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The JSE’s short-term pain

But there is a longer-term story.
Context should not be ignored – in the first five years after the global financial crisis, the JSE was roaring. Picture: Moneyweb

The past 12 months have been rather dismal for local asset classes. Despite the stock market rally at the start of the year, South African equity and listed property have both delivered negative double-digit one-year returns to the end of November.

As shares make up the largest part of most balanced funds, these portfolios have also struggled. The biggest multi-asset high equity funds in the country are currently showing 12-month performance between -3.5% and -7.5%.

For investors, this has compounded what has already been a sustained period of weak returns from local assets. Including dividends, the FTSE/JSE All Share Index (Alsi) has grown just 3.39% per annum since the start of December 2014. Given that the dividend yield on the local market is currently around 3.5%, this illustrates that, at an index level, the JSE has effectively gone sideways over this period.

A year of pain

The last 12 months have, however, been particularly tough. As the table below shows, every major market index is lower over this period, apart from the resources index, which has shown a minor gain.

JSE index performance to November 30, 2018
Index 1 year
FTSE/JSE All Share Index -12.56%
FTSE/JSE Shareholder Weighted Index (SWIX) -14.29%
FTSE/JSE Capped SWIX -12.39%
FTSE/JSE Top 40 Index -13.62%
FTSE/JSE Mid Cap Index -8.53%
FTSE/JSE Small Cap Index -10.53%
FTSE/JSE Resources Index 2.4%
FTSE/JSE Financials Index -1.7%
FTSE/JSE Industrials Index -22.73%
FTSE/JSE RAFI 40 -7.44%
FTSE/JSE RAFI All Share -7.53%
FTSE/JSE Listed Property Index -21.28%

Source: Momentum Investments/INET BFA

What is particularly notable is that this negative performance has predominantly come in the last three months. The Alsi closed at 58 668 at the end of August. By the end of November, it was at 50 663.

The table below shows how heavily the major indices have come off since the start of September. Resources are also down over these three months, meaning that every part of the market has fallen.

JSE index performance to November 30, 2018
Index 3 months
FTSE/JSE All Share Index -12.56%
FTSE/JSE Shareholder Weighted Index (SWIX) -10.92%
FTSE/JSE Capped SWIX -10.19%
FTSE/JSE Top 40 Index -13.81%
FTSE/JSE Mid Cap Index -4.33%
FTSE/JSE Small Cap Index -8.14%
FTSE/JSE Resources Index -14.12%
FTSE/JSE Financials Index -4.66%
FTSE/JSE Industrials Index -15.65%
FTSE/JSE RAFI 40 -12.14%
FTSE/JSE RAFI All Share -11.59%
FTSE/JSE Listed Property Index -5.48%

Source: Momentum Investments/INET BFA

It is worth pointing out that mid and small caps have not performed as poorly as the wider market in either of these periods. This is interesting given that this part of the market is most exposed to the South African economy. A number of analysts have also been commenting on how much value there now appears to be in these sectors.

Read: What Clover is telling us about the state of the market

In fact, over five years the mid cap index has marginally outperformed the Alsi. Small caps have, however, underperformed.

Nevertheless, there has really been little differentiation between these sectors if one looks at their five-year performance. As the graph below shows, all parts of the market have really moved together since 2013. There was a brief period in 2016 when mid and small caps delivered better performance, but they have since come off.

Source: FTSE Russell

It is understandable for investors to feel uncomfortable about these figures. This has been a sustained period of market weakness.

Over the last five years, the Alsi is up 5.51% if you include dividends. Over the same period, you could have earned 6.88% in cash if you use the short-term fixed interest composite index (SteFI) as a benchmark.

Bigger picture

However, there is a longer-term context that should not be ignored. In the first five years after the global financial crisis, the JSE was roaring. As the below table shows, four of the five calendar years in this period delivered high double-digit returns:

FTSE/JSE All Share Index year-on-year performance
2009 2010 2011 2012 2013
32.1% 19.0% 2.6% 26.7% 21.4%

Source: FTSE Russell

The average annual return over this period was 20.4%. That is substantially higher than the market’s long-term average of around 14%.

If mean reversion is inevitable, then these levels must be unsustainable. They had to moderate, and they did.

One could even argue that during this period investors received returns ‘in advance’. The stagnation of the market over the last five years has simply taken the JSE more or less to the place it would have been if it had grown at more normalised rates over the full 10-year period.

On a 10-year view, the Alsi is up 12.32% per annum. The SWIX has seen annualised growth of 13%.

These numbers are lower than the long-term average, but it’s important to consider that local inflation has also been lower than its historical average over this period. This means that at 6.5% to 7% above inflation, this level of return is just about what local equity should be expected to deliver.

The lesson for investors is that you have to take a longer-term view when looking at equity market performance. Sometimes you are told that this should be at least five years, but often that isn’t even enough.

