A fresh approach to investing for the new year

7 Dec 2016

Danie Venter, Advisory Partner, Citadel

“The world is going mad” and I agree, to some extent, that holds merit. Yes, 2016 started off with the looming Brexit vote, and boy did that surprise! Moving to more recent history, we’ve seen Mr “The Donald” Trump win the US election, and that’s just on the global front. Closer to home, South Africa’s Lucky Packet has provided a script that even Hollywood couldn’t have conceived of. We have plenty of stories to share at the recently opened #SaxonwoldShebeen.

What is indisputable is that the world is seeing a move away from “business as usual”. But ultimately, as much as things change, they have a way of staying the same and the sun will continue to rise and set. Plus ça change…

So set those goals for 2017 and plan accordingly. Start with ensuring that you don’t overspend this festive season. Have a budgeted approach to tackling the holiday spend and try your best to apply your festive season bonus – if you are lucky enough to get one – effectively. Cash is king and cash flow even more so. Paying off your debt sooner than later will allow you to establish that investment portfolio you’ve been putting off.

“Good idea”, I hear you say. So, what are your options?  Well, you can invest in an actively managed unit trust portfolio which, simply put, allows a bunch of similar investors to put their money together to buy a combination of investments such as shares (e.g. Mediclinic), bonds (e.g. SA government bonds), listed property (e.g. Growthpoint Properties ) or even cash. Alternatively, you can acquire a passively managed Exchange Traded Fund, more commonly known as an ETF (e.g. Satrix 40). ETFs generally track one asset class specifically. For example, the top 40 listed companies trading on the JSE. You can even hold an ETF which tracks the S&P500 in the US.

While the options seem endless, the key question is: What returns have these asset classes delivered and what does this mean for you? Well, as per Table 1 below, if you bought and held global shares (equities) for five years you would have earned 21.59% over the term. In other words, if you invested R 10,000 in the MSCI All Country World Index (in rand) five years ago, you would have roughly R 26,575 today. Not too shabby!

TABLE 1: ASSET CLASS RETURNS IN RAND TERMS, TO 21 November 2016

Asset Class / Index (All in ZAR) 1 Year 3 Years 5 Years 10 years
South African Equities –

JSE All Share Index

-0.6% 7.3% 13.6% 11.0%
Global Equities (USD)–

MSCI All Country World Index

4.97% 15.50% 21.59% 10.90%
South African Property –

JSE SA Listed Property Index

-1.2% 12.9% 16.9% 15.7%
South African Bonds –

JSE All Bond Index

5.3% 6.7% 7.4% 8.0%
South African Cash –

Short Term Fixed Interest

7.3% 6.5% 6.0% 7.3%

*as per all financial numbers, the past isn’t a prediction of the future so be careful and talk to a qualified financial advisor for assistance

Another key thing to consider is what expectations and risks are associated with each asset class over the medium term (i.e. five years) and how the uncertainty associated with recent events locally and globally might affect your investment.

SOUTH AFRICAN EQUITIES

When you buy a share (or equity) what you are paying for today is the future earnings the company will generate for you as a shareholder. In other words, current earnings and future expectations supports the price you pay today. The South African market finds itself in a peculiar scenario as current earnings (as illustrated below) are under pressure. But before you run to the hills shouting “the sky is falling”, bear in mind that the majority of South African listed companies sell goods to the international market and often in US dollars. If you’ve been following the news recently, the South African rand has weakened somewhat, resulting in higher than expected earnings when converting back to rand. So there may be a glimpse of hope within SA Equities. Expect muted performance from SA equities with a few hail-Mary stories of star performance by particular companies.

 

GLOBAL EQUITIES

Investors hate uncertainty and have become extremely skittish towards unexpected news headlines. For example, consider the day Trump was elected. As the US election results were being announced and it emerged that Trump was probably going to win, US equities dropped off a cliff, losing in the order of 5,5%, only to do an about-turn several hours later and recover 6.5% from the low point by close of the trading day. Similarly, post the Brexit vote, the UK market was under considerable pressure as global investors feared for the worse. Several weeks later, the market has stabilised and is testing the levels seen prior to the referendum.

Earnings have been under pressure in both the UK and the European region since 2007 and you can expect a bumpy ride in equities as lacklustre economic growth is set to continue. Why is economic growth so important? Well if an economy grows, there is more business to do. This translates into more sales (if you’re a good business man), which should result in higher earnings levels. This, in turn, enables you to conduct more business and so on.
SOUTH AFRICAN PROPERTY

Over the past ten years, South African Property has been the blue-eyed-boy everyone has fallen in love with. And it’s not surprising: it has returned 17.6% per annum and claimed the winning seat for domestic assets. In recent months, property has achieved fresh highs and is currently tracking relatively sideways as local economic conditions are challenging. Local property as an asset class has, however, remained largely stable in comparison to its global counterpart. Nonetheless, you should be cautious when including the asset class in your portfolio.

SOUTH AFRICAN BONDS

TINA (the investment acronym “there is no alternative”, not the girl in the seat next to you) describes a world in which returns are muted and investors are willing to take on more risk in order to generate positive returns. We have seen many foreigners snapping up SA bonds, generating impressive results for the asset class in spite of much uncertainty on the home front. However, just as fast as the funds have flowed into the market, so too they may leave. This could, in turn, have a knock on effect on the rand which could stumble somewhat against other international currencies. It is also important to consider the tax implications on holding this asset in your portfolio.

SOUTH AFRICAN CASH

Year to date, before considering tax, cash has shown stellar returns given the limited risk associated with holding funds in a money market account. Cash will be affected by interest rate decisions taken by the Monetary Policy Committee (MPC). Given all the uncertainty surrounding the South African climate at present, the MPC will have a challenging time balancing interest rates and inflation. Over the long term, however, holding cash does NOT pay, as it is highly unlikely to maintain its purchasing power (i.e. combat against the effects of inflation).

So, in this uncertain world, what should your fresh approach be for the New Year? Remember, investing is about time in the markets and not timing of the markets. Understand the impact of the investment decisions you make and consult a qualified financial advisor (preferably one who hold the CFP® mark) to guide you and your family through these turbulent times. Ultimately, failing to plan is planning to fail.

news@ujuh.co.za

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