Over the weekend three important events for financial markets took place:
SA was not downgraded to junk investment status
This was in line with our forecast and our clients’ portfolios are positioned to best benefit from this vote of confidence.
Although no downgrade may be a six to 12 month reprieve, we remain optimistic that economically the country is turning the corner and future political changes will on balance be positive.
Austria did not vote in a new right-wing president
As anti-globalisation / nationalism ideals continue, Austria was not swayed to this way of thinking and instead, voted in a liberal who is supportive of the European Union (EU) and somewhat reduces some risk of an EU breakup.
Italy said no to changing its constitution
This was more a vote against the Prime Minister and a vote to requiring more meaningful change. A new Prime Minister will need to be elected and it’s likely an anti-EU candidate will be elected leading to a referendum to leave the EU. If Italy decides to leave the EU, it’s possible to see the start of an EU disintegration.
Consequences and Outlook
Although SA is moving into a more positive space, global disruptions remain a risk to our economy and mostly the currency, a key investment asset class.
Europe is a major trading partner of SA and any weakening of Europe should have a negative economic effect on SA. The dismantling of the EU is a very real risk, given this weekend’s Italian vote and the likelihood that France will vote for a right-wing President in April 2017, which should also lead to a referendum to leave the EU. It is difficult to predict whether the EU will break up, but the associated uncertainty will unsettle markets.
Other global uncertainties persist such as the future of USA foreign trade policies, China’s economic health and stretched consumer debt, various emerging market political factions and geo-political tensions around the Middle East. Although some of these issues are likely to be unresolved in 2017, the resumption of growth in the USA economy (the global “power-house”) should override many global uncertainties and stabilise markets in 2017.
We turned positive on the currency at the beginning of the year when the Rand/Dollar was 16.8, due to it being abnormally undervalued. This forecast has protected our clients’ portfolios against the Rand’s 18% appreciation this year. Despite more global uncertainties in 2017, we believe local forces will be more influential over the currency. Thus we remain positive on the Rand as we believe it is still fundamentally undervalued and that the major local political and economic risks have abated. We expect the Rand to continue to strengthen to below 13 to the US dollar over the next 12 months. However, some volatility remains through this period.
Overall we expect markets to be less volatile in 2017 than 2016 and we are comfortable our diversified portfolios are well positioned to preserve capital and to benefit from stock picking opportunities to produce further outperforming investment returns.
