LONG-TERM INVESTING KEY TO FINANCIAL SUCCESS
There is no doubt that the mood and spirit in South Africa has improved from the despair and depression we faced almost daily, especially over the last few years under the rule of Jacob Zuma.
The havoc and destruction he caused will be a burden South Africans will have to bear for some time to come. For the past few years South Africa experienced political uncertainty and economic stagnation, despite a recovery in the commodity cycle which translated into a sideways movement of the JSE, for at least the past three years as illustrated below in the performance of the JSE ALSI between 2008 and June 2017.
IT HAS NOT BEEN EASY….
Local markets did exceptionally well between Feb 2009 and May 2014, however have since then delivered little to no returns mainly as a result of poor governance and an economic slowdown.
A quick comparison of SA Multi asset portfolios with low, medium and high equity exposure, flexible asset class exposure and worldwide flexible assets and income funds priced in rand all produced RETURNS OF LESS THE 8% OVER THE LAST THREE YEARS. Even the five year numbers have produced single digit returns as indicated in the table below.
WHAT JACOB ZUMA’S RULE HAS DONE TO YOUR INVESTMENT RETURNS:
For many years investors became accustomed to seeing their investments grow by between 12- 15% year after year, and while the returns of the JSE suffered from crime, corruption and state capture in recent years, the high returns from offshore investments protected local investors to a certain extent. Since then the dramatic strengthen-ing of the rand, mainly due to the weaker US dollar from R14,50 to current levels around R11,60, has removed the last hope of inflation beating investment returns for a while.
The end result is that investment returns over the past three years have been well below trend and barely above the inflation rate over the same period.
This has caused certain investors to start looking at alternative investments in order to generate higher investment returns—even Bitcoin! But there are very few investment alternatives for local investors to consider—most asset classes have been suffering from the economic chaos created by Jacob Zuma and the ANC-government.
The true economic cost of Zuma’s rule has been estimated at R1 trillion—or 25% of Gross Domestic Product by economists from Standard Bank. It would therefore be unrealistic to be expecting investment returns in the high teens, as happened in the past.
Residential property has been equally under pressure for many years and in fact has lost people a great deal of money in certain areas. Even prices in the Western Cape are now starting to feel the pressure, while Buy-To-Let, equally, has not been a great investment for many years now.
IT’S DURING THESE TIMES THAT INVESTORS NEED TO BE MOTIVATED TO STAY THE COURSE IN THEIR CHOSEN INVESTMENT STRATEGY.
The current investment environment reminds one of the investment conditions that ruled in 1998, after the Mexican Crisis. All was doom and gloom. A year later the stock market had doubled and those investors who bailed out at the wrong time, lived to regret it.
Any investor drawing an income from their investments, should review their income levels based on these substantially lower returns experienced in recent years. There is nothing more destructive to investment capital than high income levels in a low return environment. It is clear, returns of between 10% to 15% have not been achievable in this environment and investors need to adjust their expectations and withdrawal levels accordingly, which Brenthurst has suggested for some time.
International markets over the same period, delivered excellent returns in US dollars and has been part of Brenthurst’s strategy for more than eight years allocating a healthy portion directly offshore to client portfolios, where appropriate.
Although the rand has strengthened recently, longer-term investors – seven years or longer, bene-fitted handsomely in both dollar and rand from international exposure within their portfolio.
It is important to note offshore allocation may not be appropriate for all clients, as a result of the risk factors associated with global investments of which fluctuating exchange rates is only one.
More importantly, once converted to Dollars, the performance of the investment should be tracked in the respective currency in which it is held in order to strip out rand volatility. Considering the time horizon for such an investment, at least seven years or longer, short-term rand movement is irrelevant until the dollars need to be sold. Until then, dollar growth is more relevant.
The ZAR has been trading stronger on the back of positive local political sentiment, but mostly due to a weaker dollar.
