The JSE has experienced one of its weakest five-year periods in history. The economic and government fiscal outlook is barely improving, with rock bottom consumer and business sentiment persisting. Right now, most clients (and we dare say financial advisors) want to take as much money out of South Africa as they can.
As humans we find it incredibly difficult not to project our experiences of the last couple of years forward. Market pricing reflects our expectations of the future, but this outlook is driven by our past, rather than what is most likely to transpire in the future. Currently our expectations for South Africa can be described as depressed. However, now is not the time to sell all your SA equity and move everything offshore if you intend to continue measuring your portfolio in rand.
IT IS NOT THE JSE. IT’S THE UNITED STATES VERSUS THE REST OF THE WORLD.
We tend to think the JSE that has been the laggard in the recent past, but our market has performed in line with emerging and European markets. It is the United States (US) market that has far outpaced the rest of the world over the past 10 years. Investors also link the poor performance of the JSE to that of the South African economy, but over 70% of the revenue of the Top 40 Index comes from outside South Africa.
THE DECADE AFTER THE “LOST” DECADE
For the US equity market, the 2000s are commonly referred to as the “lost” decade. It started at the height of the dotcom boom, with historically high valuations. The tech bubble popped early in the 2000s and then, a couple of years later, the housing market (or sub-prime) crisis pulled the world into the Great Recession. This resulted in the US equity market experiencing one of its worst decades on record. With hindsight it was “always” expected that the US would bounce back.
If we consider South Africa, the local market has consistently outperformed inflation and even in the current decade (which feels like South Africa’s “lost” decade) it delivered the required 6% real return. It can be concluded that SA equities provided a much better hedge against SA inflation, historically. This is a very important argument for the continued inclusion of SA equity in a portfolio that aims to provide income to a rand-based investor.
CURRENT UNDERPERFORMANCE IS THE NORM, NOT THE EXCEPTION
If you go back in history and you compare SA and US equity (in rand) over rolling five-year periods, the current underperformance of the JSE is the norm, rather than the exception. Similarly, the JSE’s poor performance relative to cash over the past five years seemed to have happened a lot more in the past than the prevailing perception would have us believe. Many clients are currently disinvesting from equity and balanced portfolios in order to lock in guaranteed returns offered by a fixed bank deposit. If your investment horizon is long enough and risk tolerance is “normal”, investors should think very carefully before selling SA equity at this point in the cycle.
THE COMBINATION OF SA AND US HAS BEEN SUPERIOR
History tells us that the combination of SA and US (or global) equity delivered a higher return at a lower risk (volatility), than either market on its own. The correlation between these two markets, reduces the volatility of the combined return, thereby enabling investors to compound returns better in the long term.
IN CONCLUSION, WHAT WE ARE SAYING AND WHAT WE ARE NOT SAYING
From an expected return perspective, we still prefer global over SA equity. We are also not bullish on equity at the moment as returns have been strong year-to-date and earnings growth expectations for South Africa and the world are in the single digits over the next three years. But we are making the case that if you are a long-term South African investor, it is wise to retain meaningful exposure to SA equity. In short: Don’t sell out at this point in the cycle.