Be fearful when others are greedy and greedy when others are fearful
– Warren Buffett
Over the past 20 years, South African financial service professionals have witnessed a lot: the Russian financial crisis, the dot-com bubble, the economic effects arising from the September 11 attacks, the market downturn of 2002, the great financial crisis of 2007/8, and some very flat years when the market generated almost no returns at all.
However, the sector has also witnessed some wonderful years, where the world stock markets delivered amazing, high double-digit returns and it seemed little could go wrong. But somehow the last four years have just felt different, felt worse.
Many investors are saying that they are fast ‘falling out of love with South Africa’. Who can blame them? The news flow has been less than flattering. It seems like every day there is a new revelation about a corrupt minister, a failing SOE or other negative economic data.
To make matters worse, even in the face of overwhelming evidence, instead of the country’s ministers falling on their swords as one would be expected to do under such circumstances, there is a culture of defiance in the face of overwhelming proof of corruption – personified, of course, by Mr Zuma!
Unemployment is stubbornly high and without substantial, sustained growth, is expected to slowing increase. There is the populist and radically-fascist EFF on the far left, and on the other end of the spectrum, the DA, which seems capable of only ever scoring own goals.
Is there hope for South Africa? Is there still an investment case for South Africa, or is it time to pack up and leave?
There is sufficient indications that the answer is still an optimistic and emphatic yes! Over the past few months, another – although not yet fully clear – picture has begun to emerge. In many ways the country has been here before. The driving factors that have culminated in this point may be different, but South Africa has faced what seemed like insurmountable odds previously, and made it through. And it will do so again. There is little doubt that it won’t be quick or easy, and volatility will most certainly be a regular companion, but we have the right people in the country to turn this ship around.
It is at times like these that an objective approach is needed, one that provides as realistic a perspective as possible of the market. Such an approach allows observers to remain uninfluenced by overtly negative or panic-driven sentiment, and rather be informed by that golden rule in investing – focusing on true market valuation.
The first step to healing anything is acknowledging the problem. Mr Nhlanhla Nene, whom many of us revere, took the courageous (although obvious) step and resigned. There wasn’t much fanfare over the issue, but there should have been. That was a momentous occasion. Instead of defiantly hanging on to his position, bullying all who had the temerity to protest, he apologised and resigned.
It is time to start viewing the news differently. Yes, there will still be daily news stories about SAA, the SABC, Eskom and other flailing SOEs, but under the very able guidance of Mr Pravin Gordhan, corrupt and ineffective boards are being replaced, not based on nepotism, cronyism or political favours, but on merit. When last did we see that? This situation will take time to correct, but once the ball is rolling and corrupt ministers understand that their time is up, things will start to get better much faster.
Our president, Mr Cyril Ramaphosa, took over in a very difficult time. He does not actually control his national executive committee or his parliament. It is only after next year’s elections – and only IF he wins convincingly – that he can consolidate and begin making the changes he knows he has to make. Notwithstanding this delay, look at how many changes have already happened for the better! These might not have occurred as quickly as anticipated, but things are certainly better than before.
The case for remaining invested
It is undeniably tempting switch our current investments into cash, and wait until the markets have turned and the volatility has died down before reinvesting, but is that the best idea now?
The reasoning behind this is best illustrated by the outcomes of a study conducted by Investec Asset Management late last year:
It is imperative to acknowledge that the market has inflection points – times at which it turns and gains so much on a single day, that it fundamentally changes the overall return investors receive over their investment period.
In the graph, calculated from 1 July 2007 to 30 June 2017, the five largest return days made more than 50% of the total return over 10 years, while the 10 largest return days made up 80% of the return over the 10 years. Missing the top 20 days gave this 10-year investment a negative return of some 19%!
Where to from here?
As 2018 draws to a close and we reflect on the challenges it brought and even the market challenges of the last three years, it is time to look ahead. Will we finally get that positive upswing we have been waiting for?
Given global political uncertainty, our national elections next year, and the noise and electioneering rhetoric that this brings, now is the time to focus on what really counts in the long term – true valuations. There is plenty of value in the South African market and, indeed, around the world. It is easy to hear the noise, but the real value is in not listening.
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