Overall, 2018 has been a very poor year for investment returns. The MSCI World Index is down almost 13.0%, the S&P 500 has fallen 9.6%, and the FTSE/JSE All Share Index is off 13.6%.
Where does that leave investors heading into 2019? Moneyweb collected views from a number of analysts:
T. Rowe Price on global markets:
“With the US moving into the later stages of the business cycle, the US Federal Reserve raising interest rates, and monetary and credit conditions diverging widely across the other major global economies, the potential for renewed volatility in both equity and fixed income markets remains high,” argue David Giroux, T. Rowe Price’s head of investment strategy; Justin Thomson, chief investment officer for equity; and Andy McCormick, head of U.S. taxable fixed income. “Political risks are adding to the uncertainty. These include the trade dispute between the U.S. and China, the possibility of a disorderly Brexit in March, and renewed fiscal conflict between Italy’s populist government and European Union (EU) officials.”
Global growth momentum appears to be slowing, while inflation is rising. Investors therefore need to pay close attention to valuations.
“Relative to their own history, U.S. equity valuations do not appear excessively rich,” Giroux says. “As of mid-November 2018, the S&P 500 Index was trading at roughly 15.5 times expected forward earnings, within range of the 20-year historical average of 15.9. However, with the U.S. moving into the later stages of the business cycle, that multiple might be less attractive than the long-term average would suggest.
“What we’ve typically seen is that once you hit an earnings peak, it can take between three and five years to get back to that peak,” he explains. “So, the S&P 500 might actually be selling at 15.5 times 2024 earnings, which is saying something very different.”
Undervalued emerging market currencies may however be creating an opportunity.
“History suggests that you want to buy EM equity and debt when EM currencies are cheap, and we’re certainly seeing that at the moment,” Giroux says.
Northstar Asset Management on the local market
“The long-term average price-to-earnings (P/E) of the JSE is 12.7 times,” point out Northstar’s chief investment officer Adrian Clayton and analyst Rachel Finlayson. “Over this past five year cycle, the peak JSE P/E was 23.5 times at 31 July 2017. The current P/E of the market is 16.8 times, but if we adjust for different company year-ends, the actual P/E on the market is 13.7 times including Naspers and Quilter, and 12.1 times excluding these stocks. This is closer to the long-term average.”
Taking this view, the JSE is no longer expensive. Given that earnings are forecast to be robust over the next 12 months, cash flows from companies are rising and debt levels are relatively low, there are reasons for optimism. There are also historical reasons to believe that the weak returns over the last five years are unlikely to persist.
“Historically, the prospective (forward looking) five year annualised real return that follows a -2.4% annualised real return period, is 16.7%,” Clayton and Finlayson note. “So future returns tend to be very good after bouts of poor returns.
“Less than 20% of the time does a negative real return period follow a previous negative real return period,” they add. “In other words, if returns have been below inflation over a five year period, it seldom repeats itself for the next five years.”
Sharenet Analytics on investor behaviour:
“People are turning their backs on the JSE in their droves and fund redemptions are sky-rocketing,” notes Dwaine van Vuuren from Sharenet Analytics. “There’s blood in the streets despite the relatively mild 20% drop in the headline index. We may not have the intensity of a 40% crash but we certainly had a bear market duration almost triple the duration of the normal one.”
At the same time, investors are rushing into cash deposits.
“Fixed interest products are now all the rage,” Van Vuuren points out. “Just about every website you visit throws up tempting fixed deposit adverts and all you hear on the golf course and braais is who has what fixed interest product with whom.”
When this happens, it’s time to start thinking outside of the conventional wisdom, even though it’s uncomfortable and it’s still possible that the market may yet drop further.
“Another 10-15% drop in the markets from now would not be at all surprising,” Van Vuuren says. “All you need to know is an opportunity is building, around the time people are the most pessimistic about the markets – and you at least need your stockbroking account charged with some gunpowder when the time arrives, or risk being Joe Public that is always entering en-masse into the next asset class at exactly the wrong time. The right time to be getting into an asset class is when it feels wrong!”
Schroders on sustainability:
“Environmental and social change is accelerating, generating an ever-stronger headwind for companies to navigate,” says Jessica Ground, global head of stewardship at Schroders. “2018 has provided ample evidence of this, with populism continuing to rise alongside global temperatures. Increasingly, there is nowhere to hide for companies who don’t operate in a sustainable way.”
Investors therefore have a lot to think about when it comes to environmental, social and governance (ESG) issues.
“Rapid and large-scale environmental and social change is likely to see companies across the board come under increasing pressure from a variety of sources, whether environmental-, social-or governance-related,” Ground argues. “In light of this, we think ESG analysis and forecasting will continue to rise in importance for investors the world over.”