Monthly Market Update
September was another eventful month for South African economics. The SARB kept interest rates unchanged at 6.5% which was in line with market expectations and the August inflation figures 4.9% announced in September surprised the markets on the downside. The unfortunate GDP figures announced early in September showing that South Africa slipped into a technical recession. Hot on the heels of this news, President Ramaphosa outlined a national economic stimulus package that aims to kick-start the economy by reprioritising the current expenditure mix to target growth and employment generating projects.
On the global front we saw the Fed raising interest rates by 25bps to 2.25% in September and signalled the likelihood of further rate hikes before year-end. The risk sentiment towards emerging markets improved and volatility eased during the month as some of the EM countries changed their monitory policies. Turkey being the most notable/notorious EM increasing its interest rates, highlighting the independence of its Central Bank to its politics.
Implications of the news
The stock market and economy
Following a technical recession announced early September, the local equity market lost its August gains down 4.2% for the month and is down 3.8% Year to date. Although it is often inferred that lower market returns are a direct consequence of a country’s economic contraction, research has clearly shown that market performances are often quite disconnected to a country’s economic performance. In today’s integrated world, market performances are driven by both global and local markets forces. For example, the JSE is dominated by companies which have operations in foreign countries. Domestic returns for these companies are driven by a combination of returns from their international operations and rand fluctuations, often despite poor local economic conditions.
The Market movement (CSAM Perspective)
The graph below shows that the local JSE has tracked sideways for the past four years. As much as we understand that the last 4 years sideways market movement have created much anxiety for our investors, we believe that the current extended markets present more of an opportunity than a threat to our investors. Returns are neither predictable or certain, so there is always risk. However, we firmly believe the only way of mitigating such risks is to invest in a well-diversified portfolio across different asset classes and fund manager styles, and to stay invested.
The JSE All Share Price Since January 2017
Client Perspective and Academic Research findings
Our experience has taught us that during heightened volatility and low returns, investors too often make emotional and incorrect investment decisions. Academic research in the field of behavioural finance has documented recency bias as one of the primary drivers behind investors making emotional and destructive investor decisions. Investors who exhibit recency bias are inclined to focus disproportionality on the most recent outcomes, such as the recent stock market declines or sideways movement and conclude their investment decisions accordingly.
Rather than doing extensive research on current market valuations vs historical market valuations, etc, these types of emotional investors behave on a reactive basis. When they react emotionally based on the most recent market action, they disregard important considerations developed in their investment mandate, such as their investment time horizon, volatility tolerance range and asset allocation. It is well documented that when investors exhibiting recency bias make poor market timing decisions, they underperform more rational investors who stick to their investment mandates.
While poor monthly, year to date, and three-year returns might trigger investors “recency bias” and cause investors to switch out of equities or balanced funds into Income and/or Cash funds, history shows that stock markets go through weak periods and then, just as investors give up, the market picks up. A recent article by Sharenet Analytics confirms our view that the stock market is cheap and patient investors who stay invested will be rewarded in the medium to long term
CSAM encourages our clients not to make decisions based on the current market environment, but rather to consider their long-term investment horizon, risk profile and asset allocation as developed in their investment mandate. We might not know the exact date and time when the upturn will happen, however we think the current market environment offers extensive opportunities for the patient investor. We believe that South African growth assets (equities and listed property) are offering tremendous value at present.
Markets During the month
Local equity market (as measured by the JSE All Share Index) did not follow the global uptick in September 2018 with the firmer rand hurting domestic returns during the month. Global equities rose marginally by 0.6% while the FTSE/JSE All Share Index retraced by 4.2% in September 2018. The down turn in the local market was largely due to losses in the Industrial sector which retraced by 8.1%. Financials lost 2.0% but Resources were marginally up by 0.3%.
Listed property (SAPY) edged 2.6% down in September 2018, while the Bond index (ALBI) added 0.3%, supported by the rand strength. Cash posted a modest 0.5%.
The rand ended the month stronger against all the developed markets currencies, up:
- 3.4% against the US dollar
- 3.1% against the British Pound
- 3.9 against the Euro.
The SA rand was the third-best-performing currency globally against the US dollar for the month. However, the rand was quite volatile in the interim, weakening above R15.50/USD, but coming back sharply as risk sentiment towards emerging markets improved and volatility eased.
The past 3 years have been characterised by low returns across growth asset classes which left many investors nervous about what the future holds. History shows that stock markets go through weak periods and then, just as investors start to give up on their positions, markets recover. CSAM encourages our clients to actively avoid “recency bias” and to rather focus on their mandated objectives. Markets are always positively skewed and long-term patient investors are always rewarded.
Reasonable steps have been taken to ensure the validity and accuracy of the information in this document. However, Cornerstone Asset Management (Pty) Ltd (CSAM) does not accept any responsibility for any claim, damages, loss or expense arising out or in connection with the information in this document. The content used in this document is sourced from various media publications, the internet and CSAM internal research. Cornerstone Asset Management is an authorized financial services provider, FSP No. 45700