Cautious optimism for 2017

With 2016 over, it’s time to move on!

Good riddance in some ways, as returns have been mediocre. Over the past 12 months to 30 December 2016, the JSE All Share Index was basically flat (from 50,693 to 50,653).

Relative to this, the investments with Plexus Wealth have held up well:
Plexus Wealth BCI Property Fund: 6.96%
Plexus Wealth BCI Balanced Fund: 4.07%
Plexus Wealth BCI Conservative Fund: 4.57%

South African boutique asset managers (defined as any asset manager that does not have a bank, insurance company or distribution linked entity as a majority shareholder) continue to outperform. A recent review (November 2016) of the boutique asset management industry in South Africa by RMI Investment Managers confirmed this.

Although local performance has not been impressive due to Rand gains (a particularly strong trend in the second half of 2016), offshore returns in ZAR have been equally uninspiring.

Exchange rates have been volatile – many feared South Africa was heading to R20 to the USD, only to find we are now back to the R13-range. We have all read about Brexit, Trump and, more recently, a move further to the right in Italy. International markets have thus also been difficult to call, with the temptation to try and time the market often being savagely punished. But we must remember that inflation is the primary enemy to long term investments, rather than short term volatility.

As usual, we remain calm and take a balanced view. We also look to invest, via competent and experienced fund managers, in sectors and companies that can survive, and even thrive, through all economic cycles. This can sometimes lead to short term underperformance, but history proves this strategy works in the long term. Important aspects for an investment are company fundamentals, the business case for each investment, critical competitive factors (like barriers to entry), management track record and integrity.

As 2016 has ended, we have seen reason for optimism among the gloom. It is, after all, often the time to buy when such gloom abounds. If all commentators are negative, and presuming they have acted on their sentiments, then it is logical to assume that all the negative sentiment is already in the market. This theory has a certain weight of evidence behind it when we examine the average cash holdings levels of fund managers.

Ratings Agency Standard and Poors downgraded only South Africa’s local currency rating to BBB from BBB+ and left the foreign currency rating at BBB- with a negative outlook. We were thus not downgraded to sub-investment grade as many commentators feared. They noted weak economic growth (with political tensions hampering growth-enhancing reforms) and forecast a debt-to-GDP ratio of 54% by 2019. We were told that the negative outlook could improve to stable if policy implementation increased business confidence and private sector investment, in turn leading to improved GDP growth numbers. The previous week, Moody’s left their ratings unchanged, with Fitch assigning a negative outlook and maintaining its BBB- rating. The next review will be conducted in mid-2017, so South Africa has some time to get cracking.

For those who remain nervous about the future in South Africa, our Credo portfolios are becoming more well known, and offshore listed property portfolios are available as a means for diversification. We are also able to structure capital guarantees on your investments to give you peace of mind. It turns out that you don’t have to store wads of cash under your mattress to mitigate risk

The US economy is in good shape. As it remains the largest economy in the world, it is relevant for everyone. The much-awaited December rate hike has happened, but perhaps a slow return to interest rate normality must be welcomed. US employment figures are the best for a generation, and unemployment hit a new low of 4.6%, with the pace of hiring remaining steady. Q3 GDP was above expectation at 3.2%, with consumer confidence, Dallas Fed manufacturing activity and Markit manufacturing PMI all increasing more rapidly than expected. Mortgage applications maintained a strong trend over the medium term.

Europe will be emotional as it becomes more likely that the EU project will need some re-thinking, and China continues to grow albeit at a slower pace (but at a rate that still makes South Africa envious!).

Overall, we think a lot of the uncertainties facing the market have come to some sort of resolution, and markets hate uncertainty more than actual news. We thus face 2017 with cautious optimism.