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30 Jan 2018

The Year In Review

Global equities (+24.0%) had a blistering year, achieving a clean sweep of successive positive monthly gains and standing out for its low volatility and broad gains across markets and sectors. Share markets started the year with strong tailwinds, after Trump’s surprise US presidential election victory late in 2016 heralded a period of fiscal expansion. The rally soon tired, but emerging evidence of accelerating, synchronised global economic growth boosted equity markets as valuations were increasingly justified by rising earnings expectations.

Investor sentiment was quickly buoyed by receding European political risks, pro-EU election outcomes in the Netherlands, Italy and France and increasing expectations of a softer Brexit result. Offsetting this, US–North Korean tensions mounted as the year progressed. Latterly, markets gained on the legislative advance of Trump’s aggressive US tax reforms, tempered to an extent by signs of a revival of his anti-China trade rhetoric.

As growth gathered momentum, monetary policy gradually tightened with the US Federal Reserve making three quarter-point interest rate increases. Surprisingly robust European growth and inflation also portends more hawkish European Central Bank policy. Bond yields started to rise later in the year in expectation of rising inflation and interest rates as the global economy continues to gather pace. Indeed, our base case expectation is for 2017/2018 to mark the end of a multi-decade bond market rally. On balance, the funds‘ bias towards select global equities was prescient and well rewarded.

South Africans expecting a year of political and economic tumult were not disappointed. Initially, the JSE tracked emerging markets higher on advancing commodity prices and improving global growth. But the firing of Finance Ministers Gordhan and Jonas, surprisingly higher tax increases and S&P Global Ratings’ subsequent sub-investment credit downgrade rattled investors. The economy entered a technical recession in the first part of the year and the country’s structural economic problems ensured only tepid growth thereafter.

Notwithstanding the relief rally after Ramaphosa’s narrow December ANC elective conference victory, the economic outlook remains distressed with strained public finances, a weak consumer, higher taxes and further credit rating downgrades looming. The FTSE/JSE All Share Index (+21.0%) delivered a solid return for the year, advanced largely due to Naspers, stronger commodity prices and a late, sentiment- driven rally in SA Inc. shares.

Given the outlook, Foord’s unit trust portfolios maintain a preference for non-resource companies with foreign earnings, be they listed locally or abroad. Near-dated SA government bonds continue to offer an attractive real yield and the portfolio managers maintain a healthy allocation to select domestically focused companies, including the best managed banks. Global markets should drift higher but we remain somewhat cautious given the late stage of a nine-year expansion cycle. Politics will also likely continue to be the key variable in South Africa in the year ahead.

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