Better times ahead for SA Inc

By Adriaan Pask, CIO at PSG Wealth

The last five years have been ladened by market volatility, with investors exposed to local equities suffering the most as returns continued on a general downward trend. South Africa’s economy has undoubtedly faced its fair share of headwinds, however, we are seeing signs of improvement. Here’s why we believe better times are ahead for SA Inc:

Interest rates and inflation remain relatively low and stable

We believe that South Africans won’t be seeing any further rate hikes in the near future, which means the cost of capital will cease to rise and interest rates could remain low.

Returns from domestic bonds could support equities

Long-term government bonds are currently yielding above 9%. Yields at these levels should be able to support investment portfolios, particularly during volatile market conditions. This means that even if domestic equities have a poor run, bond yields should support portfolio returns.

The JSE is relatively cheap

With a decline of over 38% from its best levels in the past few years, our stock market appears to be super cheap. In fact, SA has some of the lowest priced stocks compared to other emerging markets. This offers great opportunities for savvy investors, if history is anything to go by. The people who bought into markets during the 2008 Global Financial Crisis (GFC) can tell you how rewarding it is to invest when everyone else is fearful.

SA still rated investment grade

Moody’s kept our credit rating one level above sub-investment grade, with a stable outlook. This presents a great opportunity for SA to improve on its fiscal policy and align itself with an economic strategy that builds confidence and facilitates growth ahead of the next scheduled rating decision in November.

SOEs are on their way to recovery

The relationship between South Africa’s economy and its state-owned entities (SOEs) is inseparable. As part of President Cyril Ramaphosa’s clean-up mission, these entities are currently undergoing structural changes, financial audits and, with the ousting of corrupt management, SOEs could be restored and become sustainable organisations. When the SOE monetary policies are back in shape, SA Inc will certainly bounce back.

Boom follows bust

The aftermath of the GFC can be used as a case study to understand the nuances of market cycles. Cheap risk assets were in abundance after the GFC, steadily regaining value in the years that followed. From 2009 to 2013, markets boomed with investors generating up to 20% returns from risk assets. High returns were a result of cheap assets available in the aftermath of the GFC.

Timing the market is futile

Investors often make the mistake of pulling out their investments after a period of underperformance, essentially selling at a low. Investors continue withdrawing until the fund starts to outperform. Just before performance plunges again, investors realise that the fund has had a good run and they start to invest into it, essentially buying at a high.

The graph below illustrates how money has flowed into and out of a popular South African balanced fund.

An illustration of how investors incorrectly time the market

This shows how investors almost always get the timing completely wrong. As a result, they are invested more in the fund’s under-performance than in its overperformance.

Sticking to a long-term investment strategy provides a buffer for your investments in a wide range of market conditions. A sound investment plan, coupled with the right amount of patience, can help investors ride out the peaks and valleys of the market to achieve their investment goals.