‘Worst returns are usually followed by the best’
SOUTH African equity investments ended last year on a sour note, with returns of the FTSE/JSE All Share Index (Alsi) falling as low as 11.38 percent. But if history is anything to go by, the poor returns of the past few years could turn.
Data shows that the Alsi is experiencing low return levels similar to those seen on five previous occasions over the past 40 years.
Although poor returns are a bitter pill to swallow for any investor, they are by no means an anomaly. It is more important to reflect on the subsequent returns the Alsi generated after each of the previous “worst-return” periods.
The red circles on the graph highlight the lowest rolling five-year annualised returns generated by the Alsi since 1979. The graphs also illustrates that these “severe” declines were followed by a drastic upsurge in returns. For example, after the market dropped in April 2003, subsequent returns jumped as much as 41.09 percent. After Alsi’s drop in March 1979, it subsequently rose by about 15 percent.
On average, the Alsi rose by more than 24 percent every time the market reported depressed returns over these five periods – exceptional returns that would easily have been lost if investors had given in to the urge to switch and invest elsewhere. Those who remained invested were rewarded with attractive returns in the aftermath.
The aftermath of the 2008 global financial crisis (GFC) provides an unrivalled case study for our premise that the periods of the worst investment returns are usually followed by the best.
Bloomberg reports that from 2009, market participants saw a boom in equity markets, with investors generating returns as high as 20 percent in an environment where relatively cheap stocks were in abundance.
Valuations done in May show that South Africa has some of the lowest-priced shares in the world, offering excellent investment opportunities for savvy investors. Additionally, Bloomberg data shows that, based on the historical average of the market’s price to earnings (P/E) ratio of 12.26 times (at May 31), the overall market is deemed cheap compared with the current P/E ratio of the market, which is slightly lower at 12.08.
If history is anything to go by, those who remained invested in equity markets amid the downturn of the 2008 GFC can attest to how rewarding it is to brave the storm, and to invest when everyone else is fearful.
The South African investment landscape comes with its own set of challenges. However, the market has acknowledged these trials and has already priced in these risks to a large extent. Although the local bourse has delivered poor returns over the period in question, we urge investors to remember that markets always run in cycles. And while it may be down now, it will eventually start rising – whether or not you are invested. So, don’t miss the upsurge – be patient and stay invested.
Adriaan Pask is the chief investment officer at PSG Wealth.