The sky is not falling

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By Daleen van Wyk, Communication Strategist

The rand hits new record lows, week after week. Economic growth forecasts are adjusted downward all the time. Business and consumer confidence are at the lowest levels in more than a decade. Labour unrest and job losses, especially in the mining sector, are creating unease. Political tension is building. The Chinese economy is slowing down, causing falling share prices on many stock markets – South Africa’s JSE included. The commodity cycle is in a severe downward phase.

The list of woes currently affecting local and global markets and conversely investment returns, is endless. Many more issues can be added to those mentioned above. What is going on? Will it ever improve? Which asset class would be the best to select for the medium to long term?

In the modern world of information overload investors are bombarded with minute-by-minute updates of how markets fluctuate as new developments or economic events unfold. The current bout of unsettling news reports is cause for much concern amongst investors. Not everybody panics, but the bad news does instill an emotional state of unreasonable fear and a swing towards total risk aversion.

Although history is no indication of what will happen in the future, during times of global economic turmoil it is comforting to look at market movements over the super long term. The feeling of despair has been around before, as often as the irrational exuberance created by bull markets and times of economic prosperity.

The biggest events of the last century each caused (at the time) dramatic market movements. Deutsche Bank tracked these since 1900 in a review of the performance of US stock markets:

  • A bull market from 1915 to 1916, ahead of the First World War.
  • When war finally breaks out in 1917, markets fall sharply and this is followed by a period of post war deflation.
  • After that a strong bull market follows, ahead of the well-documented crash of October 1929 as the great depression kicks in. During this recessionary period, 1929 – 1932, stock prices decline by more than 80%. At the time this was the longest period of recession in the USA since 1900.
  • Markets recover somewhat after that until 1937 – although not reaching anywhere near the highs achieved before the October 1929 crash – when another world war on the horizon dampens confidence and investor sentiment.
  • Word War II ends in September 1945 after which an extended period of steady growth is experienced and the so-called ‘baby boom’ era begins.
  • The next sharp downturn occurs in 1956, again followed by a gradual upturn / recovery until 1973 when an oil embargo by OPEC hits global markets. American share market prices fall by more than 40% between 1973 and 1974.
  • An extended period of growth and strong returns follow but a dramatic market crash, again in October, in 1987 pulls prices back to lower levels when a crisis in the savings and loans industry in the US unfolds.
  • Boom times follow well into the 1990’s but at the turn of the century a war in Iraq and later attacks on America on 9 September 2001 cause share prices to fall by 49% between 2000 and 2002.
  • Only to be followed by upward graphs and exuberant investors yet again. But then … a global financial meltdown, which included the fall of the once much admired Lehman Brothers, caused share prices to fall by 57% between 2007 and 2009.
  • Which brings us to the current phase of downturns, uncertainty, volatility, negative sentiment and falling share prices after a recovery period experienced since 2010.

This brief history of time (which excludes other more minor events on both the up and down side) on the markets clearly shows that bull markets and extended periods of growth do not last, despite investors believing it will while experiencing it, as much as downturns do not go on forever.

This landscape makes investment decisions, especially asset class selection, challenging and requires a calm and rational approach. Biggest question is always what to invest in over the super long term that will deliver the best returns?

According to international financial services company Morningstar investment in (USA) equities by far outperformed investment in commodities and gold between 1980 and 2009. Looking at an even longer term Morningstar’s tables show that small stocks delivered a compound annual return of 11.9% between 1926 and 2009, while large stocks delivered 9.8%, government bonds 5.4% and treasury bills 3.1%.

For South Africa the returns history is somewhat different, although the local market experienced similar periods of boom and bust over the past 100+ years. Equities also outperformed most asset classes over time, but in South Africa there has been a decade of phenomenal growth delivered through property investment. Research by local asset manager Coronation shows that for the ten years to March 2014 investment in property outperformed investments in the SA equity market. This short period of exceptional returns from property is not a long term phenomenon when comparisons are made for the super long term. As with asset class comparisons done for the US market, the research shows that the SA equity market delivered the best returns for more than 100 years when compared to the SA bond market, SA cash and SA property. The ups and downs of the JSE All Share Index are clear in this table:

JSE Source: I-Net/Standard Bank

All this should prove to you that the sky is not falling. Yes, market sentiment and more importantly, the outlook for the short to medium term, is currently rather gloomy. Locally and globally. But it brings with it opportunities for astute investors with a reasoned approach and an understanding that investment is a long term pursuit.

Sources:

Stanlib, Deutsche Bank, Morningstar, Coronation, I-Net/Standard Bank

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