The Year Ahead
At the Meet the Team investor functions in November, MIKE SOEKOE discussed Foord’s outlook for investment markets in 2017. Mike’s presentation focused on capital preservation, as well as the effect of uncertainty and extreme volatility on investors' decisions. This article is an overview of his presentation.
Foord’s forward-looking investment process means the investment team works to best understand the future path of the global economy and its implications for investment markets. Portfolio managers then position the investment portfolios after the team has conducted detailed investment research. Looking back at the presentations of the previous year, we noted that the forecast volatility did indeed transpire, and then some. Who would have believed a year ago that Brexit could happen, or that Donald Trump could be elected?
The team’s projections were mostly vindicated by developments in 2016, except for the timing and magnitude of two key forecasts: that US interest rate increases would gradually resume and that the rand would weaken. In the event, the US Federal Reserve increased interest rates only once and the rand was subjected to violent swings, but by November 2016 it was little changed over the course of the year. However, we remain confident that these events will nevertheless play out in the not-too-distant future.
The presentation first focused on the US, the world’s biggest economy and generally the harbinger of global economic activity. The financial press reported fully on the uncertainty and turmoil introduced by the US president-elect and the markets were understandably jittery immediately after the election.
However, at the time of writing, US stock markets and the dollar have strengthened, while the bond market has weakened, as market participants digested Trump’s expensive expansionary policies. These include a proposed $500 billion infrastructure programme, the aggressive cutting of corporate taxes and penalising US companies that access cheaper labour abroad only to sell goods and services back to the US.
We have for some time forecast steady growth from the US. Now, if Trump’s promises are fulfilled (and there are big question marks about his commitment and ability to do so), we envisage that US economic growth will accelerate in 2017, introducing inflationary pressures and more quickly rising interest rates, thus sustaining dollar strength. On the other hand, if actioned, Trump’s protectionist plans to nullify global free trade agreements would be negative for global GDP, especially in the event of a Sino-American trade war.
European prospects, in contrast, are less rosy than those of the US, but equally uncertain. Brexit and rising populism have shaken Europe. With elections in Holland, France and Germany this year and a belligerent Russia to the east, geopolitical risks are rising in the EU. We expect muted growth and sustained weakness from the euro and pound in the year ahead as central bank stimulus persists.
The world’s second largest economy, China, is set to continue its growth trajectory, but at a slower pace than in past years as its economic base expands. With $3 trillion in foreign currency reserves, the Chinese authorities have both the will and the means to hold its growth path steady and to withstand any economic shocks. We continue to expect the Chinese economy to normalise in favour of the consumer and away from infrastructure-led growth.
Expectations for South Africa were downbeat: 2017 growth will unlikely exceed 0.5% and prospects for net job creation are dire given private sector jobs losses and the continued public sector jobs freeze (as government attempts to control public spending while ratings downgrades loom). Business and consumer confidence is also depressed as a result of continued policy uncertainty, non-existent fixed investment and the over-indebted consumer being unlikely to achieve wage increases exceeding inflation.
Also, South Africa runs a structural deficit on its current account (we import more than we export, including dividends and interest payments to foreign investors) and, on the fiscal account, government annually spends more than it collects in taxes. These twin deficits underpin a gloomy forecast for the currency, sovereign credit ratings and bond yields.
Given that global share markets, notably in the US, are at or near all-time highs and that geopolitical risks are elevated in all markets, Foord’s portfolio managers are understandably cautious.
Investment strategies vary by mandate and investment market but generally include:
- Raising cash levels above normal weights to protect portfolios and to take advantage of market dislocations
- Within prudential mandates, a full weight to foreign assets to diversify SA-specific risks
- Preference for global equities, with investment in companies with excellent management teams, attractive business models, sound balance sheets and stable cash flows
- Within South African equities, preference for rand hedge counters
- A low to nil weight in government bonds given the risk of rising yields
- Holding some gold bullion as a hedge against severe market stress