2016: A year of ‘surprise and rapid rotation’
2016: A year of ‘surprise and rapid rotation’
- Surprise: A number of global and local surprises, especially on the political front. An even bigger surprise has been the markets’ (reflationary) reaction to the Trump-victory. And at the end of the year, SA is still “Investment Grade” according to the ratings agencies and Gordhan is still Minister of Finance.
- Rapid Rotation: Numerous trend-changes when you compare 2016 with what happened the previous 2 to 3 years. Just think of:
- But despite all these changes, the one thing that did not change (much to our dismay), is that local equities underperformed cash for a 2nd year in a row, having gained only 2.6% this year after a return of only 5.1% for 2015.
- Over the year, returns from basically all asset classes were low, resulting in very muted returns from key UT sectors. The General Equity sector average is up only 1.5% over 1 year while the MA High-Equity sector has returned a mere 1.6%.
- Returns for 2016:
- ALSI: 2.6%
- Cash: 7.4%
- Bonds: 15.4%
- SA Property: 10.2%
- Foreign Eq: -4.8% (in ZAR) and +7.9% (in USD) (the ZAR a big swing from tailwind to headwind, in terms of return contributions)
- SA Equities
- The ALSI ended 2016 only 2.6% higher. However, the muted overall return is not a true reflection of the significant return dispersion at broad sector level as well as at stock level (chart can be provided on request).
- Resources gained 34.2% in 2016 followed by Banks which were up 33.6% (albeit off the Dec ’15 ‘Nenegate-base’). On the flip-side, Industrials closed the year 6.6% lower after having led the market higher for a number of years. Despite the strong gains from banks, the overall Financials Index gained only 5.4% in 2016 due to negative returns from the Life Insurance sector and large-cap offshore property stocks.
- Resources. Having bottomed in Jan last year, the general miners rallied strongly on the back of rising commodity prices. Shares such as Assore (+300%), Anglo’s (+182%), African Rainbow Minerals (+133%) and Exxaro (108%) lead the way, and BHP gained 29%. While the precious metals (both gold and platinum) showed exceptionally strong gains in the first 9 months of the year, these sectors came under some pressure in the latter part of 2016 (falling gold and platinum prices on the back of rising global inflation and interest rate expectations). Despite a difficult Q4, these shares still showed strong gains for the whole of 2016 (Implats up 71% and Anglogold up 44%). On the negative side, Mondi and Sasol respectively declined 7% and 1% in 2016.
- Industrials. Most of the large-cap Rand-hedge industrials went from “darlings to disappointments” in 2016. Richemont (-16%), Mediclinic (-33%), Aspen (-8%), BAT (-8%), Steinhoff (-7%) and Naspers (-5%) all came under pressure. A mixed bag, however, on the ‘domestic shares’ with Woolies (-26%), Mr Price (-17%) and Truworths (-8%) struggling; while Foschini (+38%), Shoprite (+23%) and Tigerbrands (+30%) showed resilient gains in a difficult environment. MTN managed to lift its head towards the end of the year, gaining 3% in 2016.
- Financials. Very strong gains from the banks and other domestic shares (mainly off the low Dec ’15 base), but those companies with any offshore exposure got punished with shares such as Investec and Old Mutual both falling 13%. The offshore property stocks also dragged the overall Financials Index lower.
- Dec 2016
- The ALSI gained 1% in the last month of the year. Gains were mainly driven by banks which added 4%, while we saw some profit-taking in the Resources sector (-4%). Industrials ended the month 2% higher.
- SA Listed Property
- The SA Listed Property Sector (SAPY which excludes the UK property companies (Capital & Counties and INTU)) had a decent year gaining 10.2%, but lagged both bonds (+15%) and Banks (+34%). NEPI (-8%), Rockcastle (+3%) and Resilient (+3%) were the primary laggards. Those shares with a more “domestic focus” had an exceptional year (SA Corporate +33%; Redefine +25%; Growthpoint +20%).
- That said, the UK counters (Capital & Counties and INTU) had a very tough year. Both Capital & Counties and Intu fell the year by more than 30% on the back of Rand strength and Brexit.
- While the sector had their fair share of volatility with significant dispersion in returns at stock level, in general, distribution growth (especially on those companies with a bias towards SA) remained fairly decent. In a “low return world”, the outlook for Listed Property looks very decent. Yields on domestic counters around 5% to 7% and distribution growth expectations around 7% to 10% could see the sector deliver (low) double digit returns (if we don’t have any major shocks on the Rand and rising bond yields).
- Dec 2016:
- The SAPY ended 2016 on a strong footing, gaining 4.2% in December supported by a stronger Rand (and therefore declining inflation and interest rate expectations) and a bit of a relief-rally on SA bonds (following no downgrade from the S&P). Resilient (+11%), Redefine (+8%) and Vukile (+7%) lead the market on the upside. Property stocks with significant offshore exposure, again came under some pressure. Rockcastle (-2%), NEPI (-1%) and Intu (-0.4%) closed the month lower.
- SA Bonds
- Despite continued upward pressure on global bond yields, the ALBI gained 1.6% in December taking the total return for 2016 to 15.4%. Following the sharp sell-off at the end of 2015, the yield on the 10yr government bond fell almost 100bps over the course of 2016. This was driven by a stronger Rand (moderating inflation and interest rate expectations) and a favourable outcome for South Africa in terms of our Sovereign credit rating.
- Looking forward, South African bonds are offering decent yields of more than 3% in real terms. While the domestic inflation and interest rate environment should be supportive for bonds going forward, upward pressure from rising global yields could be considered the primary headwind.
- The “Trump-rally” in global equities continued in December with the MSCI ACWI gaining 2.2% (in US$) in the last month of the year. Despite a dismal start to 2016, down almost 7% in the first two months, global equities rebounded to end the year up 7.9%. These gains were predominantly driven by strong gains from more cyclical sectors such as consumer discretionary, resources and financials towards the latter part of the year. From an SA perspective, the MSCI ACWI was however down almost 5% in rand-terms in 2016, significantly lower than the gain of 31% in 2015 when a weaker Rand provided a significant tailwind.
- Global bond markets had a totally different year under the belt. After a strong rally in the first 6 months of 2016 on fears of deflation and concerns around Brexit, the Barclays Global Aggregate Bond Index fell 7.1% in the last 3 months of the year. Despite this, global bonds still managed to gain 2.1% in US$ in 2016. In Rand-terms, global bonds closed the year almost 10% lower.
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