Who are the latest winners?

Offshore equities perform the best in 2019, however…

By Andró Griessel

11 Jan 2020

If you’ve got the impression that your investments have picked up slightly in 2019, you’re right. 2019 was probably the best year since 2015 for the average investor.

However, keep in mind that it had the benefit of starting from a low base, and that performance momentum should be maintained in order to continuously achieve a decent rolling 12 month return for the next 4 or 5 months.

See the asset class returns since 1995 below.

The red in each given year indicates the worst performing asset class and the green shows that year’s best performer. All growth figures have already been converted to rand.

Foreign equity and offshore property performed the best in 2019, while foreign cash performed the worst and offshore bonds the third of the worst.

The reasonable performance of foreign assets was not, as often before, thanks to a weakening rand, but despite a rand that was strong. The values ​​of both foreign property and equity have increased considerably in their base currency.

South African equities and bonds delivered a very deserving performance and gave pension fund and annuity investors (due to the large exposure to this as a result of Regulation 28) a welcome break after a very low four-year yield.

Once again, South African cash could hardly beat inflation after tax (especially if you are on a high marginal tax rate).

Although South African listed property steadily decreased in 2018, it still failed to turn around in 2019. This asset class is a better indicator, as opposed to South African equities, of how well ordinary people are doing, in my opinion. They may have to endure this pain for a while longer.

Long-term performance

In 25 years, South African listed property was still the best performer of all asset classes (despite the past five years of disappointing performance) and the beloved dollar was still the weakest. Unfortunately, you cannot conclude that this will be true for the next 25 years.

Over the last decade, only foreign equities and foreign property have managed to achieve double digit growth (after cost). They performed considerably better than the rest. This fact is regurgitated almost daily on financial platforms. Even some respected fund managers have (in my opinion) succumbed to the temptation of making “easy money” by simply focusing their marketing on their offshore funds and welcoming people who want to invest offshore NOW with open arms.

I believe that basing your investment decisions on the performance of the last 10 years, linked with the rhetoric that “South Africa is the next Zimbabwe”, entails a whole range of fallacies.

I would like to unpack this offending statement in detail in a separate article, but as a point of departure, I wish to direct readers’ attention to the following: Take a look at the four years right at the beginning of the period under review, namely 1995 to 1998.

The South African stock exchange generated a meager 1.08% per annum over this period, while foreign shares returned an average of 34.5% per annum.

The reason for this was clear as day for many people and very simple: “The ANC has no idea what they are doing. Black economic empowerment is the main reason why the JSE is performing so poorly compared to other countries.” Another argument was that “emerging market debt levels are simply too high, and they will soon collapse one by one”.

By the turn of the millennium, you would have more easily admitted to stealing food from orphaned kids than admitting you still had funds in South Africa – everything just had to be taken offshore.

Sound familiar?

However, over the following 14 years (until the end of 2012), the JSE delivered an average return of 19.29% per annum, compared to 6.15% per annum for foreign equities.

If we follow the same trend of thought as above, how was this turnaround possible? As tempting as it is to give overly simplified reasons as explanations to complex and multi-dimensional problems, it is not the correct approach.

Believe me, I wish it was as simple as extrapolating the recent past into the distant future, but that’s not how things work.

I am still not sure that the combination of low long-term returns coupled with high liquidity makes up for the fact that these assets are negatively correlated with South African growth assets. I still prefer South African cash and bonds as stabilizers in a portfolio compared to these two asset classes.

However, it is possible for both asset classes to deliver proper returns in rand terms this year.

Over the last 25 years, only South African listed property and foreign listed property (high risk) would have outperformed a diversified portfolio invested 25% in foreign stocks, 10% in foreign property, 10% in foreign securities, 25% in local equities, 10% in local property and 20% in local bonds, which is simply rebalanced annually regardless of what is happening in the markets.

Yet I hardly see anyone with such a portfolio who leaves it alone and rebalances every now and again. Everyone is chasing the pot of gold at the end of the rainbow with extremely questionable long-term outcomes.

I’ll end off with the same age-old advice: Don’t waste your breath trying to predict the best asset class for the coming year. Instead, compile a portfolio that (a) has the right ingredients in the long run to achieve your goals/desired return, (b) be able to withstand a variety of variables and changing environments and (c) measure your progress towards your goal at least annually.

Andró Griessel is a certified financial planner and managing director of ProVérte Wealth & Risk Management. Contact him at info@temp.sg-build.co.za

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.