratings reviews next year. However, S&P’s downgrade of Eskom’s long-term corporate credit rating to BB from BB+, with a negative outlook, is a reminder of the risks posed currently by the finances of state-owned companies to the National Treasury.

The good news is the South African economy is re-balancing (painfully and slowly), supported by better terms of trade and (hopefully) an increase in agriculture production next year. Furthermore, inflation should peak by the end of 2016 and slow through 2017. In the wake of cost-cutting, including employment growth restraint, the decline in corporate profits (listed and unlisted) appears to be coming to an end. These factors should help total GDP growth lift over the next twelve months, making the National Treasury’s task of balancing the books a bit easier. Even so, the expected economic upturn is tepid and yet to be confirmed. It remains imperative that South Africa demonstrates its ability to reform its economy to lift the country’s long-term potential growth rate meaningfully. The apparent emerging consensus between government, labour and business is a big step in the right direction. But, it’s not a game changer – yet.

#FeesMustFall

The now notorious student led protest movement, which began in mid-October 2015 in response to an increase in fees at South African universities, has rocked the nation. Protests started at Wits University and spread to the University of Cape Town and Rhodes University before rapidly spreading to other universities across the country. The protest in 2016 began when the South African Minister of Higher Education announced that there would be fee increases capped at 8% for 2017. Although the focus of the protests was focused on a rise in fees, a number of factors formed the background for the protests from a lack of funding for poorer students, high incomes for University managers, a real decline in government funding for higher education, lack of social transformation, to racial inequality issues.

South Africa spends 0.75% of its GDP on tertiary education which is less than the African or world average. Visionary leadership, as well as a partnership between Government and the private sector needs to be formulated in order to deal with funding tertiary education and education at large in South Africa. In a country where inequalities, poverty and unemployment are a perennial problem; real leadership on the part of both Government and the private sector needs to show itself. The notion that poor parents who struggle to produce profitable income statements on a monthly basis, should fund expensive tertiary education for their kids is unrealistic. I would hazard to say the private sector needs to make the funding of tertiary education and good quality secondary education part of its core business. We will never come out of this perennial poverty problem that disadvantaged households continuously contend with and we maintain a status quo where CEOs of corporate South Africa are paid obscene bonuses. It cannot be business as usual if this great nation of Nelson Mandela is to truly realize its growth potential.

Retirement reform

On the regulatory front, there have been several delayed events but nothing cast officially in stone, primarily with the moratorium on P-day and T-day still in place. P-Day, not yet been agreed upon, proposes that members’ rights to take their withdrawal benefits as a lump sum when their employment terminates, will fall away. A year ago, unions also called for T-Day legislation to be postponed. As a result, the topic of compulsory annuitisation for provident fund members has been postponed to 1 March 2018 to give parties more time to consult. One of the demands made by unions is that T-Day measures can only be considered in the context of holistic social security reform.

On 18 November 2016 the long-awaited discussion paper on social security was finally released for comment. The introduction of a National Social Security Fund (NSSF) proposes a centrally managed public fund to provide pensions, death and disability benefits and unemployment benefits. All employers and employees will have to contribute a combined rate of 12% of qualifying earnings, up to a threshold of R178 464. The publication of this paper is truly a watershed moment for the South African retirement fund industry. It will greatly intensify the retirement reform debate and will help shape the future of the industry.

Geopolitical shockwaves

Brexit rocks global markets
On 23 June in a historic moment, British citizens voted that Great Britain should leave the European Union, a community they’d been a member of for over 40 years. The surprise pro-Brexit announcement rocked global equity markets and resulted in a large amount of volatility in currencies. The fear is that other members of the EU such as Italy, France and Germany may follow suit, resulting in the end of the EU. Outside of EU membership, the UK will now have to renegotiate trade agreements globally.

US elections
Trump’s surprise election win in November triggered a re-pricing of risk across asset classes and sectors, and saw a resurgence in the flight of capital to safe haven assets. Trump rhetoric, suggesting increased infrastructure spend and boosting growth, implies that the era of fiscal restraint is coming to an end, and long-term rates may start normalising in the US, with inflationary consequences. Both Brexit and now Trump speak to a mercantilist agenda where free trade is likely to take a back seat to local interests, which does not bode well for global trade, which has been growing at 6% pa for the past decade. It is these decisions about free trade and the movement of people which appear to have significant long-term implications for the US and the global economy.

