This article was first published in the first-quarter 2016 edition of Personal Finance magazine.
My “stock picks” column at the start of the year is traditionally a review of the past year and a none-too-serious gaze into the crystal ball for the year ahead. It can’t be too serious, because an equity investment should be for five to 10 years, not just the next 12 months. But, serious or not, I am pleased to report that the (imaginary) Personal Finance portfolios did fairly well in 2015.
We have become accustomed to unusually high returns from stock markets over the past seven years. Over the past 115 years, the average annual real (after-inflation) return of the Johannesburg Stock Exchange (JSE) has been about 7.4 percent, according to Credit Suisse. In the recent past, returns from the JSE were never below this, and it has often done two or three times better. This can be explained by the weight of investable funds looking for a home, a resource boom (which has collapsed over the past two years) and the successful internationalisation of many of our leading companies … Naspers, Aspen, Bidvest and SAB Miller are examples that spring to mind. We have also had former leading companies under-perform badly, and here the centenarian, one-time cornerstone of our mining and industrial economy, Anglo American, serves as an example.
I expect that, for the next few years, we will have to put up with average or below-average returns. The bearish, or negative, view is that we are moving into a period of no growth throughout the world, while the bullish view is that the global economy will slowly recover to a period of low growth. Human ingenuity will probably ensure that both views turn out to be incorrect, but I am sure we are going to experience average annual real returns of close to 7.4 percent for the remainder of this decade, which has now passed the half-way mark.
The Credit Suisse Global Investment Returns Yearbook 2015 provides a great deal of interesting information. In January 1900, stock markets’ percentage of the total share capitalisation stacked up as follows: United Kingdom, 25 percent; United States, 15 percent; Germany, 13 percent; France, 11 percent; Russia, six percent; with Australia at 3.5 percent and South Africa at 3.3 percent. Now, 115 years later, Russia is off the radar and China accounts for a modest two percent of the global market because of the lengthy period of communist rule in both nations. As one might expect, the rankings have changed dramatically, with the US now leading the way, with a 52-percent share of the international market in 2015, followed by Japan (7.8 percent) and the UK (7.2 percent). South Africa has vanished from the rankings, Australia’s share is 2.6 percent and Canada’s is 3.3 percent.
The South African equity market has been one of the world’s most successful, with an average real return of 7.4 percent over the past 115 years. According to Credit Suisse, the world markets come in at an average return of 5.2 percent, with the US at 6.5 percent, the UK at 5.3 percent, Switzerland at 4.5 percent, Japan at 4.1 percent, Germany and France at 3.2 precept and China at –3.2 percent. (All returns are in US dollars.)
There were times in 2015 when it appeared that a correction was taking place in the South African market, but by mid-November the JSE was again flirting with all-time highs. The high market seems to defy the reality of poor economic data, power outages, snail’s-pace growth, alarmingly high unemployment, unfathomable corruption, student and labour unrest, and poor leadership at many levels – particularly government – that has been unable to address many of the pressing issues of inequality, grinding poverty and service delivery. Fortunately, the market is now far more dependent on the world economy, rather than just the South African economy, to the great benefit of South African shareholders and the JSE.
As far as company news is concerned, the oldest industrial company listed on the JSE, SAB Miller (listed since 1897), became the object of a take-over bid from a larger Belgian rival, Anheuser-Busch InBev (AB InBev), which began life in 1847 as the Labatt Brewing Company. This bears testimony to how successful well-managed, South African-originated companies can be in the highly competitive international arena, but it will be sad to see it swallowed up by AB InBev after all these years of excellence.
Others showed how easy it is to come unstuck in foreign lands, as MTN and Standard Bank followed Tiger Brands in getting “bogged down” in Nigeria.
Naspers is the other spectacular success story, in that it just seems to be getting it right internationally. So it is not all doom and gloom for South Africa and our entrepreneurs, who have overcome great obstacles to achieve what many thought impossible. Despite everything, it is clear that investing in South Africa is evidence of the triumph of optimism and perseverance over adversity.
