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Cash vs equity returns: is the last five years unusual?

Local cash has outperformed equities over five years, leaving investors to wonder if something has changed.

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. 

Source: Old Mutual Investment Group (* Average of the Asisa SA Multi-Asset High Equity Category)

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.  

Source: Old Mutual Multi-Managers

“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.

Source: Old Mutual Multi-Managers

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.”

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But the Rand has devalued in real terms by 40% during the same period. So you might seem to be getting a better return as cash but not really in global terms!

Another week another article about how”cheap” SA equities are. They are cheap for a reason and will probably go even cheaper over the next few years as the full extent of the collapse of the SA economy and infrastructure becomes visible.
Ask one question: why has R400 bn of foreign money left the SA equity and bond markets left SA over the past 5 years. Latest figures confirm that they continue to do so. Are foreigners investors stupid or do they know something local investors don’t?

The difference this time round is the poor state of SOE’s that continue to drain State coffers and the devastating damage to the economy brought about by corruption and State Capture from which the country is unlikely to recover.

Since the 2007/2008 crash and quantitive easing by governments, the markets have never been the same. Cash still looks like king.

Agree cash is king. 35% of my portfolio in fixed investments at bank at 8% in total income/growth outperformed the 65% in RA balanced funds and money market by far for past 3 years. Going to follow Magnus’ advice and cash in my RA’s. What n waste.

Cryptocurrencies returns interestingly enough are negatively correlated with these traditional asset classes. It’s a highly volatile (and risky) asset class, but a small allocation of a well diversified portfolio to cryptocurrency would improve the overall portfolio risk and return profile.

Here are are returns for Bitcoin which is a good proxy for the total cryptocurrency market:

Date “BTC Price (USD)”
18 Feb 2014 626.60
18 Feb 2016 422.37
18 Feb 2018 10,551.80
17 Feb 2019 3,673.84

1 Year -65.18%
3 year 769.82%
5 year 486.31%

“Fund managers have preached patience. Financial advisors have urged clients to stay the course.” Because they will lose out on their fees if everyone switched out of their underperforming funds of course.

And … “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%.” Which is based on your ‘expectations’ which ‘could deliver’ whereas cash and bonds are based on ‘fact’.

We have been in bonds and cash for just over three years now at 8% after fees. Had we stayed in equity funds we would have been down at least 12% which would have taken how long to return to our original capital Mr Orford? 5 years?

“Today, a much better leadership team is in place..” Very little has changed with the exception of ex-pres Zuma. Most companies cannot escape political failure. Although SA fund managers try their utmost to convince investors that all is well many companies are struggling. We’re not out of the woods and the SA macro-economic environment is severely damaged.

The only thing you need to remember is that if/when the global economy tanks, and the rand plummets, OM and other fund managers will

-> reduce their 9%+ growth expectations to flat
-> inflation expectations up to 10%.
-> try to keep you calm after a 30%+ haircut on your portfolio.

We’re well on the way to become a failed nation state. Know any with assumptions like 5% inflation and expected returns of 9.5%? Historical data becomes irrelevant. It’s like using 1960’s-1990’s data to predict Zimbabwe’s economy in 2000’s.

See failed nation state development over the years for SA below.

In my view, in the long term, there is no question; Equities are the way to go, not cash. I assume above figures are post-fees/pre-tax. Taking tax into consideration, using the 5 year figures and just by way of exmple: Equities post 18% CGT comes down to 4.4%, Likewise Cash post 35% i/c tax comes down to 4.5%. Not much difference. The question is thus where to place your hard earned money: RSA, Offshore, Developed, Emerging? Irrespective of what RSA equities are going to do – don’t give the RSA economy more than the 1% it represents of the global investment universe. It’s just too risky to do that.

In full agreement. One has to get the full tax free allowance on interest received but no more to make it tax efficient. Equities are definitely the way to go with some cash / bonds depending on yields and financial needs.

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