02 May 2019
2019: Reversal of fortunes?
By: Veenesh Dhayalam, Head: Asset Manager Research, Sasfin Wealth
2018 was indeed a year of note characterised by abysmal market performances all around the world with local and global markets experiencing their worst year in a decade. Whilst both the S&P 500 and the FTSE/JSE ALSI (ALSI) ended negatively for the year, the paths to the decline were very different as per Charts 1 & 2. It was the first time ever that the S&P 500 ended the year with a loss after being positive for the first three quarters whilst the ALSI was on the back foot for most of the year.
Source: Sasfin Asset Managers
Coupled with the factors previously mentioned that weighed on the global economy, markets had to deal with a US government shutdown from the 22nd December as Congress refused to grant President Trump the necessary funding to build his border wall. This resulted in the S&P 500 (-14.0%), Dow Jones (-11.8%) and NASDAQ (-17.5%) moving significantly lower. Whilst there were some positives in the latter quarter of the year, they were not enough to buoy markets as the Euro Stoxx 600 (-13.2%), German Dax (-13.8%), France CAC (-13.9%), Spain’s IBEX (-9.1%), FTSE Italy (-11.5%) and FTSE 100 (-10.4%) all ended the final quarter lower. Emerging Markets were also impacted during the final quarter even though we did see some stabilisation in currencies and inflation. The Russian RTS (-10.4%), Japanese Nikkei (-17.0%) and Turkey’s BIST 100 (-8.7%) all moved lower. Brazil’s Bovespa and India’s BSE 100 managed to end the quarter higher, adding 10.8% and 0.2% respectively.
Is local still lekker?
With the local currency weakening by almost 16% against the US Dollar, global returns dominated as domestic markets continued to lag with global cash (18.3%) and global bonds (15.2%), the best performing asset classes followed someway behind by local bonds (7.7%) and local cash (7.3%). Whilst gains in local bonds have been reducing over the last 3-years, they have remained positive with the ALBI outperforming the ALSI by more than 16% in 2018 which is the largest annual outperformance over the last 10-years and fourth largest over the last 20-years.
South African government bonds mostly reflect realistic expectations for the local economy and have benefitted from a turn in global sentiment recently. South African bonds compare favourably to their emerging market peers, relative to their own history, and still offer a respectable cushion against further global policy normalisation.
Once the darling, now the devil
The domestic property sector had a depressing year underpinned by the allegations of share price manipulation and insider trading levelled against the Resilient Group of property companies. The JSE and FSCA (formerly FSB) are still investigating the validity of these allegations. Whilst these investigations along with the recently announced Fortress PwC investigation remain key events for the group, it is hoped that they would be settled in 2019.
At the beginning of January 2018, the Resilient Group accounted for over 40% of the SA Listed Property Index (SAPY). Due to the losses and the exclusion of Lighthouse Capital (previously Greenbay) from the index, at year-end these companies accounted for roughly 28% of the SAPY. Against this backdrop, the sector lost over 25% in value with majority of the loss realised in the first quarter of 2018. What this equates to is that the property sector has returned roughly over 5% p.a. over the last 5-years, which is effectively the dividend yield of the sector with the capital gains being erased. Risk premiums for listed property have moved upwards in order to capture the risks associated with growth uncertainty, corporate governance issues, balance sheet sustainability and key tenant risks including Edgars. As a result, income yields have adjusted upwards in order to compensate investors for both higher perceived risk in the sector and downward revision to growth forecasts. However, from an income perspective, distribution growth and expectations around future distribution growth remain sound.
On average, SA centric companies are trading at forward yields above the long-term South African Government Bond proxy (RLRS). Despite the underperformance, from a valuation perspective, the sector is still very attractive. Similarly, dual listed offshore companies are trading at attractive forward yields relative to their respective long- term government bond yields. The changes in the property sector over the last decade (including the increased ability to hedge borrowings and large offshore exposures) should make listed property more resilient going forward. If one excludes the offshore exposure, the property sector’s yield rises to approximately 10.7%.
The continuation of the current low-return environment and the strain on risky assets has resulted in single digit returns over a multi-year time-frame for various multi-asset class funds. This scenario, is however expected to continue.
2019: Stay invested!
2018 was an unsettling year with the all volatility and realised downside in the equity markets, and investors could be forgiven in thinking that they should flee and jump ship. Investors must carefully contemplate the opportunity cost of not staying invested even in tough market conditions. When investors sell in down turns, they are potentially selling at a lower price and could realise absolute losses. Whilst pullbacks are too be expected as the factors that are influential, can also work against capital markets and they have regularly suffered losses, markets tend to move up in time. The next two examples show the benefits of remaining invested for the long term avoiding the temptation of exiting markets when things get tough.
The illustrative example above demonstrates how two investors begin in the same position and their investments begin to grow. When markets decline, Investor 1 remains invested and takes advantage when recovering markets. Investor 2 exits the market and lags Investor 1.
Example 2 shows a fully invested portfolio would have returned almost three times the portfolio that missed the twenty best days in the market.