2016 Financial Forecast.

By Bevan Jones

Warren Buffet famously said, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” Still, let’s have a look at what trends might affect our financial futures in 2016.

Stock Markets – very volatile, either at least 15% up or 20% down

The year has not started well. Global stock markets have sold off vigorously within the first week, wiping out all of 2015’s stock market gains. Statistically, stock markets do not perform well in any year if January goes badly. One of the main reasons for the big January sale is the eventual realisation that markets have over performed in recent years as easy money (from low US and European interest rates) has found its way into shares, causing unsustainable price rises. It has also found its way into private equity deals and investment bankers had a great 2015 sealing record amounts of mergers and acquisitions. Now that Chinese and emerging growth is officially floundering, the markets are expecting a tough 2016. This is compounded by the fear that Reserve Banks around the world are not able to prop up growth any more with low interest rates and the fact that many of the lifeboats from the 2008 sub-prime financial collapse are still out there rescuing people trapped in debt.

Fear and greed rule markets and are symbolised by the bear and the bull. There is a saying that “the bull walks up the stairs while the bear jumps out the window”. This is an apt description of how most markets work, in that our greed causes markets to rise about 80% of the time, whereas crashes happen due to fear about 20% of the time. Unfortunately, crashes happen quickly and instantly wipe out the gains that have taken such a long time to achieve. It could be that this January sale will be a great opportunity to buy equities at much cheaper price levels. Warren Buffet again says that one should “buy when others are fearful and sell when others are greedy”. However, it could also be that markets continue in fear mode and keep selling off for months (like in 2008/2009) until more reasonable prices are achieved. Either way, don’t rush in. It’s probably safest to wait until February before deciding to invest.

The Rand – strengthen to around 12 to the US Dollar

There’s very little any of us can do about the Rand. It is determined by millions of transactions each day as importers, exporters, traders, bankers and speculators all place their various bets and hedges. This is a market where sentiment rules. Which is why the chaos in December around the Finance Ministry was not helpful. However, hopefully South Africa will come to be seen by the wider world and ratings agencies as being able to muddle through 2016, at least no worse than other emerging markets, which should have a better 2016 as most commodity prices rise.

The Rand and our credit rating are vitally important for government to finance itself. Government raises money by selling bonds to overseas investors and if our credit rating is cut to “junk” status or the Rand becomes too weak, investors simply won’t invest in us and we will find it much more expensive to repay our debt. This will put pressure on government public spending and social grants etc. Unfortunately the poor are always the worst affected as they depend the most on government support. Already, the weak Rand, combined with our worst drought for decades, is going to cause incredibly painful food price rises for some of our poorest and most vulnerable citizens. The little white maize that will be available this year will fetch sky high prices because it will mostly be imported and paid for with weak Rands. So we should all pray for rain, for a stronger Rand and for sanity to prevail in the Finance Ministry.

Interest Rates – flat to slightly up

Anyone who owns a house or is paying off debt on a car etc. would love for interest rates to come down. However, with such a weak Rand, and the very real possibility of much higher inflation rates to come this year (owing to higher oil and food prices), which makes it advisable to budget and prepare for higher interest rates. The rest of the world will most likely continue to see very low interest rates which means that foreign investors may once again be tempted to invest in South Africa as our higher interest rate means a better financial return for them. This is another reason we could see the Rand strengthen this year. Unfortunately, we can’t keep relying on foreign investor money flows. At some point we have to expand our economy and increase employment in this country, to widen the tax base and make ourselves more self-sufficient. We certainly have the people and the energy to do it.

Commodities – strengthen, but not back to 2012 levels

Most observers are predicting that commodity prices will remain depressed this year. However, these are the same observers who predicted that $100 oil prices were here to stay. The time is ripe for prices to start rising again, even with the global climate sentiment against coal. We should also most likely see oil prices back up to around $60 – $80 by year end (from around $33 currently) which means much higher petrol prices if the Rand does not also strengthen at the same time. Gold and platinum should have a good year, but only if stock markets remain depressed. This is because investors will turn to gold if they feel that nothing else is able to hold value for them. Typically gold also performs well as protection against higher inflation, so if we see inflation rates creeping up globally, expect gold to do well.

Investment Opportunities for 2016

Investing in localised food production, water sanitation and waste to energy systems are the three biggest investment opportunities in SA at the moment. As remote working, online services and shopping increase, people will start to create more self-sufficient communities in the areas they most want to live. Thus local organic food, water, energy and sanitation services will offer great rewards. Small and sustainable agriculture (with land reform) remains potentially the biggest opportunity to increase employment and growth in South Africa. Our tourism sector should also do really well with the weaker Rand and ideally we can still show the rest of the world what Ubuntu really means.

But what does all of this mean for you, the individual? Probably the best investment you can make is in becoming more self-sustainable and economically sufficient in your own house. After all, why work so hard only to pay for expensive food and energy when you can provide it yourself? Consider these goals for 2016:

1. 25% daily food consumption grown in and around your home
2. 10,000 litres of fresh water stored in and around your home
3. 30% of your home energy consumption on renewable resources