2016 economic and investment outlook

29 January 2016

Global economic growth is expected to be marginally higher in 2016 on the back of ongoing improvement in developed market economies.

Notwithstanding continued deceleration in China, emerging market growth is also expected to be a little better as economic activity in countries such as Brazil and Russia should be a little less negative than was the case in 2015.  Having said that overall growth is likely to be below recent averages (from 2000), risks are to the downside and many uncertainties such as China concerns will continue to cloud the outlook. Outside of the US where employment gains have been robust and an interest rate hiking cycle has commenced, global demand remains relatively subdued.

The global investment environment is anticipated to be challenging on a number of fronts  with returns from most asset classes likely to be relatively subdued. While global equities  have over the past number of years been well supported by low interest rates, equity performance will need to increasingly rely on the potential for profit growth which in and of itself does not appear to be particularly robust at present. The prospect of rising interest rates (albeit only on the table in the US for now) is also a potential headwind from an equity performance perspective. Positive performance is nevertheless expected from this asset class in 2016. From a global bond perspective we anticipate that currently easy monetary conditions and gradual economic growth will ultimately lead to slightly higher inflation and gradually rising bond yields. This will serve to keep returns from this asset class at low levels.

On the local front the challenges are even more severe. The SA growth outlook has deteriorated significantly with the threat of credit rating downgrades and increased policy uncertainties triggered by the sudden and poorly communicated changes in the Finance ministry.

On the local front the challenges are even more severe. The SA growth outlook has deteriorated significantly with the threat of credit rating downgrades and increased policy uncertainties triggered by the sudden and poorly communicated changes in the Finance ministry. Global investor sentiment towards SA has become substantially impaired and slowed much needed capital inflow. The marked depreciation of the rand and substantially higher bond yields have reflected this heightened uncertainty. The commodity price outlook remains poor and is a further growth constraining factor. SA faces rising inflation and interest rates in the face of a slowing economy and reduced corporate profit growth.  From an investment perspective this classic stag-flationary environment typically constrains asset class returns. From a valuation perspective local equities look somewhat expensive in the short term although they retain investment merit in the long term. Rand hedges will continue to play an important role here. Bonds appear to represent fair value with the significant rise in yields and should produce inflation beating returns in the longer term.

Is it all negative? SA can improve its lot significantly with a commitment to the implementation of structural reform. Until such time as there is definitive evidence of this SA will find itself in a difficult space.