Looking Back at the First Quarter of 2016

Is 2016 turning out to be an annus horribilis for investors and the country’s economy?  Not necessarily, but it certainly was a bumpy ride during the first quarter.  No-one promised it would be plain sailing, with the tide turning against emerging markets, interest rates joining inflation in an upward spiral, and the threat of a further credit downgrading facing the Republic.

Indeed the year started off on a tumultuous note for the global financial markets where increased volatility saw an indiscriminate sell off over the first quarter because of:

• Fears around the strength of the Chinese economy.  Chinese GDP growth slowed to 6.8%, the lowest since 2008.  China also reported the largest decline in exports since May 2009.
• A poorer outlook for corporate profit growth, particularly in the US.

In SA:

Business confidence fell to its lowest annual average since 1993.

The Rand was volatile and sensitive to domestic political news as well as negatively affected by an emerging market sell-off.  After trading through USD/Rand 16.80 in January, the Rand appreciated to USD/Rand 14.70 in early April.  Assisting this appreciation were global factors such as steadier commodity prices, a degree of stabilisation in the Chinese economy and exchange rate as well as slower interest rate rises in the US. However, the domestic backdrop, both political and economic, is still in flux and likely to drive periods of currency weakness in the months ahead.

Consumer Price Inflation (CPI) hit 7.0% p.a. up to the end of February 2016.

The SARB raised the repo rate in the quarter (January – 50bps; March – 25bps) to 7.0%, bringing the prime interest rate to 10.5%.  The main reason for this tightening is the persistent upside risk to the inflation outlook driven by rising food prices, higher oil prices and the weaker currency.  Some economists forecast further rate hikes of up to 50bps this year.

The JSE/ALSI gained 3.9% over the quarter on a total return* basis.

Moody’s put their Baa2 rating of SA’s sovereign credit on review for a possible downgrade.

In Europe:

The European Central Bank (ECB) lowered its interest rate.

*Total return includes all interest, capital gains, dividends and distributions over the period.

Source: Coronation Fund Managers / Sanlam Investments