In many aspects, 2016 have to be regarded as the worst financial and investment year for many people, many nations and many investors around the world. The many shocks markets and investors endured in 2016 are well documented – ‘Nenegate”, Brexit, Trump, in South Africa ‘state capture and slow economic growth locally and in several other countries.
Will 2017 be better? There are many issues likely to have an impact on markets this year.
Brexit (expected trigger of the Article 50 clause on the 31th of May) – it looks like it might be a hard exit for Britain as Angela Merkel has indicated that Britain will need to accept freedom of movement, if they want to benefit from trade inside the EU…
Rating agencies assessments once again spoiling the party – Fitch (June and November), Moody’s (May and November) and S&P (June and December).
Elections in Netherlands (March), France (April / May), Germany (September) which is expected to see a movement towards populism politics, away from prudence and austerity. This might be great for increasing the short-term velocity of money but provides anything but a solution for the high debt to GDP ratio’s for these countries.
Local politics are promising to keep us to the edge of our seat with the ANC’s “Policy conference” (Jun), “Nominations of the top six NEC” (July) and the “National Elective Conference” – election of new party leader and preparations for the national election in 2019.
Apart from these mostly political events – listed as the most serious concern for 2017 by many analysts and commentators – the other events that will require careful thinking this year:
Interest rates – higher interest rates are not great for consumers or for financed / leveraged expansion. Higher interest rates are used to normalise and “cool-off” economies as a monetary management tool. As interest rates start to normalise, markets could naturally reassess the valuation of consumer driven and interest sensitive stocks, together with the attractiveness of equities (against elevated risk levels), when compared with the now better yielding fixed interest asset classes (e.g. like bonds and the different forms of cash).
Strength of the dollar – a strong dollar is not beneficial for the US economy in respect of their overall cost competitiveness in the global sphere. Higher interest rates might cause the dollar to further strengthen to new highs, when measured against the pound, euro and yen.
Oil price movements – an oil production cut agreement was signed by 22 countries in November last year. Shale production has however managed to reduce their average break-even production cost from $75-90 to $35-$40 per barrel. Oil might hence be low for longer, however if not, this is going to bring substantial inflation implications forward for the consumer, coupled with higher interest rates…
Earnings growth or growing economies are not looking rosy but steady… Emerging Markets seem to be coming back marginally (Brazil, Russia and RSA) as commodity prices stabilise.
How to react to this? Prepare for eventuality, surprize, upset, shock, irrational market behaviour in advance and decide your “protocol” when it hits. Understand your behaviour in advance, necessary to weather the storm. Include this eventuality and protocol as part of your investment plan.
Always remain focus on the long-term and ignore short-term uncertainties. Identify the next long-term drivers (and there are a few) that could bring long-term benefits and stability to the South African economy and act upon their implementation.
Do not tolerate short-term thinking or short-term investment, as it is hazardous in financial markets especially at current valuation levels. Capital earmarked for investment, must be over and above three month gross income cash “emergency fund”, to cover any day to day eventuality.
Because markets are irrational, invest for the long-term in in good businesses at the right price. You can invest in a great business at the wrong entry price and not make a sent over the short-term (2-3 years). This is where investors should make use of professional analysts that can determine the discounted entry price for a business’ market perceived fair value.
Understand that actively managed investment portfolio managers need market surprizes and uncertainty to beat the market. To benefit from this, investors have to stay invested during volatility and long-term investors (as they know), will be handsomely remunerated for their patience.