South Africa is ‘wrecked’ and cash is king! True or not?

Cash is not king

A recent article from Allan Gray points out that although cash has delivered a better return than the JSE over the last year, over the long-term, cash underperforms equities and bonds materially. This raises questions of switching into cash in the short-term to gain better short-term performance. This involves timing the market and many studies have shown that this approach is very difficult.

One needs to base investment decisions on what you need to reach your goals and then stick with the plan, even if this may feel uncomfortable.

Investment return prospects should be considered alongside:

  • An assessment of your needs (risk requirement and risk appetite)
  • Your investment objectives (e.g. emergency fund versus saving for retirement)
  • Your time horizon (short-term versus long-term horizons)

The country is not wrecked

A recent article from Coronation says that in their view the worst is behind us as the economy troughs, and improved growth is in sight.

Although the state is heavily indebted, the private sector has been deleveraging. Household savings have turned positive, food inflation should remain low, and the outlook for employment looks stable and could improve with the government’s infrastructure plan. The recent decline in the oil price will also be a boost for the consumer.

Private sector capital expenditure is positive and the volume of passed building plans has picked up. In addition, excessively low inventory levels have room to recover.

A bumper tourism season is expected with the simplified visa requirements and the weaker currency.

Although more and more bad news has driven domestic sentiment weaker, it appears the rate of deterioration has bottomed. Economic growth is forecast at 0.8% and 1.8% for 2018 and 2019 respectively.

Equity markets positioned for healthy returns

A recent article from Prudential says that current equity valuations have a large buffer for bad news. If current proposed government reforms can moderately lift SA economic growth, then the investment market is poised for strong growth.

The equity market’s price to book ratio of 1.7x is historically relatively low. In the past, from this low valuation level the market has grown strongly over the subsequent five years.

Prudential’s current valuation of SA equities point to a 13% p.a. increase over the next five years.

Other valuation matrix’s point to a five-year equity market return of 12% to 13%.

The good news

The lower the historic returns, the greater the potential for improved returns in the future. Deciding which asset class (cash, bonds, equities) to invest in can be intimidating and most investors fall prey to their emotions when making decisions as opposed to relying on rational thought and researched knowledge.

During times of uncertainty or heightened anxiety, it is always worthwhile to taking a step back and taking stock of your long-term objectives. If your plan hasn’t changed, its unlikely your investment strategy should.

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