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