December 2016 market overview

Sometimes events that normally take a few years to unfold play out over a few days. President Zuma’s shock removal of finance minister Nene, and the subsequent replacement of his successor only four days later by former finance minister Pravin Gordhan sent the local market into a tailspin and the currency into uncharted territory. Fears now abound that SA’s credit status may be downgraded to junk if confidence is not restored in our fiscal policy.

In less of a surprise move, the US Federal Reserve’s Open Market Committee ended seven years of near-zero benchmark interest rates with its decision to finally raise rates by a modest 25bps. As the rate hike was largely anticipated, emerging markets and currencies had already been ebbing in the months leading up to the event, but still the MSCI Emerging Markets Index declined by 2.2% for the month on a total return basis in dollar terms. The MSCI World Index lost 1.8%.

The rand suffered with other emerging market currencies as markets awaited a US rate hike. This, however, was exacerbated by the turmoil surrounding Nene’s dismissal, causing the rand to weaken 6.9% against the US dollar and 9.6% against the euro in December.

The FTSE/JSE All Share Index lost 1.7% on a total return basis in rand during December 2015. With the weakening of the rand, dollar investors in our local stock market lost even more. The biggest losers during the month in rand terms were Financials (-6.4%), on the back of fears about the potentially very expensive funding of banks should SA reach junk credit status. The All Bond Index (ALBI) declined by an extraordinary 6.67% and inflation-linked bonds lost 1.75%, but cash returned a steady 0.55%.

Source: I-Net, Bloomberg, Deutsche Bank and Sanlam Investments | One-month total returns up to 31 Dec 2015