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Since the global financial crisis, local investors have been spoilt with good market returns as excess liquidity was pumped into the system in the developed markets in an attempt to resuscitate their economies. South Africa, like other emerging markets, was a key beneficiary of this capital, which helped to push asset prices up.
The developed markets have started to increase interest rates, tapering on their asset purchase programs leading to outflows from the inflow reliant emerging markets. After almost a decade of very good returns in the local market without a significant drawdown (a decline of 20% or more), investors have been warned to expect lower returns going forward.
As can be seen in Chart 1 (below), there has been a downward trend in local market returns. Last year the FTSE/JSE All Share Index delivered a strong return, however, this year has again been tough. The economic fundamentals of the country are weak, a tough environment for companies to grow earnings and thus returns for investors.
Chart 1 : Yearly Returns of the FTSE / JSE All Share Index (1 Jan 2009 – 30 Sep 2018) Source: Morningstar Direct (3 Oct 2018)
There is, however, light at the end of the tunnel. Global growth is projected to be stronger, particularly in the US. South Africa will also benefit from synchronised global growth. Political reform, policy certainty and implementation, if done right, will reignite both business and consumer confidence. This will go a long way in kick-starting the economy. The country entered into a technical recession in the first half of the year. Despite this, growth is still expected to be positive for the year, pointing to a much better second half of the year.
The local market has gone through one of the longest periods without significant drawdown of more than 20%, and as such, it is easy to imagine that such a drawdown could be on the horizon. This creates panic in investors as bear markets cause pain. It is important to remember that recovery is also swift, and in general, markets go up over the long run as illustrated in Chart 2 (below).
Chart 2 : Local Market Investment Growth (Rebased to 100 on Downturns of more than a 20% Decline Source: Seed Research, Morningstar Direct (3 Oct 2018)
The key is staying invested through the tough times. Chart 3 (below) shows that missing the best days in the market will significantly change your fortunes. An annualised return of 14% can easily fall down to 6% just by missing the best 25 days. Therefore, this serves as a timely reminder that as things potentially get tougher in the market, it is important to stay invested so that one can reap the full rewards of the opportunities created.
Chart 3 : Returns Forgone on Missing the Best Days in the Local Market (1 Jan 2002 – 30 Sep 2018) Source: Morningstar Direct (3 October 2018)
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