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Why are local asset managers so optimistic?

We’ve been through the pain, the underperformance.
Investors have felt pain on the JSE in recent years but there could be reasons to be positive about future returns. Picture: Shutterstock

The start of 2019 has delivered some relief for local investors. The JSE has now strung together three consecutive positive months.

From the start of December last year to the end of February, the FTSE JSE All Share Index was up 10.8%. That is the most sustained gain since the positive move that began midway through 2017.

There is still a long way to go before this translates into something significant for investors, since the market is still below the levels it reached in early 2018. However, it does suggest that the optimism that many local asset managers have been expressing lately may have some merit.

Despite the state of the South African economy, there is a quiet sense of positivity about how 2019 could turn out for both local equity and bond markets. As Clyde Rossouw, co-head of quality at Investec Asset Management, points out, this doesn’t mean that they are blind to the country’s challenges.

“There are a lot of reasons to be concerned from a macro perspective in South Africa,” Rossouw acknowledges. “Firstly we know that we have a reserve bank that is determined not to cut interest rates because it is trying to create that bastion of stability. We also have an election ahead of us, and we know economic fundamentals in the country are deteriorating. You see that in company results.”

However, they do see reasons to be positive about future returns, given current valuations.

Bond markets

The yield on 10-year government bonds was above 9% for most of 2018, and is still near that level. This is extremely attractive, at around 5% above inflation.

“Getting 9% from a South African government bond, which is not entirely risk free, but is risk free for most intents and purposes, is an extraordinarily large return hurdle to overcome,” Rossouw argues.

In addition, he believes there is plenty of room for these yields to come down, and therefore for investors to realise capital gains. This is because he expects local inflation to continue to come in below expectations.

“There is clear evidence in our minds that we have seen the peak in inflation,” Rossouw says. “I’m not saying that there aren’t areas where inflation is a little bit more stubborn, like municipal rates and education. But if you look at the broad basket, there are definite signs that inflation will continue to surprise on the lower end going forward.”

That being the case, the South African Reserve Bank (Sarb) will have room to cut the repo rate, which is currently 6.75%. That is nearly 3% above the most recently announced inflation rate of 4%.

“We do think that, ultimately, the Sarb cannot run monetary policy with a 3% real interest rate,” says Rossouw. “It’s too draconian.”

He believes there is scope for rates to be cut by more than 1.5% points. “We know that Lesetja Kganyago, the Sarb governor, is fairly hawkish. He wants to do the right thing from a macro perspective, and I have sympathy for that view. That was definitely the case when we had more question marks around governance. But now that we have a responsible finance minister, and a responsible budget, he no longer needs to carry the full can from a responsibility perspective, in which case his mandate needs to change.”

This is unlikely to happen before the May elections, but could take place soon thereafter. Already the market’s expectations of where the repo rate is headed have moderated substantially in just the last few months.

As the chart below from Granate Asset Management shows, the expectation towards the end of last year was that the Sarb would be hiking rates in 2019. Now, however, what is being priced in is that rates will, at most, be kept unchanged.

Source: Granate Asset Management

The stock market

It is however on the JSE that investors have felt the most pain in recent years. The period to the end of 2018 was just the sixth time since 1900 that the rolling five-year real return on the local stock market was below the real return from cash.

Source: Investec Asset Management

But it is worth remembering where this period began. Back in 2014, both equities and listed property had run hard since 2009 and were, overall, expensively priced. At that point, Investec Asset Management held the view that equity returns would come down, and that all asset classes were likely to deliver similar performance for half a decade.

That is indeed what has happened.

“If you look at five-year returns, all asset classes have been giving you something around the mid single-digit range, which we thought was a realistic outcome to expect given that shares were simply too expensive,” Rossouw says. “But now we’ve had the pain, we’ve had the underperformance, we’ve had the weak economy, and you have a much better setting in terms of valuation and prices. In simple terms, there is scope from this point going forward for returns to start diverging again.”

That doesn’t mean he’s expecting a smooth upward trajectory on the JSE.

“Financial markets are never an easy ride,” Rossouw says. “There will be ups and downs. But the difference in 2019, we think, is that last year you had a lot of volatility and a declining trend. This year you will probably have the same degree of volatility, but the trend is more likely to be upwards.”

Source: Investec Asset Management

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Question remains, remains –

We all know the issues in SA. Look around you. The politics.
Do you invest in SA long term?

Let’s say a bus hits Cyril. Who take over? Do we invest in SA long term?

Jeez I don’t know. There are 99% other shops in the world

Me, I am 68 year old. No country will except me. Not even my fathers homeland of India. So now I am putting away the little money that I can save and buying gold and silver a little at a time for knowing not what the future holds for me. At least with the little gold and silver stash I hopefully will able to survive in the future.

They are always optimistic and always find reasons for people to invest because they want our money and the fees and commissions that come with it.

