In­vest­ment: Try to hang on to some per­spec­tive

It’s in­creas­ingly dif­fi­cult for South African in­vestors to not lose hope com­pletely. But as an emerg­ing coun­try, we play a very small role in a very large in­vest­ment world. And even­tu­ally, things will change.

Finweek English Edition - - Contents - By Schalk Louw Schalk Louw

many of you will know the story about the suc­cess­ful lawyer who bought a brand new car and parked it right in front of his of­fice for all his col­leagues to see. While he was get­ting out, how­ever, a mas­sive truck passed too close to the curb and tore the driver’s side car door right off.

A po­lice­man was close by and wit­nessed the whole or­deal. He im­me­di­ately rushed to­wards the lawyer. But be­fore the po­lice­man could say a word, the lawyer started scream­ing about how his brand new car, picked up just the day be­fore, was now com­pletely ru­ined and that no mat­ter what the pan­el­beat­ers do, it would never be the same again.

Once the lawyer man­aged to col­lect him­self, the po­lice­man shook his head in shock and said to the lawyer: “I can’t be­lieve how ma­te­ri­al­is­tic you are. You are so fo­cused on your pos­ses­sions that you still haven’t re­alised that your right arm was torn off along with the car door!”

“Oh my gosh!” the lawyer replied. “My Rolex!”

You may won­der what on earth this has to do with in­vest­ing. Well, it’s all about per­spec­tive. As South Africans, many of us might feel like the lawyer whose car door has been ripped off by the rest of the world (from both an eco­nomic and in­vest­ment per­spec­tive). You don’t have to travel abroad to know that your rands can no longer buy what they could five years ago.

Look­ing at our lo­cal stock mar­ket, we only seem to see more of the same. Over the last five years (to the end of Au­gust 2018) we ex­pe­ri­enced 7.6% growth per year in the FTSE All World In­dex in US-dol­lar terms. Over the same pe­riod, the FTSE/JSE All Share In­dex grew by 10% per year in rand terms. But only when we con­vert our lo­cal growth into dol­lars do we gain some proper per­spec­tive.

In re­al­ity, the South African mar­ket has de­clined by 0.6% per year over the last five years in dol­lar terms.

What went wrong? A mere decade ago, fa­mous in­vest­ment ex­perts like Mark Mo­bius claimed that emerg­ing mar­kets (in­clud­ing South Africa) of­fered the best in­vest­ment po­ten­tial. Were they wrong or did things just change so much that this is no longer true?

The short an­swer is that they def­i­nitely weren’t wrong, but in or­der to prove my point, we need to have a look at the rea­sons why in­vestors like Mo­bius in­vested in emerg­ing mar­kets in the first place.

In my opin­ion, the def­i­ni­tion of emerg­ing mar­kets holds the key. Ac­cord­ing to In­vesto­pe­, emerg­ing mar­kets are so pop­u­lar among in­vestors be­cause they of­fer the prospects of higher re­turns due to the fact that they of­ten ex­pe­ri­ence faster eco­nomic growth as mea­sured by their gross do­mes­tic prod­uct (GDP). Ob­vi­ously, this higher-thanex­pected growth also comes with much higher risks due to emerg­ing mar­kets’ po­lit­i­cal in­sta­bil­ity, prob­lems with in­fra­struc­ture, volatile cur­ren­cies and lim­ited stock op­tions.

A decade ago, when ev­ery­one was still smit­ten by emerg­ing coun­tries, the South African econ­omy was still healthy. The South African GDP grew roughly 3% faster per year com­pared to the G7 largest coun­tries in the world’s an­nual GDP be­tween 2005 and 2009. This made it worth­while for huge in­vestors to face the risks in favour of the pos­si­bil­ity of higher re­turns. Since then, this growth gap has steadily de­creased and South Africa’s eco­nomic growth has slowed down to such an ex­tent that it’s now even slower than some of the much older es­tab­lished and de­vel­oped coun­tries.

This means that de­spite its strong un­der­per­for­mance, South African shares, when com­pared to de­vel­oped mar­kets, still won’t en­cour­age larger in­ter­na­tional in­vestors to look for bar­gains in the South African mar­ket.

But don’t lose per­spec­tive.

As an emerg­ing coun­try, we play a very small role in a very large in­vest­ment world. We can’t take all the blame for the slow­down in eco­nomic growth lo­cally. The only thing the data above re­ally shows us, is what went wrong. Past per­for­mance def­i­nitely doesn’t guar­an­tee fu­ture per­for­mance. And I re­ally do be­lieve that things will even­tu­ally im­prove. ■ ed­i­to­rial@fin­

is a port­fo­lio man­ager at PSG Wealth.

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