The rest of the world also made heavy weather of 2015. The heartbreaking violence in Africa and the Middle East resulted in the escalating flight of people looking to escape to a new life in Europe. Growth in Europe slowed. Greece was still the problem child, while Germany toiled to keep the euro-zone engine going and the UK began debating whether or not to remain within Europe. Growth in Japan and the US was unable to gain any traction. The slowdown in China continued. India threw out a corruption-riddled government, but the economic advantages this may bring will take time to materialise.
South African portfolio
The (imaginary) Personal Finance South African portfolio had a good year, advancing 17 percent compared with the more muted 6.48 percent return of the FTSE/JSE All Share Index (Alsi). The returns of the 10 equally weighted shares in the portfolio were: Bidvest, 13.14 percent; Glencore, –54.68 percent; Mondi, 67.09 percent; MTN, –21.32 percent; Netcare, 22.31 percent; Old Mutual, 34.05 percent; Reinet, 17.9 percent; Standard Bank, 7.95 percent; Steinhoff, 53.41 percent; and Truworths, 33.93 percent. (Returns for both the South African portfolio and the international portfolio are from November 21, 2014 to October 26, 2015.)
Over the years, I have decreased the exposure to resource shares, expecting a fall in commodity prices, which, with the benefit of hindsight, was the correct call. Sadly, I included Glencore, believing that its trading arm would cushion any blow. That theory exploded spectacularly and Glencore was a major disappointment, with its share price and market value halving in value. As a result, and because I do not see a recovery in resources during the next year, there are no resource companies in the portfolio this year.
The portfolio for 2016 is: Bidvest, Mondi, MTN Group, Netcare, Old Mutual, Reinet, Standard Bank, Steinhoff, Tiger Brands and Truworths. Tiger Brands comes in to replace Glencore, and I hope the drought does not affect the economy too badly. The portfolio continues to be positioned for a low-growth economy facing many challenges, and it continues to have a high weighting in rand-hedge shares.
Few investors are limited to trying to out-perform the JSE each year with 10 shares in equal weighting. I have stressed repeatedly that investors must be in the market for the long-haul: five years or longer. In creating your own share portfolio, focus on your risk profile, investment objectives, income requirements and other financial needs.
International portfolio
I am pleased to report that, unlike in 2014, the international portfolio did bring home the bacon last year, producing a real return of 5.67 percent in US dollars. International markets had mixed fortunes. The MSCI World Index was down 1.86 percent; the S&P 500 was up a negligible 0.37 percent; the Japanese Nikkei Dow was up 9.16 percent; the London FTSE 100 was down 4.94 percent; and the Hong Kong Hang Seng was down 1.37 percent. The average return was 1.31 percent.
The returns, in US dollars, of the international portfolio were: Airbus, 26.64 percent; General Electric, 13.49 percent; Google, 32.9 percent; Intel, –0.59 percent; Johnson & Johnson, –5.29 percent; Market Vectors Vietnam Exchange Traded Fund (ETF), –15.67 percent; Microsoft, 15.37 percent; Pfizer, 15 percent; Porsche –35 percent; and Wisdom Tree Japan Equity Fund, 10.25 percent.
The only really bad performance came from Porsche, and, as it is owned by Volkswagen, no explanation is needed. In hindsight, the Vietnamese ETF was a bad choice, because the philosophy behind it, as I mentioned in the column last year, was a generational change and it was therefore not really appropriate on a one-year view, but I think it will do well in my personal long-term portfolio. So Porsche and the Market Vectors Vietnam ETF are dropped and replaced by Nestlé and Amazon. The portfolio for this year is: Airbus, Alphabet-Google, Amazon, General Electric, Intel, Johnson & Johnson, Microsoft, Nestlé, Pfizer and Wisdom Tree Japan Equity Fund.
May 2016 bring you many happy returns.
* David Sylvester is a stockbroker with Investec Wealth and Investment.