Investment markets have not had a good start to 2018. The JSE All Share Index and the World MSCI Index are flat in 2018. These poor equity returns are continuing from the last three years with the JSE returning an average 5% per annum.
The JSE fluctuated wildly some 5 to 7% a few times over the last 12 months but stayed range bound. Global markets were similar and the Rand remained volatile. Frustrating, annoying and potentially unsettling. The key is to understand what is leading to this volatility and muted returns.
The good:
- Synchronised global economic growth
- Technology advancement driving efficiencies and cost savings
- Inflation as opposed to deflation providing evidence of sustainable growth
The bad:
- Rising interest rates to quell inflation
- High USA stock market valuations
- Global middle- and low-income stagnation
- Populist political uprisings – Brexit, USA, Italy, Spain, and likely Mexico and Brazil.
The ugly:
- US, China and European trade wars
- Continued Middle East unrest threatening global oil supply and prices
It does appear the bad and ugly outweigh the good, but over time, the world has always had its conflicts. Despite these, investment markets have continued to grow over the long-term, as globally the growth rate has increased. We don’t see a major global war or a global economic collapse. But the key issue is to ensure your investments are properly diversified to mitigate risk.
In South Africa we also have our own issues:
Most importantly we have a new leader, Cyril Ramaphosa. But, he has a difficult job as he goes through the process of restructuring a dysfunctional ANC.
Government institutions are starting a major clean up under Pravin Gordon. This is leading to union unrest. This is a battle that has to play out.
Land reform is a major issue. Certain land needs to be redistributed and it needs to be settled soon. It is a very complicated issue, but we are comfortable that it will not have
a negative impact on the economy. We do not believe farms / land will be taken away without compensation. Unfortunately the topic has been poorly communicated and is
rather being used as a political tool, which has been negatively affecting the perception of the country.
Economic growth is low (0.8% last quarter year on year) but we believe with government changes taking place and renewed confidence, growth will improve and surprise on the upside
over the next three years. Rating agencies are less negative and an overall downgrade to Junk is unlikely.
The Rand remains volatile and is a victim of global and emerging market sentiment as seen in its recent 15% decline to the dollar. This is unpredictable and barring an unlikely
global market crash, the Rand should not weaken much more in the short term. In the medium term we expect the Rand to strengthen back into the 12.50 to the dollar range.
Fundamental fair value is around 11.50 based on purchasing power parity.
SA shares with mostly SA earnings offer a lot of value and are relatively cheap to the rest of the world. These opportunities will drive good future returns, but investors need to
be patient as growth returns to the country.
How do we deal with this uncertain investment environment?
Low investment returns are frustrating, but one needs to remember that your best investment returns will be achieved over the long term and will be significantly enhanced
if invested in the right unit trusts. Below is a graph illustrating the five-year rolling return of three premium balanced funds combined. Currently (May 2013-2018), the five-year average return is 8.5%, which is near the low point over the last 15 years. The low point in May 2012 of 7.5% was a result of the effects of the 2008 global financial crisis.
What the graph below shows is even during a financial crisis as in 2008 (when the JSE All Share Index collapsed 40% in six months), long-term investing in the right balanced unit trust funds produced a 7.5% average annual positive return over 5-years (May 2007-2012).
The average 5-year return of this graph was 16.2% per annum, which illustrates the benefit of sticking with an investment strategy through market cycles.
The key is to ensure your investment is properly diversified and matches your risk profile. With the market’s low returns over the last five years, we believe we are at the bottom of
the long-term cycle and better growth should return.
Invest in the right balanced unit trusts (as illustrated above) and good above-inflation returns should be achieved despite the continued global wrestling.