Stock markets can go through long cycles, and you have to be able to see through these to the bigger picture. The JSE has been dismal for nearly five years, but that doesn’t mean it is broken. If you are a long-term investor, the reality is that you have done perfectly well over the last decade.




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“If you are a long-term investor, the reality is that you have done perfectly well over the last decade.”

Not applicable if you are a long term investor that could only start in 2013. And now you can only hope that the market does go up at some stage and doesn’t stay flat for decades.

Starting to suspect that the term “Long term investor” is a term used to feel more comfortable with oneself after losing substantial invested money.

very much so. Many people that buy shares that go deep into the red after a short term loss become long term holdings because they wont take the pain of realizing the loss.

Especially when the broker’s idea of long terms is 150 years at least.

Short term? The Brexit vote is scheduled for the 11-Dec-18, watch that one.

these long term returns on SA indices are irrelevant against the backdrop of USD/Zar moving from 7.50 – 14.25 between 2010 and 2018….

Listed Property, the darling of the JSE for well over a decade, doesn’t that just tell a story! Down over 21%.

Another “Long term investment”?

There is no “reversion to mean” while Eskom is busy imploding around us. The local asset managers are guilty of blatant lying when trying to pretend all will be well quite soon.That is not going to happen. Get your money out of the JSE and as much into local cash or equities offshore, while you still can.
The JSE has been the worst stock market in the world for over 7 years now and has returned zero return in USD over that time.
But then local asset managers will never tell you that, will they? Their fees on cash is minuscule compared to what they earn on their ever-declining equity funds.
I often listen to local fund managers and I’m astounded that there is virtually no mention of EWC and Eskom in their presentations!

Off course not, asset managers won’t tell you about EWC, Eskom, crime & corruption eating away business profits. Keep in mind, in the high-image corporate world, one dares not to be seen as negative (but realistic). There is apparently no place for negative people in the ivory towers of the corporate world…brand-image counts 😉 …nobody wants to be branded as a bunch of negative losers *lol*.

Fund managers won’t tell you they have also investments abroad, but RELY on local employer’s fees/salary to earn a living.

On TV for example, look at most of the adverts for financial companies….be it from a bank / insurance co / asset manager…the free-thinking advertising/marketing companies paints a happy, optimistic picture. I sometimes have to pinch myself…

Currency movements cloud the real picture. The situation is described more accurately when we take the rand out of the equation to measure the local market in US dollar terms. The JSE All Share Index in US dollar terms has been moving sideways since 2007. The JSE recovered from the 2008 Financial Crisis, but the effects of deflation is still with us. There is no growth because there is no inflation.

The JSE All Share Index outperformed the Emerging Markets Index since 2007 and has been better than the MSCI Euro index since 2012. (All in dollar terms of course). So, when we compare ourselves with the rest of the world we are not doing so bad actually. It is only the US market that is showing strong growth. The USA is the factory where the inflation is manufactured. The Fed’s reaction to the financial crisis led to a fourfold increase in the supply of dollars. That was enough to get the US economy going but the rest of the world is still stagnant, shell-shocked after the Financial Crisis.

But do not despair, the breakout of interest rates on the US 10-Year and 30-Year bonds signal the return of inflation after a decade of absence. The US 30-Year Bond tells us that the inflation tugboat is coming to pull the JSE out of the doldrums.

in USD terms, Europe and Far East hasn’t been much better. It really all is just the US markets – the USD currency strength has negated a lot of stock markets globally over past few years.

Yet another Jam Tomorrow article from yet another happy-pants-harry financial journalist.
Yup, it’s all gonna be fine next month, year or…fill in the time you like folks.
The 1929 crash took until 1954 to get back to the same level,of course during that time MILLIONS of Mom and Pop investors were vapourised, and I do not mean in WW2 either.
Personally I truly believe that these Tea Leaf readers could see an asteroid the size of Table Mountain heading straight for Maude Street and they would still be typing their ol’ schtick, wait for it………….”There’s NEVER been a better time to be in equities!”
Have a happy Eskom future everybody!

If you keep in mind that they only exist to deliver us to advertisers, then it all makes sense.

This is a hard pill to swallow when investors like me only entered after the financial crisis boom period and more so if you are dependent on your portfolio and monitor it on a daily basis like me. Stock markets are cyclical and this is why fund managers encourage 5 year plus time horizons. The intelligent investor will stay invested, manage their emotions and look forward to great returns in the following years, irrespective of the day to day “noise” out there. The years following a bloodbath year like this, had always been rewarding to the disciplined investor. The worst thing to do now is to switch out and realize losses.

…indeed, unfortunately I also have to apply the “Warren Buffet approach” on (some) of my local equities, i.e. keeping them for life 😉

The real issue is the future returns and given the risks in South Africa isn’t it better( on a risk/reward ratio) to invest in decent economies that are growing?

