Over the last three months we have seen a remarkable turnaround in markets following the flat and in many cases negative returns experienced in 2015. There seems to have been a marked turnaround in sentiment. Is it sustainable though?
Global markets were negative 12% for the year to mid- January followed by an uptick of nearly 12% in the three months thereafter. Our local JSE Allshare, having been down 5% in Rands over 2015 and into 2016 then turned positive by nearly 13%.
The Rand had a horrendous year in 2015 – depreciating by 32% against the US Dollar – but has since clawed back nearly 8% over the last three months.
This improving sentiment has been driven by a turnaround in commodities and a weaker dollar. The US Federal Reserve has kept interest rates on hold when it was expected that once the tightening commenced, rates would continue to rise incrementally. Markets have interpreted this dovish stance as an indication that the US economy is perhaps not growing as fast as expected. With problems in Europe ranging from little or no growth to the migrant crisis and the possibility of Britain exiting the EU, there has been improved sentiment towards emerging markets of which South Africa is one.
Can this turnaround be sustained is the big question? Although it has slowed dramatically, China’s economy still has positive growth and 6% per annum is still admirable by global standards. However, the country continues its transition from an export led economy to a consumer driven one. Exacerbating China’s somewhat parlous economic position is its growing debt. This now stands at over 200% of GDP which is an issue to keep an eye on.
So what is the outlook for the rest of the year? China’s somewhat anaemic growth and debt problems remain key. The upsurge in commodity prices over the last three months may not be sustained. Therefore emerging markets will be affected negatively. Global inflation is likely to increase modestly and the US will most probably increase interest rates again in the short term but at a slower rate than originally anticipated.
In summary, as far as markets are concerned, the extraordinary volatility we have seen in recent times is likely to continue.