The strong performance in higher yielding equity and bond assets has spilled over to currency performance; this has resulted in a boost for commodity and emerging market currencies. Following a decline of over 25% against the USD in 2015 for the local unit, the Rand reversed the negative trend observed last year to arise as one of the super stars of emerging market currencies.
Last week ended with a welcome sigh of relief with Standard & Poor’s (S&P), one of the major global rating agencies, announcing its decision not to downgrade South Africa’s credit rating to junk status.
The first three months of the year have seen equity markets experience their worst start to a year on record. This was “fuelled” by the ever-dwindling oil price, while concerns over economic growth in China did the markets no favours either. Investors found their only hiding place in developed market government bonds, which coincidentally offered the worst risk/reward profile. And yet, despite the blood on the floor, there is still money to be made and reason for optimism.
Investors grew used to unprecedented low volatility levels in financial markets from 2012 until 2015. This was due to synchronised monetary policy stimulus from the major central banks.
Economic growth of less than 1% is bound to feel like recession for the South African consumer that is facing high debt levels, rising interest rates and higher inflation.
Investors fixated by the latest data releases instead of the broader trend.
Global earnings expectations have the potential to surprise on the upside.
Financial market volatility, which has increased over the last few months from unusually low levels, should remain elevated during 2015 as macro-economic inflection points are reached.
Unusually low levels of volatility in asset prices over the last few months are not expected to continue and investors should brace themselves for more volatility, especially if US economic data continue to improve and investors reassess interest rate expectations.
Equity market investment returns over the past year have been strong, but the outlook for the coming 12 months is for much more muted returns and investors will struggle to outperform inflation.