Opportunities in SA equities are emerging for the first time since the Global Financial Crisis

Annual Long-term Perspectives review

With the five-year annual return for the South African stock market at only 5.8% to the end of 2018, compared to the inflation rate of 5.3% over the same period, investors are increasingly asking whether they are better off in safer interest-bearing investments such as cash – particularly when considering the current volatile political and economic climate.

While the past five years have certainly been challenging for SA investors, expected future returns have improved, given that the market is offering value opportunities for the first time this decade. This is according to Zain Wilson, Portfolio Manager for Old Mutual Investment Group, speaking at the launch of the annual Long-term Perspectives review, a summary of proprietary long-term asset class data compiled by the Group’s MacroSolutions boutique.

Drawing on the data compiled by the review, Wilson demonstrated the upward trend of SA equities, despite periods of volatility, from 1924 to 2018. “While volatility reigns over the short run, equities fluctuate around the trend over longer periods, with a tendency to revert to the mean,” he explains. “SA equities’ strong performance for the five years post the Global Financial Crisis drove returns well ahead of trend, setting the foundation for the five lean years to follow as markets became more expensive.”

Wilson adds that poor performance since 2013 has taken long-term real returns back down to the historical trend for the first time since 2009. “Although returns have not fallen far enough below the mean for us to fill our boots with equity, this sets the foundation for better returns looking forward.

The end of 2018 saw real returns of SA multi-asset funds drop below zero for the first time in almost 20 years. Compounding local investors’ woes was the fact that, when comparing the asset class returns in 2017 to those of 2018, SA Equity and SA Property went from the top of the performance rankings to being the two worst performing asset classes. This has prompted concern among many investors that the poor performance of SA equities over the past five years is likely to be a permanent market fixture in the future.

Wilson points out that the reality is that investors need growth assets like equities to grow wealth. “Do equities underperform from time to time? Of course. But our data over the past 95 years shows that equities have always outperformed cash over the longer term, offering significantly more return on average,” he says.

Also speaking at the launch, Old Mutual Investment Group Head of Retail Distribution, Gontse Tsatsi, says that the dominant reason investors currently tend to prefer cash to equities is the fear of losing money. Yet, over the past 87 years, cash has been the best performing asset class for only 11 of these years. In 100% of these instances, the JSE was actually down, including the 1932 Great Depression, the 1948-1949 post-WWII bear market and the 1998 emerging market crisis.

“While cash guarantees security in the short run and equities give you the best chance of growing your wealth in the long run, our data shows that the top performing asset class over any single year has been consistently different since 1929. The best way to manage the risk of losing money is to remain invested in multi asset solutions – giving you access to a full toolkit and the ability to invest where the best available returns are.”

“Looking at historical data, SA equity’s past performance shows that that as soon as you extend your holding period for more than three years, the chance of losing money becomes negligible. A classic example is what happened in 2008: after a negative 30% return, the market rebounded to deliver 14% a year over the following five years.”

He adds that short-term volatility can often lead to investors selling their investments off at the worst time. “Long-term data shows that almost all of the 10 best days on the JSE occurred after bad news or during uncertain times,” he highlights. Sitting on the sidelines in an asset like cash can mean missing out on the upswing,” he warns.

So where is the current market opportunity likely to come from? Wilson and his team are steadily reducing their exposure to global markets such as the US, and, instead, are increasing allocations to South African asset classes where they see more pockets of opportunity.

“Since 1950, domestic economic growth has been on the low end of its range, when compared with the US,” he says. “However, considering the tailwinds of incremental structural progress ahead of us, and the US facing a slowdown as fiscal and monetary stimulus has receded, we expect this trend to reverse years to come SA bonds are still our preferred asset class as it’s still too early to start aggressively buying SA equities, but an improved local backdrop combined with attractive valuations in select areas, means we are seeing pockets of opportunity come through.”