Surely some first world markets and suitable emerging markets are a better choice than a country that is barely growing, has a population with the lowest maths marks, EWC, NHI, Eskom, SARS, SAPS, Denel, SAA, a deputy president whose integrity has been publicly slaughtered by the NY Times, as well as 17 million people living off the State?

Why take the risk of investing here? where is the potential upside story?

Patrick, thanks…despite that MW-readers are aware of the JSE’s past performance, that remains a short & hard-hitting article!! 😉

In my younger years, I’ve always heard the term “investing in a bear market”….well, now I know what it means myself!

As a Tax Consultant for individuals, I noticed numerous HNWI-clients prefer to continue pay heavy income tax on their large Interest-income money market and other cash funds, despite my advice to consult your fin.advisor for a more tax-friendly investment. But no….they seem to be happy to pay tax on large interest… see, they get a (positive) return 😉

Is this article an example of “home bias”? Need to ask ourselves why we agonize over the returns an equity market which comprises less than 1% of the global market. Will South Africa ever be able to create wealth on a large and sustainable scale similar to the US and Asia?

Sometimes it is convenient not to mention CFR and NPN which have driven recent historical returns on the ALSI. Take these away and I suspect the 10 year average growth rate is quite a bit lower. This is a moot point, since we are concerned with future returns. It is impossible to say if there are going to be any future winners which will drive future returns to the same degree.

In the short term, I suspect a lot more pain for the ZA equity market with no prospect of increased earnings and the higher probability of a downturn in the US.

In the long term I see South Africa becoming increasingly irrelevant in the global equity market.

Point taken, Lemon. I hear what you say.

On a global regional basis, would there by any particular country or region that you’ll take a longterm “bet” on?

(e.g. despite Brexit, the UK equity market is starting to appear more attractive, with GBP lower & dropped equity valuations. But it’s likely too early…let it slide further post-Brexit. But UK longterm should still be great, methinks(?) Asia…China? South Korea? Japan? Perhaps 2 old favorites, Oz and NZ… 😉

The problem with a severe downturn in the US markets is that when this happens almost all other equity markets become correlated – there is nowhere to hide. I suppose the trick is to be in other asset classes (cash, bonds, commodities?) and have the fortitude to stay invested.

Starting valuations play a role in determining future returns.

Thanks Lemon! I appreciate that German fund-manager website (have saved it under my favorites to research more later).

You’re correct, when the US ‘sneezes’ the rest of the world (equities) catches a cold…

Perhaps the priority now is to get USD/Euro/GBP cash investment, and/or “conservative” ETF fund. And park it there for now, and wait for huge US correction 😉 Perhaps one area to temporary hide could be Gold ETF (and other precious metals)… Crypto is a no-go.

Which is exactly why so many SA resident have utilized the offshore investment allowance via independent quality financial advisors to invest in a properly managed international risk based portfolio in USD, Sterling or Euro. Independent providers regulated via the FSCA based in locations such as Jersey deal with such clients daily – and again it is all about diversification of risk and returns… It is far simpler and not nearly as expensive as is often assumed – our firm charges a management fee of 0.50% for our Model Portfolio Service…all in – with the advisory fee set by the advisor of course.

Good long-term focussed article. Thanks, Patrick.

Best performing investment of a well diversified portfolio over the past five years, has been my whisky stock self-managed investment. I bought large quantity good whisky for daily use at discounted prices, store it properly and only start to sell it back to local retailers after five years.

All in all, I would love to see one of Patrick Cairns articles relating the growth of a portfolio in relation to how much gold it will buy. If, at the beginning of the investment, my wealth buys 100 ounces of gold and at the end of the investment, when my money has gone into the stratosphere, I can still only buy 100 ounces of gold, well then, has my situation really improved?

Why anchor to how much gold you can buy?

Well, what would you anchor it to?

Is the investment return positive after accounting for inflation? I cannot buy anything with gold so I am not sure what the point of referencing an investment return to it is. You could equally reference it to how many USD you can purchase. That is not to say that gold does not have a role to play in a portfolio.

Gold is not a creator of wealth but a store of wealth. If your wealth is not growing relative to the size of the amount of gold you could buy with the money from your portfolio then I don’t think the investments are making progress, even if they are growing logarithmically. This is very relevant (IMHO) in South Africa, where there is strong volatility in the ZAR. So that, even with a good real growth rate (the rate that has inflation stripped out of it) there is no confidence in what is happening to ones wealth, as opposed to what is happening with one’s money.

Just recalculated historical returns of different asset classes. See below for return of gold in ZAR (ETF GLD) over different time periods. For periods >1 year this is annualized. Can see why the recent past has been so difficult for the gold miners in South Africa.
1 Year: 4.2% p/a
3 Years: 2.4% p/a
5 Years: 5.6% p/a
10 Years: 7.5% p/a
Turns out that returns are < ZA inflation except maybe over 10 years.

End of comments.





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