Economic and Market Overview


2017 turned out to be a buoyant year on the global economic front. Leading indicators in most developed economies were trending up and talk about a synchronised global recovery has been widespread. This was evident in capital market performance over the last twelve months.
The manufacturing PMI lead indicators have been particularly strong towards the end of 2017: the ISM indicator in the US rose to its highest level since 2004, the Chinese official PMI is the highest since 2012, and the European composite is its highest since 2011.
Real sector data has not been nearly as positive and as a result, the consensus forecast for growth has been contained. Based on the Bloomberg poll, US and European economic growth is likely to slow down marginally from its 2017 performance. The continued lack of significant inflationary pressures in an environment in which unemployment rates are falling, remains somewhat of a mystery. Headline inflation and, more especially, core inflation remain below target in the US and Eurozone. There are, however, some signs of inflation picking up in the United States, which are likely to lead to a continued rise in US interest rates. The Federal Reserve’s 0.25% increase in December went almost unnoticed as it was widely expected and even though the board of governors has advertised another three increases for 2018, the market’s only expecting one.
The economic cycle in the United States is at a mature stage, but still shows very little indication of nearing a peak. Economic momentum leading into 2018 is solid, and should persist through the year. Growth will be driven by continued gains in capital expenditure and moderate progress in consumption and housing.
Chinese economic growth continues to play a pivotal role in a global sense, especially with regards to commodities. Industrial commodity prices ended 2017 strongly, buoyed by evidence of a synchronised global economic recovery. And yet, there are clouds gathering on the horizon. Developed market economic growth is less commodity-intensive than it has been in the past, and it is China’s economic momentum that will play a dominant role in determining demand for industrial metals in 2018. Chinese economic activity is likely to slow down perceptibly in the months ahead, which implies volatility and downside risk for commodities.
In short, the global economic outlook for 2018 is one of continued synchronised growth, but some cracks may start to appear as the year unfolds.
South Africa

Cyril Ramaphosa’s election as President of the African National Congress dominated headlines in December. The composition of the top six members of the National Executive Committee (which contains three members from the so-called Zuma-camp) may make significant and far-reaching changes somewhat more laborious, but overall it was seen as a positive outcome for both the ruling party, as well as for the country. The rand strengthened by almost 10% (against USD, EUR and GBP) during the course of the month, but it may also have been influenced by an improvement in South Africa’s terms of trade and current account deficit. An increasing trade surplus has benefitted from rising commodity prices and global sentiment towards the rand following the ANC conference could also have played a role in the strengthening of our local currency. Capital flows have, however, painted a far less rosy picture. We have seen large bond outflows since the October medium-term budget and the subsequent rating agencies’ downgrades.
In contrast with the rest of the world, South Africa’s real economic growth remains weak and is likely to be no more than 1% in 2018. There could be an expectation that the South African Reserve Bank will lower interest rates further, in order to give some boost to the struggling economy, but increasing fiscal risks and the knock-on effect to the rand via further credit rating downgrades are the main risks on the central bank’s horizon.
Following its strong performance in December, the rand has now moved ahead of fundamentals and is now increasingly vulnerable on a number of fronts. We see a high risk of a rating downgrade from Moody’s, following the February budget in spite of the ANC election outcome. This downgrade and the resulting outflows from being expelled from the World Government Bond Index could lead to the local currency giving up the gains it made during the last month and then trading sideways for the rest of the year.

Market Performance
In South Africa, developments around Steinhoff enjoyed a lot of focus during December as the share price lost nearly 90% of its value in a fortnight.  This followed the resignation of CEO, Markus Jooste, on the back of potential accounting irregularities.  Most pension fund and unit trust investors would have had some exposure to this share, and would be eagerly looking for some more clarity when the annual financial statements are eventually released in January 2018.
For the 2017 calendar year, growth assets remained the stand-out performers, but it does not hide the fact that all the broad asset classes have delivered positive results. December’s rand strength has curbed the effect that global developed market equities have had on portfolios and it gave South African (21%) and emerging market (25%) equities the opportunity to end the year as the best performing asset classes in rand terms. Local bonds benefitted from lower yields and ended the year with double digit performance (up 10%).
Emerging market equities was still the stand-out asset class over one year in US dollar terms – the MSCI Emerging Markets Index added nearly 38% in 2017. The US dollar was broadly weaker last year and gave up nearly 10% against the rand over the last year, with sterling and euro broadly flat against our local currency.
South African Multi-Asset High Equity funds delivered an average of 10% to investors during 2017, with their low equity counterparts ending up 8.4%. With inflation around 5% during last year, it means that investors in these portfolios have been able to grow their wealth well in excess of inflation for the first time in a few years.