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