June 2017 Update
South African investor confidence has been weakened recently by the news on the country’s political and economic uncertainty. This has been deepened by poor returns from local equities, which have not performed very well compared to money market returns and inflation over the past few years. These conditions, in turn, have pushed some investors to sell their local equity holdings and other risk assets, and move into cash. We caution investors that this could be a serious mistake, as cash can be a risky asset in the portfolio of a long-term investor.
Digesting the News
Experienced investors will affirm that the present news headlines might be compared to many similar alarming scenarios in the past. In late 2008 the media was filled with doom and gloom following the stock market crash (JSE down 25.8% in 2008), causing most investors to become overly negative. Some investors however remained focused on fundamentals and were extremely positive given how cheap many shares had become. These investors were rewarded with 17.3% p.a. over the next three year (January 2009 to December 2011).
Similarly in early 2015, many investors were complacent about expected stock market returns (not unsurprising after receiving 19.3% p.a. over the preceding 3 years). Again, certain investment strategists were warning that returns could be limited in the coming years, which proved correct with the JSE up only 4.5% from January 2015 to December 2016.
While the current economic and political conditions are causing understandable worries in the country, shrewd investors should be open to the possibility that attractive investment opportunities may be produced in these difficult times.
This does not mean that we are projecting a sudden jump in the market, however long-term investors who are able to cut through the noise and focus on fundamentals should be sticking to their strategies that are most likely to deliver returns well in excess of inflation. We view this as a more prudent strategy for a patient long-term investor, when compared with switching to the secure 7% or 8% available from cash or other similar “low risk” investments.
Markets in the Month
In June the Rand appreciated slightly (-0.1%) against US Dollar and depreciated (1.5%) against the Pound and (1.9%) against the Euro.
The most significant move across the major asset classes was the -3.5% delivered by SA shares, as big counters such as Naspers (-6.3%) and British American Tobacco (-5.4%) were down strongly.
Impact on Our Portfolios
The weaker rand in most cases is expected to have a positive impact on the performance of South African stocks which generate their earnings outside SA. However in June, the stock market was down (-3.5%) due to the selling pressure from both local and foreign investors. SA cash was the best performing major domestic asset class in June (+0.6%), while bonds are the best performer over twelve months (+7.9%).
June was a tough month in absolute terms as only CWM Income delivered positive returns (0.5%). The negative returns are not unexpected in a month when both the ALSI (-3.5%) and the ALBI (-0.95%) were down. Furthermore, the Rand strengthening against the US Dollar also hurt returns.
As highlighted in our article last month, short-term performance (weak or strong) can deviate materially from the long-term expected returns of an investment strategy. While uncomfortable, it is important to always remain cognisant of the investment’s time horizon and the long-term aim of the portfolio. We use the target of outperforming inflation over the long-term as our guide for making allocation decisions within each strategy. Enduring some short-term weaker returns is at times necessary in order to achieve the long-term goals.
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 only 3.4% p.a. over the period, we are comfortable with the returns delivered by all of the CWM model portfolio.
Humans (and therefore most investors) are emotional and markets can be intimidating. Often this combination may tempt you into acting, either to stop the uncomfortable feeling one gets from holding a risky asset that’s not delivering strong returns or to chase better returns from a market darling.
Whether one gives in to the temptation of low risk comfort when market gets choppy, or the thrill of investing in a past winner, this behaviour can destroy wealth. Letting your emotions drive your investment decision making can cause one to make the serious mistake of buying high or selling low.
At Core Wealth we do not profess to have the hidden secrets to investing success, but rather a proven investment process that we stick to during difficult periods to avoid making the common emotional mistakes. Within each of our client portfolios we balance the long-term return objectives with our clients` risk appetite and investment horizon. The need to maintain the correct balance ensures we do not become too optimistic when things are going well, or too conservative when risks are perceived to be too high.
This combined with our focus on valuations and the approach of building diversified portfolios gives us the confidence to stick to our long-term strategies, and encourage clients to do the same with conviction.