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09 Jan 2017

The Year In Review 2016

Populist nationalism arrived in force in 2016 with the “out” Brexit vote, the Bernie Sanders campaign, the Donald Trump election win, the impeachment of Brazilian President Rousseff and the frustration of government-sponsored Italian constitutional reform. We also saw a strong reversal in the fortunes of several emerging markets after a number of torrid years.

The continued search for yield and speculative activity pursuant to large Chinese economic stimulus and a potentially massive US fiscal expansion under Trump, led to generally buoyant markets. The MSCI All World Index gained 7.9%, with emerging markets rising most on strong gains by the Brazilian and Russian bourses. US equities gained 10.9%, largely due to a strong rally in the US industrials sector.

Commodities generally advanced, especially oil, gas and iron ore, which all posted high double-digit gains. Related emerging market currencies including the rand, Brazilian real and Canadian dollar gained against hard currencies. But the US dollar was understandably stronger against the euro, pound and yen given the relative economic performance of these markets and nascent hawkishness by the US Federal Reserve.

It is quite possible that 2016 saw the inflection point in a multi-decade fall in interest rates. Indeed, by mid-year, $11 trillion of developed market government debt was trading at negative yields. Even corporates began issuing debt at negative yields. Latterly, however, yields on US Treasuries and the dollar surged after Trump’s election on expectations of higher US economic growth, inflation and US interest rates. The nature of global trade is also likely to look very different in future as Trump ushers in a new protectionist era.

South Africa seesawed between the fortuitously benign global environment for emerging markets on the one hand and the risk-drenched domestic political environment on the other. The FTSE/JSE All Share Index eked out a mere 2.6% annual return, weighed down by the cohort of large rand hedge counters as the rand improved. Bonds (+15.5%) delivered a reasonable return and listed property (-20.4%) disappointed. Cash proved to be a safe hiding place amidst the turmoil.

Bill Bryson’s One Summer: America, 1927 recounts the era-defining events of the short season bridging the Roaring Twenties and the looming Great Depression: The first non-stop trans-Atlantic flight (Charles Lindbergh); the first “talking movie” (The Jazz Singer); the original Ponzi scheme (Charles Ponzi’s postal coupon “business”); the advent of television; the birth of the shopping mall; the Great Mississippi Flood and Babe Ruth’s phenomenal 60 home-run season. Bryson also offers fascinating insight into President Coolidge who somewhat lazily restored confidence in the White House after the scandals of his predecessor – an unexpectedly comforting facet of the book for a South African reader in 2017.

An astonishing number of important things happened in 1927 that affected events in subsequent decades. And so too might events of 2016 prove to be somewhat epoch defining. Most notably, the turning point in the trajectory of interest rates could be the single biggest driver of return outcomes in the coming years.

So a lot happened in 2016 and in 1927. But a lot has happened in other years too. In fact, the more one thinks about it, the more striking it is how normal a cluster of abnormal events actually is.


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