By Andró Griessel
Opinions that are not facts can cost you dearly
There is a saying that goes “everyone is entitled to their own opinion, but not their own facts.”
It feels to me that recently everyone has a convincing opinion on foreign investments, but how aligned are these views with the facts and how much is possibly speculation based on flawed assumptions?
In today’s article I will try and compare some of the most popular opinions and assumptions against the facts and hopefully challenge one or two readers to think a little deeper about some of these opinions.
All return figures in the article have already been converted to rand.
Opinion 1: Foreign shares have outperformed South African shares over the last 10 years.
Fact 1: This is largely a fact! Over the past 10 years the JSE (the 19th largest stock exchange in the world) performed poorly against the other larger stock exchanges, particularly against the US stock market.
There is no doubt that you would have generated significantly more wealth by investing 100% in US shares as opposed to investing locally. Compared to the Nasdaq index, the gap is even bigger, although I would go as far as to say that this index has also made all the other indices look bad.
It should be clear from the accompanying table that developed countries (blue) have outperformed developing countries (orange).
Opinion 2: South Africa has even performed worse compared to other developing countries.
Fact 2: The JSE’s performance of 11.13% per annum over the past ten years was weaker than the 12.77% of the emerging markets MSCI index, although this statement is technically only half true.
Asian stock exchanges experienced a very good period. Developing countries (excluding Asia) produced a meager average of 7.05% per annum over the same period. Therefore, South Africa performed much better that most other developing countries.
Opinion 3: The future looks like the recent past, in other words South Africa will produce a substantially weaker performance than that of foreign investments (especially the USA) over the next ten years.
Fact 3: The above can unfortunately be seen as nothing more than speculation. See, for example, the performance of these exchanges over the previous ten years – from 2001 to 2011. Do you see the opposite trend, where developing markets comfortably outperformed developed markets? Pay special attention to the changes in ranking from one decade to the next. If you used the same reasoning – that the previous ten years’ winners will subsequently be the winners of the next ten years – as part of your investment strategy ten years ago, you would have been relatively disappointed.
Can the same fate possibly be waiting on many investors?
Opinion 4: Unemployment, low growth and high debt levels will lead to South Africa performing worse than other markets over the next ten years.
Fact 4: An attempt to make a significant connection (whether positive or negative) between the performance of different countries’ stock exchanges and their unemployment rates, economic growth rate and debt levels, fails miserably.
See the table below with the correlation based on unemployment, growth, and debt figures for these countries versus their historical performance. Remember that 1 indicates perfect correlation, -1 indicates a perfect negative correlation and 0 shows no correlation.
In all cases, there is basically no correlation. Ironically, there is a slight negative correlation between unemployment and the stock market performance. Please note that the US debt level is currently north of 130% of the gross domestic product (GDP); Japan’s is over 200% and both Canada and Britain are about 110%, compared to South Africa’s level of 80%.
Opinion 5: The rand weakens at an increasing rate compared to the dollar and for that reason foreign investments will always have an advantage over local investments. It also means that you as a South African become poorer at significant rate.
Fact 5: Over the past 20 years, the dollar has strengthened against the rand at an average rate of only 2.59% per annum. This figure is slightly misleading due to the initial value of the rand in 2001, therefore it would make more sense to look at the 30-year figures.
Over the past 30 years, the dollar strengthened against the rand at an average rate of 4.86% per annum. However, we still do not see an increase (over long periods) in the rate at which the rand has been weakening.
The general view that an investor has become poorer due to the weakening of the rand against the dollar, is only true if you, for example, kept your rands under your mattress for 20 years and then exchanged them for dollars. You are obviously going to be able to buy much less with it.
In practice however, this is not what people do. The interest rate differential between South Africa and the US compensates investors for this weakening. Therefore, you do not become substantially poorer, if at all.
I wish I had a crystal ball to look through to see what the next 10 years will bring, but alas. I just want to leave you with the warning that oversimplified answers do not work for complex questions and that it will be to your benefit by making sure you follow a thorough process in constructing your investment portfolio, given the prevailing circumstances. The past ten years’ returns by itself do not qualify as the basis of a good process, in my opinion.
Andró Griessel is a certified financial planner and managing director of Woodland Wealth. Contact him at andro@woodlandwealth.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. Woodland Wealth is an authorised financial service provider FSP5966 (Reg nr. 2002/024416/07).