But reflecting on the past provides valuable food for thought

By Andró Griessel

27/1/2024

Traditionally, in my first article of the year, I review the preceding year in the financial markets—examining long-term trends and considering their implications for the future. I do this without attempting to play the role of a modern-day Siener van Rensburg, as we all know how that ended.

2023 will be remembered as a year with relatively favourable returns, akin to a cowboy dismounting a bull’s back unscathed after eight seconds that felt like eight minutes.

The average return for funds in the South African Multi-Management High Equity category was around 12.25%. It is indeed a very satisfying return, but it is necessary to mention that the total return was realised in two months, namely January and November.

The rest of the year was a rodeo without any forward momentum. An overweight position in foreign stocks was, as usual, the honey that made the investment porridge a bit sweeter.

Refer to the graphic and table below depicting the spectrum of returns for 2023 and over 20 years (all returns have already been converted to rand).

From this, a few points for consideration emerge:

• The past ten years have been a very difficult period for investors in emerging market stocks, and certainly so for South Africa. It represents, by far, the smallest margin by which stocks outperformed cash over all the periods under review.
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  Understandably, many investors who had exposure to emerging markets are wary.
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• Further, notice emerging markets’ performance over three, five, and ten years compared to that of foreign stocks (mainly developed countries, dominated by the USA).
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  These periods of massive relatively weaker performance have led to a situation where emerging markets are currently at a 60-year low compared to American markets.
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• Over all periods longer than three years, a cash investment in South Africa would have yielded better rand returns than a foreign cash investment. The idea that we are rapidly getting poorer because the rand weakens by between 6% and 7% per year is simply not correct.
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  Inflation and interest rates are something to keep an eye on. So far, South Africa, especially for an emerging market, has been surprisingly stable in this regard.
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• We tend to think of local vs. foreign stocks as if they are only two different asset classes.
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  It is important to keep in mind that there are about 80 stock exchanges in the world; with about 25 where sensible investments can be made. The JSE is the 19th largest, while our economy is the 37th largest out of 177 countries in terms of gross domestic product (GDP).
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  Around August 2023, we accounted for less than 2% of the total market capitalisation of these markets. Traditionally, South Africans’ exposure to local investments, however, is north of 50%. The New York Stock Exchange and the Nasdaq in the USA cover more than 42%.
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  So, when you invest in a global index-linked fund, you must be very comfortable with significant exposure to America and the US dollar.
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  Over the past ten to 15 years, this allocation has borne wonderful fruit. The question is whether some of these fruits are reaching their sell-by date.
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  In other words, your positioning regarding the dollar/USA and the rand/SA is expected to determine your comparative returns over the next ten years.
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  To assume that recent history will simply repeat itself would, in my opinion, be a mistake. Investors may need to look beyond these two markets.
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• Further to the point above: The so-called Magnificent Seven global stocks’ market capitalisation is currently larger than that of any other stock exchange (in total) on which they are listed.
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  Let that sink in.
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Even the tallest trees do not grow into the sky, but investors in these companies, at current prices, must expect them to do so. Here are the seven with their current price-earnings ratios (PE):
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• Apple (32)
• Microsoft (39)
• Alphabet (Google) (28)
• Meta (Facebook) (35)
• Nvidia (79)
• Amazon (81)
• Tesla (67)

• After strong performances in 2020 and 2023, gold as an investment is again on many people’s lips. Although the long-term returns (as the table and graphics show) are reasonable, investors should keep in mind that it is not a stable investment.
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  Gold has delivered a negative calendar year return in seven of the past 29 years (24% of the time). I also see a commentator writing that one of the benefits of gold is that you can take it with you on the plane if the proverbial paw paw hits the fan. This is not true since you can currently only take 1 kg of gold with you before additional taxes come into play.
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  The recommendation that amateur investors, who like gold, should rather invest in gold mining companies is also, in my opinion, not a good one.
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  Gold mining companies, due to the cyclical nature of the industry, make very poor buy-and-hold investments while volatility is extreme and dividend payments sporadic. Those venturing into these waters better keep their fingers permanently on the trading button.
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• As a final point: A very popular but oversimplified train of thought is that a chaotic political environment or an incompetent government leads to poor returns on listed stocks and therefore that the reverse, namely a stable environment and a responsible ruling party, will lead to good returns.
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  Turkey and Argentina have gone through hyperinflation and dramatically weakening exchange rates in the past two years. In dollars (not in their own currencies), their stock markets have returned 73% and 118% over the two years, respectively, compared to “bastions of stability” like gold’s 9%, Australia’s 5%, Canada’s -2.9%, and Germany’s -7%.
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  Remember that the best opportunities usually hide where no one is looking.
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In conclusion: This is an election year. Expect shocking statements and headlines and keep in mind that emotion is not your friend in rational decision-making. Get the facts, look at realities instead of illusions, and try to make reasoned rather than emotional decisions about your investments.

Andró Griessel is a certified financial planner and managing director of Woodland Wealth. Contact him at info@woodlandwealth.co.za.

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.