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Market review of 2014 and key themes for 2015

Source: Mohammed Sibda (Momentum Portfolio Manager)

The 2014 calendar year provided a number of surprises to investors. Most of the economic news reported in the latter half of the year was a genuine cause of concern among investors and led to an increase in market volatility. However, despite the challenging global and local macro landscape, most asset classes provided positive nominal and real returns to South African investors.

Global economic stories of 2014

Some of the major global economic stories of 2014 included:

  • Continued improvement in the US economy which led to the Fed announcing the end of quantitative easing (QE). The economic outlook was in no doubt a positive story, but this led to a material weakness in a number of emerging market currencies.
  • The spectacular collapse in commodity prices in the latter half of the year was perhaps the biggest story in 2014 and probably the most relevant to the South African economy and stock market.
    As the year unfolded, continued concerns around the Eurozone and Chinese economies as well as the material dollar strength led to a 2009-like collapse in commodity prices.
  • During 2014, interest rates remained low and there were additional monetary measures from central banks. The Bank of Japan, the Chinese Central Bank as well as the European Central Bank (ECB) provided further liquidity in an effort to stimulate their respective economies.

Local economic stories of 2014

The following were some of the more important local stories:

  • The protracted strike at the platinum mines had a negative effect on 2014 gross domestic product, as a result of lower mining output as well as lower consumer expenditure because of lower disposable income.
  • There was material rand weakness, as a result of poor local economic fundamentals coupled with the termination of US QE.
  • SA had poor economic growth relative to other emerging economies.
  • The current account deficit got worse, as a result of the weak currency.
  • There were electricity constraints, which led to further weakness in the economy.

Review of asset classes

All local asset classes provided positive returns, with listed property being the best-performing asset class (26.6%).
Equity volatility, the low interest rate environment as well as property fundamentals explained most of the stellar returns from this asset class.

The FTSE/JSE All-Share Index and Shareholder-weighted Index returned 10.9% and 15.4% respectively. However, these returns were driven by a select few industrial and financial shares.

Some of the shares, which did particularly well, were Naspers, BAT, SABMiller, Aspen and the four-largest banks (Barclays Africa, FirstRand, Standard Bank and Nedbank).

After a strong start to the year, the sharp decline in commodity prices in the last six months resulted in the FTSE/JSE Resource sector losing 14.7% in 2014 compared to the 27.3% and 16.8% returns of the FTSE/JSE Financial and Industrial sectors.

After a rough start to the year, local bond yields recovered, with the BEASSA All Bond Index producing a return of 10.2%. This was mainly due to the lower oil price, which led to lower future inflation expectations and in turn led to the reduced possibility of further interest rate increases.

Global equity markets were mixed and developed markets in aggregate outperformed emerging markets. Within developed markets, the S&P 500 was the best-performing market, while the UK market (which like the SA market is heavily weighted towards resource) lost 2.0%.

Global bond yields continued to compress, given the economic landscape, fears of deflation in Europe as well as the prospect of lower inflation in 2015.

Key themes for 2015

Some of the themes Momentum Outcome-based Solutions thinks will be important for investors in 2015 are:

  • The timing of interest rate increases in the US
  • The ECB measures to stimulate growth and fight deflation
  • The fortunes of commodity prices
  • Increased market volatility
  • Lower absolute returns

Source: Mohammed Sibda (Momentum Portfolio Manager)

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