Gloomy sentiment brings good investment opportunities for South Africans

Currently, as a South African, investing appears difficult in an uncertain post-election environment. We look at investing in uncomfortable times and detail some regular investment mistakes that we should all avoid.

Investing in uncomfortable times

We draw on a recent article from PSG Asset Management, which supports our views that the long-term local investment horizon is attractive.

Over the last five years, pure SA equity returns have been a dismal 4.7% p.a., which is below average inflation of 5% p.a. If we look back to 1979, 1992, 1998, 2003 and 2012, each of these years were preceded by very poor five-year stock-market returns. However, they were then followed by double digit returns for at least the next three years. Interestingly, with the benefit of hindsight, each strong recovery has always looked obvious.

The lesson here and one worthwhile considering, is that when sentiment is poor (current attitude in SA), and market returns are low, there are often many good investment opportunities to be found. Unfortunately, these are often missed by the average investor.

Gloomy sentiment brings good investment opportunities

Prevailing negative political and economic headlines naturally provoke a fearful and emotional response. Many investors have looked to the election to provide some signal or at least less uncertainty so that they can make investment decisions more confidently. Yet, buying opportunities are not accompanied by a ‘ringing bell’. They are found through in-depth research and replacing emotion with rigorous investment processes.

Such an example are SA government bonds, which according to PSG, are currently priced at junk status when compared with other emerging market countries. Therefore, any certainty that we will not be downgraded into the future should drive bond returns materially.

The most difficult issue to determine, is how much of the bad news is discounted into equity and bond values?

In our opinion, most of the bad news is priced into SA local shares, which is reflected in their historical low valuations. Key is to ensure your investments are in the appropriate asset allocation to benefit from these low valuations, but to still match your personal risk profile.

Basic investor mistakes to avoid:

Not knowing your investment goals – Not having a time horizon and return expectation.

Chasing Performance – Past performance is not a good indicator of future performance. Rather select a reputable fund manager with a consistently good, long-term track record.

Falling for the hype – Listening to the media sensationalising or following the latest craze. Often this hype is all already priced into the investment price, leading to disappointment.

Expecting smooth sailing – Volatility is a natural aspect of investment markets. Long-term investing generates the best returns over time.

Buying popular assets and ignoring cheap ones – Be careful of overpaying for the ‘trendy’ investment or expensive ‘quality’ shares. The dull and boring often provide the best risk-adjusted returns.

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