The markets have not been kind to investors over the first quarter of 2018. Whether one looks at global or local markets, negative returns were on offer across the board. The JSE ALSI gave up 4.2 % in March for a total first quarter return of -6 %. That made it the worst performing quarter since the second quarter of 2010 which delivered a negative return of -8.2 %. However, the month of April 2018 was different. The stock market rallied on the back of the weaker rand, new political landscape unfolding, improved confidence and the expected better economic outlook and policy certainty under the leadership of Cyril Rhamaposa. So far (year to date), we have seen positive sentiments towards South African equities and bonds continuing against a backdrop of volatile international markets.
Implications of the news
The positive stock market returns in April 2018 came as a relief to our investors who might be tempted to switch to cash in these volatile and challenging times in the market.
Source: Investec Asset management
The above cumulative returns suggested that cash is the riskiest asset class for any long-term investor. Cash as a long-term asset class barely keeps up with inflation. Consequently, investing in cash, as a long-term investment strategy, will surely erode the real value of your investment over time.
Source: Investec Asset management
In the short term (last 2-3 years), however, cash has delivered cumulative returns greater than growth assets such as equities and properties. The other common mistake which long term investors should avoid is trying to time the market when returns are low, negative or when markets are too volatile. Trying to time the markets between asset classes is extremely difficult to do correctly over time.
Cost of Market timing
Market timing is the act of moving in and out of the market or switching between asset classes based on gut feelings or using predictive methods such as technical indicators or economic data. Because it is extremely difficult to predict the future direction of the stock market, financial research argues that investors who try to time the market, especially mutual fund investors, tend to underperform investors who remain fully invested. The graph below shows a hypothetical example to illustrate the impact of missing the best 10 and 20 months of the market over a period between May 2002 and April 2018. We have used the JSE All Share returns for illustrative purposes. Our analysis has incorporated the Stefi (Cash) return for comparison purposes over the same period. Our analysis is based on a R1 000 000 lump sum initial investment. The graph below shows that an investor who has remained fully invested in the market over the 16-year investment horizon would have grown their investments to approximately R8.3million. An investor who has tried to time the market and missed the best 10 months would have lost out on approximately R4.5million of their potential investment.
An investor who has tried to time the market and missed the best 20 months would have lost almost R7.0 million, while the cash investor lost almost R5.0 million. From the analysis above, CSAM advises our clients to always remain invested to achieve their long-term investment objectives. Our experience, skill and qualifications have taught us that factors that drive markets in the short term are fear and greed. However, over the long-term fundamentals and valuations play a more important role in determining the market direction.
Markets during the month
- SA Equites, as measured by the FTSE/JSE All Share (ALSI), outperformed global shares (measured by the MSCI World) and staged a solid performance in the first three weeks of the month, before trading sideways. Returns in April increased by 5.4% in April 2018, supported by a surge in resource shares and a weaker rand.
- The MSCI World Index was up 1.1%.
- The SA Listed Property Index (SAPY) recovered by almost 7.7% in April 2018, partly on the news that an independent review found no evidence of executive breaches in governance rules by the real estate investment trust, Resilient.
- The Bond Index (ALBI) ended the month down 0.7%.
- The rand ended the month weaker against all major currencies:
- 7% weaker against the US dollar,
- 5% weaker against the Pound, and
- 0% weaker against the Euro.
The rand lost value against major currencies as the market focus shifted to geopolitical events, including the US/China trade tariff dispute.
- Investors should try to NOT do the following:
- Time the market.
- Make emotional decisions based on short-term uncertainty.
- Investors should always remember that, on average, growth assets will provide a better return over the long term (a minimum of 5 years, ideally 10).
- Understand your long-term investment plan….and stick to it.
- Be disciplined and stay invested.
- Enlist the advice and assistance of a licenced and professional financial adviser to co-create an investment plan that is underpinned by your financial needs and risk appetite.
Reasonable steps have been taken to ensure the validity and accuracy of the information in this post. However, Cornerstone Asset Management (Pty) Ltd does not accept any responsibility for any claim, damages, loss or expense arising out or in connection with the information in this document. The content used in this document is sourced from various media publications, the internet and CSAM internal research. Cornerstone Asset Management is an authorized financial services provider, FSP No. 45700