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A mismatch between investor expectations and reality

Investors should not suppose that the next five years will be anything like the last 10.
It seems investors should moderate what they are hoping to see from markets going forward. Image: Andrey Rudakov, Bloomberg

It may seem difficult to believe now, but half a decade ago the JSE was flying.

For the five years to the end of September 2014, the FTSE/JSE All Share Index (Alsi) had delivered an annual return of 18%.

Not many investors enjoying those kinds of returns at the time were paying much attention to the analysts who were saying that this was unlikely to continue. South Africans were being told to expect more subdued performance from the local market given how sharply it had climbed.

Yet, due to how good their recent experience had been, investors were not inclined to heed those predictions.

Over the following five years, however, the Alsi produced an annual return of just 5.3%. This is one of the weakest five-year periods that the local market has ever experienced.

While this is probably worse than anyone anticipated, it should not have come as a surprise that it didn’t match the period that preceded it. Given the valuations on the local market, the good times were inevitably not going to last.

Where are we now?

This experience may well be instructive for how investors should be seeing the world at the moment.

For the past decade, the US market has performed exceptionally well. It has returned 14.7% per annum over this period, at a time when inflation in the country is below 2%. The real return from the US stock market has therefore been just a little under 13%, which is well above its 80-year average of 7.5%.

Understandably, therefore, the focus for many investors at the moment is on the US. That is where the best returns have been found over the past decade, and so that is where money has gone.

However, it is worth considering what kind of returns investors can realistically expect from US stocks from this point. As investors experienced on the JSE, periods of high returns are often followed by much weaker performance.

Projected returns

Global asset manager Schroders projects that returns from the US market over the next five years will be less than half of what they have been over the past decade. This is also likely to be the case across all developed markets, as the graph below indicates.

Source: Schroders (as at June 2019)

“The returns we have had from market indices over last 10 years have been tremendous,” says Charles Prideaux, global head of investment at Schroders. “But on a projected basis, when we look at valuation metrics, what we are predicting is much lower, with the exception of emerging markets.”

This is not just true for stocks. The expected returns from bond markets are expected to be depressed as well.

Source: Schroders (as at June 2019)

“Fixed income is even more dramatic,” Prideaux notes. “No one can get overly excited about those projected returns.”

Investor expectations

Realistically, therefore, investors should be expecting rather unspectacular performance from this point. Apart from the potential for reasonable returns from emerging markets, there are unlikely to be significant gains from major indices.

Yet, a recent survey by Schroders found that the majority of investors are anticipating above-average returns over the next five years. As the graph below shows, this sentiment is even more prevalent among South African investors.

Source: Schroders 2019 Global Investor Study

Almost half of global investors are expecting returns of more than 10% per annum from this point. In South Africa, that number is just under two thirds.

When compared against the Schroders projections, these expectations look highly unrealistic. This suggests that investors should moderate what they are hoping to see from markets going forward.

That may not sound like a reasonable message when returns on Wall Street have been so spectacular in the recent past. However, as the JSE example has shown, market cycles are inevitable. The US is no more immune from this than anywhere else.

Patrick Cairns attended the Schroders International Media Conference in London as a guest of Schroders. His travel and accommodation were covered by the host company.

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I would guess they have allowed one or two bear markets in their estimates for the next ten years. We have not had that in the last ten years.

So maybe one has to take profit when due and get back in at the lows of the next bear market. A phased approach is not that painful.

This is typical investor psychology to expect that the good times will continue. Investors follow the herd mentality and just consider what happened to Bitcoin. US stock market is in bubble territory. A bear market can be expected in the near future. Unfortunately this will also pull down the SA stock market as we fully exposed and influenced by global sentiment!!

The USDollar strengthened by 33% against the Euro and the Dollar Index over the past decade. Emerging Market shares and specifically the JSE, underperforms the US during times of dollar strength. The tide was against us for the past decade, but the tide is turning now.

The US Fed has already implemented a new round of QE, and president Trump is nagging and throwing tantrums for negative interest rates. They want to manipulate the dollar to weaken against the basket of currencies. A strengthening dollar drains liquidity from emerging markets. This has a negative impact on everything from consumer spending to profit margins of listed companies.

The dollar weakened by 40% against the Dollar Index during the period between 2000 and 2010. The JSE All Share Index increased by 370% during this period. The JSE outperformed the US and Emerging Markets during this period.

Most people use the USD/ZAR to measure our economic prospects, but our real fortunes are determined by the Dollar Index or the USD/Euro. Dollar strength or dollar weakness has a determining influence over the profit-margins of local companies.

There is always a story behind the story.

There is one burning question that remains unanswered in the financial press. We read about the wonderful performance of the US markets and the possibility of a recession in the USA. This performance is only wonderful if measured in dollar terms. What happens if we measure it in terms of a stable currency? If we measure the Dow Jones in terms of gold, it currently stands more than 50% below the levels that were reached in the year 2000, more or less at the same level as in 1929. Zero capital appreciation in almost 30 years!

We are still struggling to recover from the previous crash, and people are talking about the next one already! Best of all – investors are all excited about the wonderful performance of the US markets.

This is similar to betting on the donkey to win the J&B Met, after injecting the competitors with a tranquillizer.

Is it not possible to predict the economic future by “Technical Analysis” i.e. by studying JSE All Share and related charts?

One will then be able to (more or less) predict trends using “40 day moving averages”, and notice when “head and shoulders formations” or “double tops” (..or double bottoms) gets confirmed, look at the indications provided from “candle sticks”. Don’t ignore the “cup & handle” formations. And “oscillator” graphs can be helpful, right?

Let’s ignore articles like these below:


Two patterns of particular relevance and interest in the next couple of weeks to look out for is the.

“Hindenburg Omen”

and the

“Titanic Syndrome”.

Some say……..

When these signals appear at the same time they are almost always right. Especially with divergence between the DJIA and the DJTA at the same time..

Shouldn’t be too difficult. Those that study historic equity market trends should be able to see the characteristics/movements of indexes of countries that:

(i) went from hero to zero economically, e.g. look at the Zimbabwe & Venezuelan stock indices over long-term. How did they react during decades of decline?

(ii) and compare historic indices of countries that went from investment sovereign rating to junk status (Greece, Brazil, Argentina, many others)

(iii) try even to look at past indices of countries in conflict zones (e.g. Syria) and compare market movement prior conflict commenced, and after.

(With the above in mind, it’s not an assumption that all indices have to go down…there are even upsides)

One needs at least minimum of 2 decades of charting. Use the above methology & apply to SA.

(The past decade in SA relates to the “lost” years due to a certain dancing tribal chief as ANC president, who believed corruption is a western concept. His nickname is “nothing sticks”. With massive Capital flight as the result.
The concern is: the blinded idiots who voted shower-king in power, are still there as future voters.)

Thanks Patrick,

I really enjoy your articles and always look for them in the Moneyweb mail. I don’t think that we as a community give enough recognition and we are quick to point out mistakes or oversights as if we don’t make any. I usually find myself agreeing with you, but even when I don’t, your views are always thought-provoking and well-researched.

Thank you for your generous comments. I wouldn’t want everyone to always agree with me. That would suggest that I’m being insipid. I prefer to be interesting and, occasionally, provocative.

End of comments.





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