Over the past five years, local markets returned just above 75% in ZAR terms, which is comparable to the JSE’s long-term average. However, when taking into account that over this same period the currency weakened by almost 50% to the US dollar, the JSE’s hard currency return – in real comparable terms – is 24%, or just over 4% per year, and this despite the recent bounce in performance on the back of Cyril Ramaphosa winning the ANC presidency in December.
When considering that the S&P and Dow have both returned more than 110% in US dollar terms, or approximately 200% in South African rands over this same period, David Cook, Portfolio manager from Old Mutual Investment Group’s Titan boutique, says that the JSE’s continued weak performance in US dollar terms has disappointed local investors hoping to keep up with global markets.
“The JSE has been a weak performer over the past three to five years, particularly if you exclude the performance of the big multinational industrials whose earnings are derived largely from overseas, such as Naspers, Richemont and British American Tobacco.”
While this relatively weak performance could be viewed as a signal to buy, Cook says that the local market is currently still reasonably expensive in absolute terms, and the environment, even after the Cyril Ramaphosa ANC win, does not instil confidence among investors. “While multiples of these stocks are reasonable relative to global comparatives, they are not cheap. Furthermore, when looking to forecast returns, it is important to consider the absolute return in terms of expected earnings growth and the factors that could impact this growth, which include fiscal and monetary policy changes, as well as future market volatility that could arise as a result of these.
These factors do not currently paint a particularly positive picture for domestic equities going forward, he adds.
Global equities face the opposite problem. “Globally, we are looking at relatively expensive markets, particularly in the US. While Europe and Japan may offer slightly more value, along with some emerging markets, I wouldn’t go so far as to call any of these cheap.”
The outlook in these markets, however, is generally far more promising than that of South Africa right now, he believes. “This means we have South African equities at reasonable valuations, but with a relatively poor outlook for earnings; while global stocks currently carry high valuations with a decent outlook for earnings.”
In terms of current positioning, Cook says that he would have higher allocations to global, but keep in mind how best to navigate such an expensive market. “The best way to deal with an expensive market is to invest with an active manager who is able to generate alpha, particularly in the event of a market sell-off.”
Looking towards the future of domestic markets, Cook says that while a positive outcome from the December ANC elective conference will help, he doubts whether this will be enough to turn things around, given how weak South Africa’s current fiscal situation is. He also cautions that global investors are very much “risk-on” at the moment, and all but ignoring any potential risks in the investment landscape. When this optimistic mindset changes to one of pessimism, as it will do as inevitably as night follows day, riskier markets such as SA could be in for a difficult time in terms of valuations and currency weakness, he says.
“With this in mind, investors would be best served with a globally diverse portfolio of high quality and reasonably priced assets, and with managers who are very active and more defensive in their approach, rather than simply trying to mimic a market index. This would mean seeking a portfolio that includes companies with more defensive earnings profiles, such as consumer staples or tobacco businesses, as well as companies that offer significant potential for value growth,” he concludes.