The JSE’s short-term pain is not a har­bin­ger of its fu­ture

The Citizen (KZN) - - BUSINESS - Pa­trick Cairns

In the past 12 months, South African eq­uity and listed prop­erty have de­liv­ered neg­a­tive dou­ble-digit one-year re­turns to end Novem­ber.

As shares make up the largest part of most balanced funds, they have also strug­gled. SA’s big­gest multi-as­set high eq­uity funds show -3.5% to -7.5% 12-month per­for­mances.

For lo­cal in­vestors, this com­pounds a sus­tained pe­riod of weak re­turns. In­clud­ing div­i­dends, the FTSE/JSE All Share In­dex (Alsi) grew just 3.39% per an­num since De­cem­ber 2014. As the lo­cal mar­ket’s div­i­dend yield is around 3.5%, the JSE has ef­fec­tively gone side­ways at an in­dex level. The last 12 months were par­tic­u­larly tough. As the ta­ble shows, ev­ery ma­jor mar­ket in­dex is lower, apart from the re­sources in­dex. This neg­a­tive per­for­mance has pre­dom­i­nantly come in the last three months. Ev­ery part of the mar­ket has fallen.

Mid and small caps haven’t per­formed as poorly as the wider mar­ket in ei­ther pe­riod, which is in­ter­est­ing as they’re most ex­posed to SA’s econ­omy. An­a­lysts have also noted how much value now ap­pears in these sec­tors. In fact, over five years the mid cap in­dex has marginally out­per­formed the Alsi. Small caps have un­der­per­formed.

It’s un­der­stand­able for in­vestors to feel un­com­fort­able. Over the last five years, the Alsi was up 5.51% if you in­cluded div­i­dends. You could have earned 6.88% in cash us­ing the short-term fixed in­ter­est com­pos­ite in­dex as a bench­mark. How­ever, in the five years af­ter the global fi­nan­cial cri­sis, the JSE was roar­ing. Four of these five cal­en­dar years de­liv­ered high dou­ble-digit re­turns. The av­er­age an­nual re­turn was 20.4% – sub­stan­tially higher than the mar­ket’s long-term av­er­age of around 14%.

If mean re­ver­sion is in­evitable, these lev­els must be un­sus­tain­able. They had to moder­ate, and did. One could even ar­gue that dur­ing this pe­riod in­vestors re­ceived re­turns “in ad­vance”.

The mar­ket stag­na­tion over the last five years took the JSE more or less to where it would have been if it had grown at more nor­malised rates over the 10-year pe­riod. On a 10-year view, the Alsi was up 12.32% per an­num. These num­bers are lower than the longterm av­er­age, but at 6.5%-7% above in­fla­tion, this re­turn is just about what lo­cal eq­uity should be ex­pected to de­liver.

In­vestors must take a longert­erm view of eq­uity mar­ket per­for­mance. The JSE has been dis­mal for nearly five years, but that doesn’t mean it’s bro­ken.

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