Market pain brings opportunity for investors

The JSE All Share Index is down 14% this year and has been flat over the last five years. The past few years have been extremely testing times for investors. At Investonline we have been cautioning our clients for the last three years that the markets posed a risk in the shorter term and that a less aggressive investment strategy needed to be adopted.

Equity markets have always fluctuated, and this five-year period of no performance has been a slow, painful correction after six strong years of 24% per annum growth to 2014. It is difficult to time a rebound, but what we do know is that the JSE All Share Index is showing a lot more value than over the past five years.

An interesting analysis is looking at the 5-year returns of our proxy moderate portfolio over the last 14 years. Currently 5-year returns are at their 14-year low of 7.0%. The high was 27.5% in 2008.

In a recent PSG Asset Management article, they write about the market trend where the best returns are born in times of fear and uncertainty. We subscribe to this notion and believe that the SA equity market is offering some great investment opportunities in these unfavourable times and that now is not the time to flee and disinvest. Below are the salient points of the article:

The endless and seemingly unsolvable problems of the country (the worst of times) could be the (best of times) for investors.

Exploring market cycles is key to investment success. There are ups and downs and the goal is to exploit the extremes.

Rolling 5 year performance figures

South Africa is at the low end as the signs point out:

  • The media consistently point out the negative
  • Business confidence is close to a 40-year low – at similar points to the Rubicon speech in 1985, Chris Hani’s assassination in 1993 and the financial crises in 2009.
  • Listed JSE companies stating they are experiencing their most testing times ever.

But Mid-Cap shares (a good proxy for pure SA companies) are at historical low valuations.

Valuations closely follow business confidence, as both are proxies for investor sentiment. This highlights the low confidence and fear that is priced into these shares.

Investonline’s views

Investor risks both locally and globally continue to exist, but a lot of these risks are now being priced into the markets. A conservative investment strategy is still recommended in the short term.

Although clear value exists in SA local equities, the market is likely to “tread water” until the election next year (probably in May). This is because meaningful policy changes will only be announced after the election and once Ramaphosa has secured a higher majority for the ANC.

Until then, Ramaphosa has to pander to the social conscience of the electorate as was evidenced in a disappointing, no action, mini budget.

Perfectly timing the up turn in the market is impossible, but as our 5-year rolling return graph is at a low and given the historical low valuations of local SA shares, we are near the bottom and prospects of far better returns are in sight.

To read the full PSG article please click here: The best investment returns are born in times of fear and uncertainty

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