Markets’ red October
POSITIVE SPINOFFS: AS PRICES HAVE FALLEN, YIELDS HAVE IMPROVED
Every asset class is cheaper than at mid-year and expected to offer a better real return long term – Peter Brooke. Moneyweb
Market watchers will probably describe October 2018 by a single colour: red. While the local market has experienced three very difficult years, October was a particularly bad month for most global asset classes.
Table 1 highlights the total return percentages of various local and global asset classes for the month, year and three years ending October 2018.
There was almost nowhere to hide, said Peter Brooke, head of Old Mutual Investment Group’s MacroSolutions boutique.
The extent of the fall had an impact on the 12-month and three-year total return numbers too.
“I think there is one big thing that is driving that [market volatility] and that is US interest rates rising,” Brooke added.
Although US economic growth is healthy and company earnings intact, the higher cost of capital due to US interest rate hikes is causing price-earnings ratios to fall, he said. With markets falling and earnings rising, the market’s getting cheaper.
The liquidity withdrawal was expected to be a big theme impacting markets in 2018, and while there were incidents where Argentina, Turkey or emerging markets more broadly experienced a sell-off, US equities have
Driving market volatility is US interest rate rises
now started to see this withdrawal’s impact.
Brooke said that after such extreme movements, there was often a rebound.
“I don’t think this is a cause for panic, but it has had an impact on delivered returns.”
While October market volatility may have been tough to stomach for local investors, after the JSE experienced three tough years, Brooke said the volatility has offered opportunities.
Local equities are down 6%, but some share prices have fallen by much more, offering opportunities to buy.
The group believed the real (after-inflation) return expected from various asset classes over the next five years has improved since July 1. See table 2.
Brooke said that almost without exception, every asset class is cheaper than in mid-2018 and expected to offer a better real return in the long run.
As prices have fallen, yields have improved.
Brooke said the yield on its property fund is now 9.5%, whereas a company like British American Tobacco, whose share price has been hammered, now has a forward dividend yield of around 7.5%.
Absa Group’s yielding about 7.7% and several other companies 5% to 7%.
Many financial advisors have had a tough time managing the drawdowns from clients’ living annuities over the last few years and the conversations often weren’t easy.
For these investors, higher income yields in some balanced funds mean they can draw an income without having to sell units when the market’s down, thereby locking in capital losses (provided the draw doesn’t exceed income yield).