The JSE’s short-term pain
But there is a longer-term story.
Eight of the 10 best performers over the past year were mining companies, while the uglies include Tongaat Hulett and Massmart. Image: Moneyweb
The past 12 months have been rather dismal for local asset classes. Despite the stock market rally at the start of the year, South African equity and listed property have both delivered negative double-digit one-year returns to the end of November.
As shares make up the largest part of most balanced funds, these portfolios have also struggled. The biggest multi-asset high equity funds in the country are currently showing 12-month performance between -3.5% and -7.5%.
For investors, this has compounded what has already been a sustained period of weak returns from local assets. Including dividends, the FTSE/JSE All Share Index (Alsi) has grown just 3.39% per annum since the start of December 2014. Given that the dividend yield on the local market is currently around 3.5%, this illustrates that, at an index level, the JSE has effectively gone sideways over this period.
A year of pain
The last 12 months have, however, been particularly tough. As the table below shows, every major market index is lower over this period, apart from the resources index, which has shown a minor gain.
What is particularly notable is that this negative performance has predominantly come in the last three months. The Alsi closed at 58 668 at the end of August. By the end of November, it was at 50 663.
The table below shows how heavily the major indices have come off since the start of September. Resources are also down over these three months, meaning that every part of the market has fallen.
It is worth pointing out that mid and small caps have not performed as poorly as the wider market in either of these periods. This is interesting given that this part of the market is most exposed to the South African economy. A number of analysts have also been commenting on how much value there now appears to be in these sectors.
Read: What Clover is telling us about the state of the market
In fact, over five years the mid cap index has marginally outperformed the Alsi. Small caps have, however, underperformed.
Nevertheless, there has really been little differentiation between these sectors if one looks at their five-year performance. As the graph below shows, all parts of the market have really moved together since 2013. There was a brief period in 2016 when mid and small caps delivered better performance, but they have since come off.
It is worth pointing out that mid and small caps have not performed as poorly as the wider market in either of these periods. This is interesting given that this part of the market is most exposed to the South African economy. A number of analysts have also been commenting on how much value there now appears to be in these sectors.
Read: What Clover is telling us about the state of the market
In fact, over five years the mid cap index has marginally outperformed the Alsi. Small caps have, however, underperformed.
Nevertheless, there has really been little differentiation between these sectors if one looks at their five-year performance. As the graph below shows, all parts of the market have really moved together since 2013. There was a brief period in 2016 when mid and small caps delivered better performance, but they have since come off.
It is understandable for investors to feel uncomfortable about these figures. This has been a sustained period of market weakness.
Over the last five years, the Alsi is up 5.51% if you include dividends. Over the same period, you could have earned 6.88% in cash if you use the short-term fixed interest composite index (SteFI) as a benchmark.
Bigger picture
However, there is a longer-term context that should not be ignored. In the first five years after the global financial crisis, the JSE was roaring. As the below table shows, four of the five calendar years in this period delivered high double-digit returns:
The average annual return over this period was 20.4%. That is substantially higher than the market’s long-term average of around 14%.
If mean reversion is inevitable, then these levels must be unsustainable. They had to moderate, and they did.
One could even argue that during this period investors received returns ‘in advance’. The stagnation of the market over the last five years has simply taken the JSE more or less to the place it would have been if it had grown at more normalised rates over the full 10-year period.
On a 10-year view, the Alsi is up 12.32% per annum. The SWIX has seen annualised growth of 13%.
These numbers are lower than the long-term average, but it’s important to consider that local inflation has also been lower than its historical average over this period. This means that at 6.5% to 7% above inflation, this level of return is just about what local equity should be expected to deliver.
The lesson for investors is that you have to take a longer-term view when looking at equity market performance. Sometimes you are told that this should be at least five years, but often that isn’t even enough.
Stock markets can go through long cycles, and you have to be able to see through these to the bigger picture. The JSE has been dismal for nearly five years, but that doesn’t mean it is broken. If you are a long-term investor, the reality is that you have done perfectly well over the last decade.
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