The greenback has been weaker across the board with commodities, emerging markets and other developed markets all benefiting from a weaker dollar. Any dollar strength from current levels will have a negative impact on emerging market currencies and weaken the rand.
The upcoming budget and in particular Moody’s call on South Africa’s debt rating shortly there-after, is also an immediate concern for the local currency.
International markets recently experienced a correction in February, but have stabilised since then. Most analysts have been expecting this after the strong returns internationally over the last twelve months. The universal belief, at least for the last couple of months, was that stock markets have been overextended and that a correction was imminent.
Therefore, performance over the last three years has been affected by low levels of confidence and growth locally, resulting in sideways movement on the JSE, while offshore allocation was affected by a stronger rand, despite very strong US dollar growth.
FOR THOSE INVESTORS WHO HAVE BEEN INVESTED FOR SEVEN YEARS OR MORE, LONG-TERM RETURNS HAVE BEATEN INFLATION AND MONEY MARKET, PROVIDING STRONG CONSISTENT ANNUAL RETURNS IN US DOLLAR AND ZAR.
UNFORTUNATELY MARKETS DO NOT PROVIDE STRONG RETURNS EVERY SINGLE YEAR AND CERTAINLY NOT DOUBLE DIGITS. THERE WILL BE PERIODS OF LOWER RETURNS FROM TIME TO TIME, AS A RESULT OF FACTORS BEYOND OUR CONTROL.
However, with a change of guard and the newly elected President, we are hopeful for positive change for the future of SA, our economy and the local market. President Ramaphosa’s State of the Nation Address was aimed at boosting confidence, with much of his focus on the economy, the fiscal situation, corruption and reducing the size of the state.
It is clear our new president has a tough job ahead of him. Not only does he need to restore confidence in the country and the economy, but he also needs to unite his party and the country behind a common goal.
Cyril will need to convince his party, his voters, citizens and investors of this. We will however most likely experience some pain in this process before we see the benefits. The 2018 Budget Speech, will no doubt be a lot tougher than what we have seen in the recent past.
His “New Deal for jobs, growth and transformation” includes amongst others: the creation of “decent” jobs; focusing on driving growth and investment; rejuvenating local investment and developing SMEs; implementing a macro-economic policy that promotes growth and secures economic sovereignty; improving access to quality, relevant education; revitalising and expanding our manufacturing capacity, maximising the impact of our infrastructure build, restoring state owned enterprises as drivers of economic growth and social development and establishing judicial commissions of inquiry into the tax administration and governance of SA Revenue Service and State Capture.
There are various issues that will be closely monitored by voters and investors going forward. These include:
– The fight against corruption.
– The combination of energy solutions needed in the country.
-Mining regulation, which has become a key issue in terms of investor sentiment.
-Institutional crackdown needed in SARS and National Directorate of Public Prosecutions.
-SOE governance needs to be addressed as it presents a clear risk in terms of government finances.
-The National Development Plan (NDP) has been neglected due to political infighting,
shifting the attention away from this key policy. THE NDP needs to be implemented in
order for the economy to improve on a more sustainable basis.
The President thus needs to restore confidence in the country by providing and actioning a clear plan for the way forward. This is no easy task with simple solutions.
We continue to monitor progress in this regard as we look towards the upcoming Budget for further indications as to how the ANC will manage SA finances to ensure we avoid any further down-grades from ratings agencies, in particular Moody’s.
As we cannot predict the outcome of the budget or the short-term impact on markets, we continue to focus on assessing our investment strategy on a regular basis. Forecasting the future is an extremely difficult task, instead we focus on diversifying investments across markets and asset classes to minimise risk and maximise returns in line with individual risk profiles.
We continue to monitor this on an ongoing basis, but do not advise any short-term panic or sudden changes to any portfolio at this stage. Despite the difficult environment, we discourage chasing returns and switching from one investment vehicle, asset class or region due to the lower return environment, as this does not build wealth over time. In fact, this very emotional response by many investors is the main contributor to the destruction of wealth.
