Making sense of the rapid-fire changes taking place in the world around us requires a cool head and a steady nerve as we assess investment prospects for 2017. Events do seem all a bit bewildering, so we want to share some insights from independent fund research and ratings agency Fundhouse, which captures much of our own conclusions.

Looking back on the past 12 months, we need to consider the implications of Brexit, Trump, Chinese debt and shadow banking, South African politics, the rand, which started at R16/$ and ended at R13.70/$, a significant US rates hike, an emerging market crash and recovery, and OPEC cutting oil production and causing the price of oil to double to $56/barrel. That is without even considering asset classes in which we might invest or any of the numerous fund manager changes over the year.

Unfortunately, the world is no more normal than it was 12 or 24 months ago, and it is unlikely to be more normal in the near future. The policy implications of a Trump administration appear positive for growth (and therefore investment prospects) but this comes with a fairly strong health warning as the US is a repeat offender in creating bubble valuations without the necessary fundamental underpin. There is also the potential for Trump to materially change how the West deals with the East in terms of trade between the economies, causing further market risk.

The UK will be a case study for years to come, with the power of the voter acting at odds with economic stability. Under Theresa May, the way in which the UK renegotiates its way out of the EU will be felt by investors. The outcome of these significant events in the next 12 months and even longer is uncertain, which also makes investment risk higher than usual.

In Europe, we face major elections in France, Germany and the Netherlands, which could provide answers to the question of whether the UK has started a chain reaction in the unravelling of the EU. Voters in these countries may well push against their governments, as has happened in the US and the UK. The consequences of a negative outcome with respect to the EU are extremely complex to consider, which again leads to higher risks for investments.

Locally we will be going through a transition phase as potential suitors come forward for the ANC leadership and probably the South African presidency in 2019. Depending on which faction takes the lead, we could find the base for an economic recovery, or potentially find ourselves in a worsening position driven by political uncertainty. The outcomes are far apart and equally likely. In addition, the credit downgrade risk remains.

For South African investors, currency plays a major role in the success or failure of any investment planning. In 2016 we had the double edged sword of a strong rand. Its relative appreciation is negative for investment returns held offshore, further reducing what are already quite pedestrian local returns. On the plus side, this strengthening helps keep inflation under control, which is key to having a stable economic environment and interest rates. As we stand today, the rand is roughly fair against the dollar; sterling is almost 20% cheap relative to the dollar; and the Euro is around 12-13% cheap relative to the dollar. By implication, the euro and sterling are cheap relative to the rand, bearing in mind the high-risk environment in those regions for the meantime.

Fortunately for investors, economic strife is often distantly related to investment returns, so the potential for a positive 2017 is still there despite the relatively weak position in which we find ourselves at the start of the year.

In conclusion, higher than normal volatility levels in markets also present investment opportunities. Between the asset managers and ourselves, a very high level of vigilance is needed in these times. This is especially true when it comes to diversification and asset allocation decisions.

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