Half way through the calendar 2017 is a good time to take stock of what investments have produced - not only for the 6 months - but for longer periods of time as well.
It would be fair to say that investors into the local equity market have been disappointed now for at least two to three years, where both the rolling annual returns, and the compounded 3 year return, is far lower than what investors have become accustomed to. Below are a few of the numbers for clarification purposes:
- The JSE All Share index up 3.4% for the 6 months to June 2017
- Over the last 3 years, this index has compounded at the same level at 3.4% per annum
- The Top 40 index fared slightly worse at just 2.5% per annum
- The Resource index has had a torrid time, declining by 15.4% per annum over 3 years
- Industrials, the best performing main sector, has also only returned 7.6% over the 3 years (annualised)
Naturally, these returns are far less than what investors have come to expect, and also relative to expectations, given the risk levels. As mentioned above, the total return from an investment into the JSE All Share index has now compounded by only 3.4% per annum over the last 3 years – very poor when compared against a relatively lower risk investment of money in the bank.
One concern we have regarding the sideways price movement over the last 3 years, is that it has not been accompanied by an improvement in valuations. Typically, there is an improvement in valuations as prices fall or move sideways. However, when we measure current valuations compared to long term valuations, they remain on the expensive side.
On a positive note, one of the factors that has put pressure on the JSE All Share index over the last 18 months has been the firmer rand, which, from closing at R15.86/USD at its weak point in January 2016 has strengthened to its current level around R13/USD. As 50% - 60% of the JSE All Share is rand hedged, this headwind has the potential to turn into a tailwind, should we see rand weakness from this level out.
Chart 1 (below) reflects the annual total return from an investment into the JSE as measured by the JSE All Share index. Since 1986, the 12 month return has varied from a positive 80% to a negative 37% as measured on month end prices. Clearly, there is huge volatility in the 12 month total return that an investor experiences on the local stock market.
Chart 2 (below) compounds up these returns from January 2003. Even with the large 2008 sell off in the global financial crisis, prices have moved up on average by approximately 15% per annum from the base in 2003. When taking into account dividends, the total annual return for this period came in at 18.4% per annum. Extending that for the poor performance over the last 3 years has now reduced that compounded return to 15.9%.
In conclusion, given the range of issues that has concerned the rating agencies resulting in downgrades, it would be fair to say that the risks of investing in South Africa have generally increased. Therefore, investors should demand a higher required rate of return. Over the long period of history, investors have been rewarded with higher returns, but as illustrated in the charts above, this return is never achieved linearly.
Ian de Lange
Tel +27 21 914 4966
Fax +27 21 914 4912