Agreed. And add to that fact the small issue of regulation 28 which forces 75% local investment. Cant exactly let cuzzies know they are forced to invest in a sinking ship. Not good for fee collection.

Reg28 is only on compulsory vehicles. You can easily invest 100% offshore via a normal unit trust investment..

He runs their global fund i.e. if your argument held water he would motivate for sending funds offshore.

It is not easy to share the optimism. My own portfolio and managed ones (including balanced ones) are considerably down. Because of that one cannot change.

Suddenly my inbox is full of income fund managers wanting to come and pitch for business. This has never happened before. I wonder why?

Obviously the local PM’s are going to talk their own book. They get bps on AUM so they not going to tell investors to pull AUM and invest in another (hopefully offshore) fund. IMHO any investors would have to be insane to be investing into SA….. you don’t need to be an actuary to figure this out

I only started investing (through EasyEquities) last year May. By the end of last year the 8 stocks and 2 ETFs I invested in was down by 25%, as of today it’s up by 1.2%, This is extremely short term, but the thing is, I don’t pay fees for a FA. (Except the ETF fees and the fees when buying/selling stock). I’ll continue doing/learning things myself. In the long run, I think (know) I’ll gain much more through learning and maybe making small mistakes than just chucking money at a FA, that may or may not have my best interests at heart, so long as he/she gets the fees.

My next goal is Tax-Free ETFs. Especially looking at CoreShare Global DivTrax, Satrix S&P 500, and Ashburton Global 1200.

That’s right, self-education and cutting out financial advisors is the way to go with investment. This is a process of life-long learning that is hugely rewarding financially, emotionally and intellectually.

Read! Excellent website for DIY investor and personal finance!

Would you put and leave your retirement money for 114 years in the stock market of a country knowing that it would be riddled with apartheid for 56 years, subjected to severe economic sanctions (1986-1994), with low education and skills levels, riots like Soweto and Sharpeville, a debt default (1986), taxpayers money wasted on many years of wars with neighbouring countries (Angola, Mozambique), slow economic growth, lashed by the Global Financial Crisis (2008), crippled by corruption, sharing a border with Zimababwe and located on what some regard as an economically dysfunctional continent? Well, you would have been extremely well-rewarded! Would you do it now? See Fig 8 page 12…
Would you also believe that weak past country GPD growth and a weak currency predicts superior stock market returns. See page 81, Fig 46

The Achilles heel here is currency.

Currency depreciation has ravaged your rand returns. R1 in 1970’s was = $1. So after SA real returns of lets say 7% p.a for 50 years = a 29 bagger for equities.

After stripping out rand devaluation, you’re left with a 2 bagger! Yay! 50 years of risk and you doubled your wealth. That sucks.

Weak past country GPD growth and a weak currency predicts superior stock market returns?

-> I’ll bet the farm that this dataset doesn’t include all 54 African states where failed GDP and weak currency has been followed by more and more failure and asset losses.

SA stock market was build on a strong and growing mining industry, property rights and capitalism. Socialist/communist policies will break any economy. Zimbabwe, Cuba and Venezuela all did well up to a certain point.

Those are returns in dollars…
(maybe read the entire article carefully and try and understand what one of the brightest minds in American investment circles is saying)

JTB your point is very fair and maybe you will be right in the end.

But to me, SA has now consolidated into a typical African state, moving further away from Western free market principles. Closer to Zim than US.

I just don’t want a 50-50 gamble in a 1% market. Reminds me of Wiese and Steinhoff lesson

Yes, his point is just that. Take a global view… diversification remains the only free lunch. That probably includes a bit of SA…higher risk, higher potential reward.

On the other hand US market sits on a CAPE of about 32 (= earnings yield of 3 dollars per hundred invested), with a long-term average of 16. Simple reversion to the mean CAPE over the next 10 years of US market will result in you halving your invested dollars. There ain’t no 1-way bets!

Read these website and pretend you are sitting on Mars, rather than being an emotional South African!

If you took your Rands 10 years ago and invested them into

1. Satrix Indi – return 370%
2. FTSE 100 – return 135%
3. Satrix Fini return 226%
4. Eurostoxx return 109%
5. Sanlam return 405%
6. S&P 500 return 412%
7. PSG return 1671%
8. RMB 542%
9. Santam 318%
10. Naspers 2045%
11. Spar 286%
12. Woolworths 334%
13. Netcare 204%
14. Discovery 547%
15. Richemont 632%
16. Aspen 193%
17. Firstrand 422%
18. Pick n Pay 118%
19. Shoprite 268%

All of this despite JZ rule and corruption.


Fund managers are correct but also horribly wrong.

If SA goes the route of Venezuela or Zimbabwe, you should expect local JSE counters to soar.

Both Zim and Ven stock markets have had returns in the 100%’s and 1000%’s during their turmoil. The JSE will be your only buffer against economic meltdown.

After inflation and currency though, expect to be way poorer.

If SA somehow manages to have real GDP growth, you’d probably do quite well from current valuations.

End of comments.





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