Politics played a major role in our experience of 2016, both locally and globally and both in developed and emerging markets. Events such as Brexit and Trump immediately spring to mind. Locally we will remember the Constitutional Court finding on the Public Protector’s report into the President’s private homestead in Nkandla, the local government elections, #FeesMustFall, #ZuptaMustFall and the report into State Capture in our country.
The world of sport did not disappoint either, from Leicester winning the Premier League, to Ireland beating the All Blacks… and of course Italy beating the Springboks (although that last event might not necessarily qualify as a low probability event anymore).
To be sure, 2016 was definitely a year in which the frequency of low probability events was indeed very high.
With the benefit of hindsight, it is fair to say that many of us experienced 2016 as a bit more intense than usual. But is this necessarily the case? Various media houses were quick to declare 2016 as the worst year ever. It dethroned the previous worst year, 2015, which in turn dethroned 2014. It does not bode well to extrapolate this into 2017, but it does point to a trend, especially regarding how we experience things. As humans, we suffer from a number of cognitive biases and we tend to remember recent and bad events the most vividly. It therefore becomes difficult to maintain perspective.
From a South African investor’s perspective, 2016 will be remembered as another difficult year for risky assets, defined as equity and property. The JSE All Share returned 2.63%, with the SWIX managing to deliver 4.13% YTD. Property fared somewhat better, returning 10.20% for the year. Comparing these returns to headline inflation (6.34%), only property managed to deliver positive real returns. If you invested offshore you would not have been better off. In rand terms the S&P 500 delivered -1.19%, the FTSE 100 was down 11.90%, and the Japanese Topix returned -11.08% for the year. Overall the MSCI World and MSCI ACWI were also down -5.12% and -4.81% respectively (in rand terms).
Rand appreciation played a major role in investment performance during 2016. The rand reached some of its lowest levels in January 2016, only to recover strongly and appreciate around 11%, 26% and 14% against the US dollar, British pound and the euro respectively. This detracted from the performances of offshore assets, but also had a meaningful impact on rand-hedge stocks as well as listed property counters, specifically those with material UK exposure. Therefore, funds that were exposed to these counters as well as making full use of their 25% direct offshore exposure would have had a particularly difficult 2016. These funds tended to have held very negative views on the South African economic and political environment, and while the events of 2016 have certainly confirmed their views in many ways, these events did not materialise in investment performance.