Fund managers have preached patience. Financial advisors have urged clients to stay the course.
But it hasn’t been easy.
Equities are generally expected to do much better than cash in the long run, but over the last five years, local cash investors have had better returns than those who have invested in the stock market.
Monene Watson, chief investment officer at Old Mutual Multi-Managers, says many people are wondering if this situation will be a permanent feature going forward.
Against this background, it may be useful to go back in history to see what the situation has been over long periods of time, and whether the current situation is unique, she says.
The maroon line in the chart below depicts the rolling five-year return of the JSE All Share Index after inflation. The green line shows real cash returns in the same manner.
“I think in many people’s minds five years feels like a long time, but one can see that even over five years, there is a lot of volatility in the red line, but that is also cyclical … it turns around,” Watson says.
For those investors who had the patience to stay invested, equities managed to outperform cash 80% of the time over all these rolling periods, she adds.
But what confidence and conviction can investors have that the current situation will turn around over time and that equities will start outperforming cash again?
Firstly, one must believe that the macro-economic environment isn’t broken, Watson says.
While the South African economy faces many risks and challenges, it is coming off a low base. Economic growth has been low, but the view of Old Mutual Multi-Managers is that it will turn around.
The second consideration is whether there is value in the market – in other words, if assets are cheap.
The chart below shows the real returns of various asset classes over the very long term (the maroon dots). When the green bars are above the dots, they believe the asset class is offering value.
In almost all cases, asset classes currently look cheap with the exception of global bonds, Watson says.
“There is still no value in global bonds, but if you look at a wide selection of asset classes – both locally and globally – the valuation opportunity has improved. Assets are much cheaper and in many ways pricing in the risks that we all feel today, both locally and globally.”
John Orford, portfolio manager at MacroSolutions, says based on their current expectations of asset class returns, the typical balanced fund could deliver around 9.5% in nominal terms per year over the next five years, compared to 7% for cash. The assumption is that inflation will be around 5%.
“This [the expected balanced fund return] is somewhat lower than what we have been used to over the long run in South Africa, but it is considerably better than what we have experienced over the last few years and we have been upgrading our expectations.”
Orford says many people are disappointed that change in the country hasn’t happened quickly enough, but points out that change has been extraordinary. Just over a year ago, South Africa had a poor team in charge. Today, a much better leadership team is in place and President Cyril Ramaphosa wants to take the country in the right direction.
“It is going to take time. Confidence has to come back, but we expect that in the context of depressed asset prices in South Africa – because of those poor returns over a number of years – it lays the grounds for better returns, specifically in South African assets.”