Playing the long game

By Menachem Kay

Have you ever seen those cartoon drawings on the roof above your dentist’s chair? You know, those ones with a beach or picnic scene with so much going on, all at the same time, seemingly designed to keep your mind away from his incessant drilling?

Well, in some ways I feel that accurately characterises the last six months in South Africa. There has been so much news; some good, some not so good, some absolutely phenomenal and some, well, some challenging news.

Six months ago, much as we all desperately wanted it to happen, few could have believed that President Cyril Ramaphosa would beat Dr Dlamini-Zuma in becoming president of the ANC. Who would have believed that the Republic of Zupta did not have a Plan B? Yet, albeit by the slimmest of margins, Mr Ramaphosa did indeed become the president of the ANC and subsequently our State President, although that too looked unlikely for a while. The very next day after Mr Zuma’s resignation and Mr Ramaphosa’s appointment as president, the JSE jumped by more than 4% and all seemed right with the world!

Yet, when we look at our local investment portfolios, the last few months have been very challenging. As investment advisors, we are frequently asked the following two questions: 1) From an investment standpoint, why have the last three years have been so difficult and 2) with the current level of volatility, would it not be wise to just wait it out in cash and then come back into the markets when they settle down and start to climb again?

I think it is important for investors to review and truly understand the events of the last few months, and more specifically, how they have affected markets and investment portfolios.

From December 2016 to November 2017 the rand was fairly stable. It was weak, but stable, and the JSE grew by more than 20%. The JSE’s fantastic growth was largely due to this weaker rand, and was aided in no small measure by one single stock, Naspers.

Our portfolios all enjoyed fantastic growth during this period. Notably, investors’ returns were less heady than the JSE’s growth, largely due to the massive weighting that Naspers had in the market. But in December 2017, the markets began to nose dive. First, we got hit by the Steinhoff scandal, where even though our portfolios had minimal exposure, the collateral damage to the markets could not be avoided. Then, as it became likely that Mr Ramaphosa could mount a serious challenge to Dr Dlamini-Zuma, the rand began to strengthen, pulling the JSE back with it.

As a result, since the beginning of December, the rand has strengthened some 20% against the US dollar. The much-anticipated State of the Nation address filled us all with hope, but also raised the land expropriation without compensation issue, which has dominated headlines and indeed, our emotions, for the last few weeks.

However, these issues were purely South African. The US markets, which have enjoyed some substantial growth, also came under pressure. At the end of January 2018, the US job real wage increases definitively indicated that the US Fed would begin raising interest rates. This spooked world markets, and the JSE fell some 10% in just a few days. The good news is that since then markets have stabilised, although the JSE remains under pressure. At the time of writing this article, the JSE was down approximately 2% for the year.

Now with this background, the second question becomes relevant. Why should we remain invested? Surely it would be wiser to wait out this volatile time in cash?

It is a fair question. Our Chief Investment Officer, Steven Crouse, discusses this very issue in his article in this month’s newsletter, but allow me to offer a very brief analysis of the issue.

If you look at the graph below, you will see that had you invested R1 million in the JSE 20 years ago, your investment would be worth some R10.9 million today. However, if you had chosen to sell out of the markets for the top 10 days over the 20-year period, your investment would have only have grown to R6.1 million. That means you would have lost out on growth worth R4.8 million! Worse still, had you missed out on the top 20 days, your investment would only have grown to R3.8 million. Worst of all, had you missed the top 40 days, you would only have made R800 000 over 20 years!

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The message is clear: yes, the markets are volatile and the recent rand strength has not helped markets, but it pays to remain invested. Notwithstanding the monumental challenges we face, we remain very positive about the prospects for both South Africa and the JSE.