July 2017 Update
In this environment of economic, political and policy uncertainty, many South Africans have decided that they would rather keep their money in cash instead of investing in growth assets, such as equities and property. They are influenced by the news headlines that there is no economic growth in RSA (and therefore no earnings growth and/or returns available on the South African stock market).
However, as July showed (when the local market, as measured by the FTSE/JSE All Share, was +7.0%) no one can predict returns in the short-term, and that being out of the market completely is a big risk. While we accept that conditions are tough, there are still opportunities for South African investors who are prudent and prepared to take a long-term view on their investments.
Digesting the News
The lack of confidence to invest extends to SA consumers who are delaying major capital expenditure (such as vehicle or home purchases) at the moment. This results in a build-up of inefficient cash holdings, often for extended periods of time as investors can never quite find the right time to re-enter the market or make that bargain property buy, as prices have got away from them.
The chart below highlights the real risk of never getting back into the market. On average an investor would have sacrificed at least 6% p.a. over periods longer than 5 years, by sitting in cash versus being invested in SA Shares. Assuming a hypothetical investor had R1m to invest but chose to remain in cash, he would have lost out on growth of R2.2m over the average 10 year period, and incredibly, R6.6m over the average 15 year period.
The chart above uses historical data from 1960 to 2017, and while past performance is not a guarantee of future returns, the above example shows the power of compound interest (which is always certain) and the benefits of adopting a disciplined, long-term approach.
Markets in the Month
The local equity market staged a recovery during July 2017. The FTSE/JSE All Share Index rallied 7.0% in the month, supported by a good return from resource shares. In particular, higher precious metal prices supported a notable return from gold shares. The Bond and Property market was up 1.5% and 3.5% respectively in July.
The Rand was mixed against the major currencies during the month, and had a marginal impact on global equity returns which were also stronger during the month (+3.5%). Given the strong month for growth assets in July, the year-to-date returns across the major asset classes are led by local and foreign equities which have both delivered +10.6% so far in 2017.
Over the longer-term (15 years), growth assets (SA & Foreign Equity and SA Listed Property) have outperformed defensive asset classes (SA Cash & Bonds) by +7.3% p.a., and have on average, delivered 10.3% more per year than inflation, rewarding the patient long-term investor.
Impact on Our Portfolios
July was a good month across all client strategies and model portfolios, driven largely by the ALSI that was up 7%, and given that every other major asset classes delivered positive returns. The range of returns across the local CWM Model portfolios was +0.9% to +4.7% in July, with Long-Term Growth the best performing local portfolio, and the Foreign Equity Houseview delivering the best absolute return.
3 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Houseview Strategies
The chart above shows that the foreign houseviews have performed strongest over the last three years, helped by the weaker Rand (+7.2% p.a. versus the USD) over this period. All CWM domestic model portfolios (except CWM Retirement Growth) remain ahead of inflation over the past three years. Considering the fact that the stock market (ALSI) has only delivered 3.4% p.a. over the period, we are comfortable with the returns delivered by all of the CWM model portfolios.
Considering our illustration above, clients should be disciplined and maintain a long-term view with regards to their investments. To achieve your financial goals you need to stay the course which at times, means sitting on your hands. Or, in the face of uncertainty continue to prudently allocate capital (or if you are already invested, hold onto) those assets that offer you the best opportunity for long-term inflation beating returns.
A major advantage of long-term investing is found in the relationship between volatility and time. The longer an investment is held, the lower the range of potential outcomes becomes. Therefore, the longer you invest, the more likely you will be able to endure shorter periods of low returns.
As shown in the market return table above, assets with higher short-term volatility risk (such as shares) also tend to have higher returns over the long-term (versus less volatile assets such as cash and bonds). This is evidenced by the worse growth asset (foreign equity) performer over the last 15 years, still outperforming both SA Cash and Bonds. While the best performing growth asset (SA Listed Property) outperformed the defensive asset classes by more than 12% per year.