The astute and experienced investors do not panic or implement multiple changes to their portfolio during difficult markets, as this behaviour (with differing levels of intensity) has been witnessed many times before.
Unfortunately, during times of extreme volatility many investors get fearful and their immediate reaction is to change or switch to cash.
Investing during times of volatility or lower returns naturally results in higher levels of anxiety and nervousness. However, investors who truly understand that investing is a long-term pursuit, will not be alarmed and instead rely on their financial plan, which if well diversified and appropriate, should weather any short-term volatility.
A 100 years of investment tracking shows that the markets always recover. Sometimes recovery is swift and strong and at other times more muted and over a longer period. Patience and time in the market are very important factors to a successful long-term investment strategy.
THE BRENTHURST TEAM SPENDS A SIGNIFICANT AMOUNT OF TIME WITH ASSET MANAGERS, POLITICAL ANALYSTS AND ECONOMISTS ANALYSING MARKET CYCLES, GLOBAL TRENDS, INDUSTRIES, SECTORS, REGIONS AND RISK FACTORS THAT HAVE A BEARING ON INVESTMENT PERFORMANCE, TO DEVISE THE BEST STRATEGIES TO PROTECT AND BUILD WEALTH, AS WELL AS LONG-TERM SOLUTIONS FOR OUR CLIENTS.
WHY INVEST AND NOT HOLD CASH OR USE MONEY MARKET INSTRUMENTS:
-Taxes on cash or money market holdings are typically higher.
– Interest rates rarely deliver returns significantly above inflation.
– Growth in stock market prices increase the buying power of capital over time.
– By investing in different sectors and regions investors can reduce risk through diversification.
WHY INVEST OFFSHORE AND NOT IN SA MARKETS:
A review of the market movements and the direction of the local currency for the past three years (a very short period of time in the life of investments) tell a story of political upheaval driving market sentiment; very poor economic indicators, a widening budget deficit; to name a few.
Although the winds of change started blowing since late last year, political issues will remain a factor and it will require dedicated effort and a protracted period of time before the SA economy turns around. By diversifying investments away from these risks and sharing in the upward movements of markets as the economies of the USA, Europe and the East improve, investors can protect and build truly global portfolios.
WHY STAY INVESTED?
Research by Investec Asset Management shows that investors who switched in and out of funds chasing the better returns offered by another asset class were far worse off than those who remained invested in an average balanced fund.
No asset class consistently outperforms every year and most asset classes have their run at being the worst performing asset class in a year.
Investec reviewed this behaviour and it clearly shows that staying invested – in a portfolio or asset class suited to the investor’s risk profile and investment goals – remains the most prudent approach.
OUR STRATEGY CONTINUES TO DIVERSIFY CLIENTS’ PORTFOLIOS ACROSS ASSET CLASSES AND
GEOGRAPHIES TO REDUCE RISK.
WE CONTINUE TO ALLOCATE A HEALTHY PORTION OF OUR CLIENTS’ ASSETS BEYOND THE BORDERS OF SOUTH AFRICA DESPITE THE RECENT RAND STRENGTH.
THERE ARE STILL RISKS WHICH REMAIN IN SA AND WE FEEL THE RAND IS POTENTIALLY OVERVALUED AT THE MOMENT.
Refrain from watching market movements on a daily, weekly or even monthly basis. Over the long-term many of the dramatic movements over shorter periods are insignificant and should instead be viewed over a period of seven years or longer.
Do not chase returns by switching or trying to time the market, and benefit from the upturn of a particular asset class or fund, which in most cases may be too late. Depending on the investment vehicle each transaction may attract fees and also in many instances, capital gains tax.
ALWAYS CONSULT A QUALIFIED, CERTIFIED FINANCIAL PLANNING PROFESSIONAL TO REVIEW YOUR FINANCIAL PLAN AND PROVIDE ADVICE AND GUIDANCE SUITED TO YOUR SPECIFIC NEEDS.