Let’s be frank! When investment performance is disappointing, managers look to the longer term to justify their returns. This is perfectly acceptable as it has been proven that the best returns are realised over a longer time period, +10 years. The JSE has produced a 12.7% p.a. return over the last 10 years and 16% p.a. over the last 40 years.
However, disappointment comes largely with unrealistic investment return expectations which correlates frequently with investing in an investment portfolio that does not suit your personal risk profile.
2018 was an awful year for equity markets. The JSE All Share Index was down 8.5% and the MSCI World Index was down 10.1% in US Dollars. There have been far worse years such as 2003 and 2008 where the market slumped 40% and 32% respectively. However, the big concern for some investors is that over the last five years, the SA stock market has only returned 5.8% p.a. versus inflation of 5.4%.
The bottom line is that the sluggish returns over the last five years, coupled with an 8.5% decline in 2018 has been a correction of overvalued markets resulting in far more attractive investment opportunities today. Allan Gray believes that there is decent value in SA equities, way better than five years ago and their investments should produce in excess of 10% p.a. over the next four years.
Big Issues for 2019
Locally – it’s all politics
A general election in May – where the ANC should improve their majority to 60% from 54%. This should give President Ramaphosa more support to make more meaningful government changes.
Fighting the unions – this will start with government employees as expenditure needs to be redeployed into more income-producing assets, such as infrastructure. The first big battle is likely to be with Eskom where a rumoured 30% of staff could be retrenched this year.
A Moody’s debt downgrade is still unlikely. Although it is unlikely to bring about a material increase to 2019’s economic growth (currently forecast at 1.9%), further critical government structural changes to boost economic growth should go some way to prevent an ultimate downgrade to junk status.
A range-bound Rand/Dollar. We expect the Rand to continue to remain range bound between 13.50 and 14.50 to the US Dollar in 2019. This will be largely driven by global market flows in and out of emerging markets. Although the fundamental fair value of the Rand to the US dollar is around 12, this stronger value is only likely to be realised towards the end of 2019 if successful government changes materialise.
International
A strong global economy, but risks are rising:
Increased interest rates – The jury is out on how much more the US will raise rates in 2019. Rising interest rates slow economic growth and provide other areas to invest in, which equity markets don’t like.
Trade wars and populist political tension – These are unknown outcomes that are fuelling further market fear.
A transforming Chinese economy – As China moves its economy more to consumer services, will strong economic growth persist?
Investment Outlook for 2019
We believe investment returns will be better in 2019. Much of the global disruptions and bad news anticipated for 2019 are priced into the market. However, sector selection will be important, such as local vs offshore, developed vs emerging economies, industrial vs financial vs resources. Big diversions in these different areas have created opportunities and therefore we believe there will be large differences in fund performances.
Volatility is likely to remain in 2019, but it brings great investment opportunities. Choosing the right investment/unit trust is key. Although we see more value in local versus offshore investments, we will initially maintain a conservative approach as a ‘new’ political landscape unfolds.
Our Prosperity Fund continues to perform well with an annualised 7.6% p.a. return since inception (September 2014) and ranked 3rd over the last three years in its Morningstar category of 47 funds. We believe the fund should continue to produce steady, outperforming returns.
We recommend re-addressing your investment goals in order to ensure your risk profile is aligned with your investment strategy. Let one of our Financial Advisors formulate a financial plan with you to ensure the most appropriate investment strategy is in place.