Global markets begun the year poorly with there being a generally negative sentiment in the market. This was primarily as a result of weak economic data from China and the volatile oil price creating an uncertain environment. As a result global equity markets did not perform particularly well during the first quarter, but did rally significantly towards the end of the quarter with more dovish statements from the US Federal Reserve and as a result the MSCI World Index returned -0.3% (USD). However, the MSCI Emerging Market Index returned 5.7% (USD) mostly as a result of dollar weakness. The general risk-off behaviour in the markets decreased the yield on global bonds with the Barclays Capital Global Aggregate Govt Index returning 7.2% (USD).

Locally, equity markets performed well, with the All Share Index returning 3.9% (ZAR). This has been driven by the strong resurgence of the resources sector with a return of 13.2% (ZAR). The deprecation of the rand in the latter part of 2015 and the drought affecting the agricultural sector have resulted in significant inflationary pressure in South Africa with inflation breaching the 3 to 6 percent target. This has forced the SARB to raise rates by 0.75% during 2016. This has had a positive effect on the bond market with the All Bond Index returning 6.6%. Inflation-linked bonds returned 2.2%. South African listed properties provided a strong return of 10.1% (ZAR). The rand also managed to appreciate 5.3% against the dollar in the first quarter of 2016.

The world economy continues to find itself in a fragile state, with low growth (the IMF continues to downgrade growth estimates) and deflationary pressures in many parts of the globe. This is why regions such the European Union have increased their Quantitative Easing (QE) programs recently. The US on the other hand remains in a rate hiking cycle, which diverges from much of the rest of the world. The US Federal Reserve, though, has already reduced its expected number of interest rate increases during 2016 from four down to two during the first quarter alone. This confirms what we wrote at the beginning of the year: this interest rate hiking cycle that the US is going into will be a very shallow, slow and careful one.

The South African economy continues to be under significant pressure with the prospect of a ratings downgrade still looming. The Budget Speech in February appeared to provide the ratings agencies with some of what they wanted to hear in the short term. However, there continue to be concerns about structural problems in the economy that have resulted in persistently poor growth. In addition, rating agencies are sceptical about the government's commitment to ensuring the targets set are met, given government's track record over the recent past in this regard. Heavy political turmoil also ensures that the economy takes a back seat in the short term as issues surrounding the President continue to take central stage. Foreign equity remains our favoured asset class from a fundamental perspective and global bonds remain expensive but are good insurance against very negative events. Domestic property is very expensive as is domestic equity, with domestic companies likely to struggle to grow earnings within South Africa. Bonds look attractive but could suffer if South Africa is downgraded to junk status. The increase in interest rates means that cash is finally offering a real yield and this asset class is starting to look more attractive especially when considering the volatility inherent in other asset classes.