French revolution?
Now that the British have voted to withdraw from the European Union and the US has chosen Trump, the French appear to be following suit. In November, the centre-right Republicans chose Francois Fillon in a landslide victory to lead France’s Republican Party in the 2017 presidential election. This makes France the third major power, after Britain and the United States, to experience a shock election result, largely as a result of grievances over culture and ethno-racial identity. Polls suggest Fillon will stand a good chance of winning the Presidency in the 2017 April-May election – but will face a tough challenge in the form of far-right candidate Marine Le Pen, the leader of the Front National. François Hollande’s decision not to stand for a second term, the first time since the war that a French president has not bid for re-election, was greeted with mixed sentiment. Hollande was the third “dinosaur” of French politics to depart the scene in recent weeks.

Italy’s referendum on constitutional reform
In December, Italy’s voters made a historic decision not to back prime minister Matteo Renzi in a referendum on constitutional reform, amid growing anger at political elites across the west. Consequences could be profound, as the Eurozone’s third-largest economy plunges into a period of political uncertainty. Now that Renzi has resigned, as many as 8 of Italy’s troubled banks risk failure.

Trend of rising Populist Nationalism

It seems that the combined forces of nationalism and populism have been unleashed all over the West and all over the world. We are living in a changing world where old regimes are falling. Old parties are dying and new ones rising. Old allegiances are fraying.

Events such as Brexit and Trump as US President threatening global co-operation appear to be causing the Western world a degree of unease. Over the next year, domestic politics in Italy, France and Germany may well see substantial changes as emboldened populists drive a new and more militant nationalistic zeal.

A mainly liberal and democratic West has also seen increasing political strength of an autocratic China and rebirth of Russian nationalism. Also, the Middle East continues to be a source of global instability. Global terror and unrestrained migration will add to the attractiveness of a ‘fortress’ style future for both Europe and the US.

Global corruption

South Africa is certainly not alone in its corruption scandals. Early this year, Brazil’s Senate voted to remove leftist President Dilma Rousseff. In September, her predecessor, popular ex-President Lula da Silva, was indicted in a corruption investigation. President Michel Temer, who, as vice president, succeeded Rousseff, is now under investigation for corruption. There is talk of impeaching him.

And meanwhile, South Korean President Park Geun-hye is facing impeachment and prosecution for corruption.

2017 – the year ahead

Says Azola, “If we thought 2016 was a volatile year, 2017 will – in all likelihood – be no better”. It seems we’re in for a volatile twelve months with the world economy likely to be far from robust . A new US president and the risk of game-changing events like Italy possibly leaving the European Union could have a dramatic impact on the global economy.

A low-growth economic environment in both Europe and the USA, rising income inequality and weak demand for goods and services will be worsened by falling levels of wage growth. The US will continue to outperform its peers. With global demand soft, the price of money (interest rates) and the prices of oil and other commodities are likely to remain low. Central bankers Janet Yellen, Mario Draghi, and Haruhiko Kuroda will be in the spotlight as the Federal Reserve attempts to nudge rates higher and the European Central Bank and Bank of Japan look for ways to stimulate growth.

China, whose annual GDP growth rate has been slowly dipping, will be important for 2016. Developing nations that have come to depend heavily on China as a customer for their resources include Brazil, Chile, Indonesia, Malaysia, the Philippines, South Africa, Thailand, and Vietnam, will be hard hit.

Locally in South Africa, a cabinet reshuffle within the ANC may well be on the cards. It appears that the outcome of the ANC NEC’s recent 3-day meeting on the fate of President Jacob Zuma will only be fully resolved next year. Meanwhile, ongoing pressure on the ANC as South Africa remains under threat of junk status due to mounting political instability, will weigh heavily until a new leadership team takes over at the end of 2017.

A final note…

As fiduciaries, we recognize that you have challenging goals. Our key priority is to help you achieve the best possible retirement outcomes for your members and enable them to save enough for retirement. At the heart of everything we do, we understand that financial freedom is a key enabler to realising members’ life goals. In attempting to help mitigate against the primary risk of failing to meet members’ retirement objectives, next year we will focus on sharing articles about investment strategies to maximize retirement outcomes – highlighting equities, global balanced, alternatives as well as passive investment strategies as effective, long-term pre-retirement investment strategies.

We look forward to sharing our thoughts with you to support you on your journey ahead.

Thank you for your support throughout the year. We wish you a restful and safe festive season and a fantastic entry into 2017!

Azola Zuma, Chief Executive, Sanlam Investment Management