Time to ditch SA equity?

HOLD ON: THE EVIDENCE SUGGESTS NOT

Given South Africa’s abysmal economic performance and years of anaemic market returns, negative sentiment has sent local investors sprinting for offshore equities. So, while Regulation 28 limits the offshore exposure of retirement funds to a maximum of 30%, a question frequently raised by investors is: does South African equity still have any place in discretionary savings portfolios?

The answer is that although global equity currently represents a more attractive “buy” prospect than local, this does not mean you should sell out of SA equity.

It’s true that global markets have significantly outperformed the JSE over the last 10 years. However, this was largely the result of a surge in strength from the US.

A closer examination of the MSCI All Country World Index excluding US reveals that global market returns were largely in line with the JSE’s returns in dollar terms.

Moreover, the narrative that poor economic performance in SA has caused the JSE to underperform substantially is patently false.

Measured in dollar terms, the JSE’s performance over the past decade is virtually indistinguishable from emerging markets and Europe, even though many of those regions fared far better economically.

And here it is important to note that the JSE is still home to world-class international companies. Some 71% of the JSE Top 40’s earnings are derived outside of SA, which is why the JSE’s movements are often in line with non-US stock exchanges.

The most compelling argument for SA equity as part of a long-term investment strategy, however, lies in a comparison of the JSE’s historical performance with the US market.

History reveals that the JSE’s recent period of underperformance relative to the US is not a new or once-in-a-lifetime occurrence. In fact, it is the norm rather than the exception, as the SA market regularly goes through cycles of outperforming and then underperforming the US.

Strydom is investment strategist and portfolio manager at Citadel