December 2016 market overview

Locally, the most anticipated event for December, was the potential downgrade of SA debt by ratings agency Standard and Poor’s (S&P). In the end, S&P kept the foreign currency debt rating at one notch above sub-investment grade, but downgraded the local currency debt to BBB, still two notches above junk. Also during December, Q3 2016 GDP growth data was released: SA eked out only 0.2% of economic growth during the quarter, with mining, finance, real estate, business services and general government services being the main contributors. Despite the low growth, headline consumer inflation accelerated to 6.6% year-on-year up to the end of November.

On a more positive note, a total of 93 000 jobs were created in SA in the third quarter of the year, according to data released in December. These were mainly in the community and social services, and in institutions such as technikons. Also, according to the FNB and Bureau of Economic Research (BER) consumer confidence with regard to South Africa has improved to the highest level since Q4 2014.

Globally, the biggest event was most likely the US Federal Reserve’s announcement that it would be hiking the federal funds target rate from 0.25-0.50% to 0.50-0.75%. This is only the second rate hike this decade. This decision was widely priced in by markets, especially as US unemployment has hit a nine-year low, but it’s worth noting  that the median of FOMC participants now foresee three hikes rather than two during 2017.

European monetary policy is still moving in the opposite direction from that of the US, with the European Central Bank announcing that it will extend stimulus beyond March 2017. The Dow, the S&P 500 and the Nasdaq all reached fresh records after the European Central Bank’s announcement. The European Union’s statistics office also released that Eurozone unemployment had unexpectedly declined to the lowest level in more than seven years, signalling that companies are confident in the region’s slow but steady recovery.

Italy bucked the high-confidence trend of December, as Prime Minister Matteo Renzi resigned shortly after he had been voted out of power in a referendum on constitutional reform. Worries around Italy’s troubled bank Monte dei Paschi di Siena also caused European stocks to retreat somewhat during the month.

In the UK inflation jumped from 0.9% in October to 1.2% in November, the highest since October 2014 due to the sterlings’s post-Brexit demise. UK import prices increased by almost 15% in November, the most in five years.

Most markets were buoyant in December. The FTSE/JSE All Share Index (ALSI) gained 0.97% on a total return basis and the SA Listed Property Index 4.2%. The All Bond Index (ALBI) returned 1.57% during the month and cash 0.63%. Among the main indices, the Inflation-linked Bonds Index was the only loser for the month at -0.29%. The MSCI World Index gained 2.4% in dollar terms and the MSCI Emerging Markets Index ($) eked out 0.05%.

2016 was an exceptional year for bonds, with the ALBI the clear winner at a 15.45% total return for the calendar year. Listed property kept up the pace at 10.2%, while the ALSI disappointed with its 2.63%, lagging SA inflation and the 7.37% performance of cash. The MSCI World Index ($) and the MSCI Emerging Markets Index ($) returned 7.51% and 11.22% during 2016. However, the strong appreciation of the rand during the year meant that most South Africans invested in these global indices would have experienced a negative net return after taking into account the strengthening of the rand in 2016: 13.21% against the US dollar, 34.93% against the British pound and 16.67% against the euro. According to investment economist Arthur Kamp, the rand was overvalued against the pound towards the end of 2016.

Source: Stats SA, MSCI, I-Net, Bloomberg, Deutsche Bank and Sanlam Investments | One-month total returns up to 31 December 2016