Global economic growth disappointed in 2015. Although the US and Eurozone registered somewhat better growth, it was the Emerging Markets that disillusioned investors. Chinese growth slid to around 7%, its worst year since the global financial crisis. We also saw Brazil and Russia slip into an outright recession. Against this backdrop of weak global growth, commodity prices were hammered again, extending the four year slump in these prices. Oil prices crashed back towards levels last seen in 2003. Inflation rates benefitted from lower commodity prices, but commodity and related industries are suffering. Locally economic growth also disappointed, partly due to these international trends, but also due to ongoing policy uncertainty, fiscal constraints and gradually rising interest rates. The outlook for 2016 looks pretty similar, as confirmed by recent World Bank forecasts.
Slower growth worried investors as equity markets were volatile over the past year. In the US and Europe equity prices held up reasonably well, but many Emerging Markets suffered as poor growth and the prospect of higher US interest rates led to capital outflows from these economies and markets. The currencies of these economies came under tremendous pressure and the rand was one of the worst hit. At a sector level commodity shares fared the worst as investors realised that the super cycle in commodity prices was over. In these uncertain circumstances investors preferred the more defensive consumer related sectors. JSE returns strongly reflected these developments and local equity fund performances diverged enormously. Local bonds also struggled, particularly in December with the rotation of Finance Ministers.
Looking ahead investors should expect continued volatility amidst all these uncertainties. Under these circumstances portfolio diversification is of utmost importance. Following recent weakness equities generally appear reasonably priced, but the prospects for earnings seem unclear as economic growth remains anaemic. International equities are still favoured over local equities. Global property also offers decent yields. After surging in December local bond rates are well above longer term domestic inflation expectations and preferred to global bonds. Although shorter-term prospects are uncertain investors should remain focussed on longer term goals and an appropriately diversified portfolio is considered the best approach for achieving those goals.
By Dave Mohr
Chief Investment Officer at Old Mutual Multi-Managers