JOHANNESBURG - The JSE appears to be living in a parallel universe from the South African economy as it breaches ever higher ceilings at the same time as the economy slowly emerges from recession while facing its greatest political uncertainty since the early 1990s.
Tandisizwe Mahlutshana, PPS Investments executive responsible for marketing, explains: “The economy and markets are pulling in different directions. However, a welcome surprise is our markets’ performance because most of our Top 40 listed companies today are earning the bulk of their revenue outside South Africa.”
That ‘welcome surprise’ shows the JSE All Share index (Alsi) returning 19 per cent over the past 12 months, a tense period which included the Cabinet reshuffle that saw off former finance minister Pravin Gordhan, and the almost immediate ratings downgrades.
What has been occurring on the JSE is that it is following international rather than local drivers, says Mahlutshana, benefiting from abnormally low global interest rates “which is anyone’s guess as to when they will normalise”.
Just to give one example of stock performance, he says, “Naspers returned 14.7 per cent during a single quarter ending September, and 45 per cent year to date to September. It has delivered an annual 30 per cent return over the past ten years.
“It is these heavy rand hedge shares which are really driving our equities market.”
What this means, says Mahlutshana, is that notwithstanding what is happening in the news and in the economy, this is no time to panic.
“No investor can afford to be out of the market, but at the same time they have to ensure a diversified portfolio which embraces all different potential outcomes and asset classes, because nobody can foresee what is going to happen particularly ahead of the ANC elective conference in December - but it almost doesn’t matter who wins because a political party should not be about an individual but the collective.
“Investors therefore need to construct a portfolio agnostic of political events. The alternative is that if your single viewpoint doesn’t materialise, then your portfolio is vulnerable.
“It is going to be a difficult year in which uncertainty will increase. Nothing is going to make the current circumstances miraculously disappear.
“Heading towards the 2019 national election we will see a lot of political events driving markets, as well as a lot of changes in government as, whoever the December winner is tries to get structures in their image in place,” says Mahlutshana.
He therefore reiterates: “Firstly, you want to be in the market, and secondly, be diversified.” Just as stock picking can add concentration risk to a portfolio, single asset classes will underperform periodically depending on the market nuances.
“However, in an active asset allocation fund mixing and diversification across the various asset classes can be a significant alpha generator.
“A diversified solution fund like those offered by PPS Investments is designed to outperform inflation and minimise downside risk.
Another form of diversifying risk is to have sufficient offshore exposure. Unit trusts that are classified as South African portfolios may not hold more than 25 per cent of the fund’s assets to be invested offshore, with a further 5 per cent that can be invested in Africa excluding South Africa.
PPS Investments, as a multi-manager, has the philosophy of including a range of different investment managers managing its portfolio, with as many as five or six such blended philosophies at any one time.
This allows it to construct a portfolio rich in thought, analysis and market intelligence, and also gives it access to different investment opportunities. For equity investing it has equity specialists, and the same for each other asset class.
“This strategy has over the years stood us in good stead, and enabled our various portfolios (with different risk profiles) to meet their mandates and return targets 95 per cent of the time.”
As to where this leaves the retail investor, Mahlutshana suggests that given the complexity of investment opportunities and market uncertainty over the coming 18 to 24 months, they need to have a financial adviser.
“Research shows us that retail investors who have a financial adviser in their corner benefit from more robust returns, because they receive well-considered advice which produces a solution suited to their specific needs.
“For the average man in the street, it is easy to be persuaded by all the noise currently in the media, and they often tend to ignore some of the peripheral but vital investment issues such as tax, investment fees and liquidity.”
An average private investor whose unit trust investment is currently ranked, say, no.97 is inclined to be persuaded by the bragging advice of a friend whose unit trust is currently ranked in the top ten.
“The individual is typically inclined to believe that this out-performance will continue, whereas experience indicates the opposite. If anything, those two unit trusts are more likely to reverse rankings within the near future.
“Therefore, the disappointed investor, in the absence of objective advice, may well switch from the current no.97 ranked fund into the top-ten fund which could become the new no.97.”
Mahlutshana is optimistic as to the robustness of the South African economy and its ability to ride out tough times. The JSE’s performance in the face of weak economic fundamentals is but one example of that.
The economy too has been relatively stable notwithstanding downgrades, which have an effect on the real economy and not just on investments.
“Who knows but the economy could turn within 18 to 24 months. But it will require the willingness of all parties concerned to make the right decisions for the country. But when confidence re-emerges, we will see renewed corporate investment, economic growth and job creation.
“The intervening period is a time that investors need to be in the market: don’t try time a return to the market, so that when it does turn you’re already in it.
“Downgrades, and finance minister Malusi Gigaba’s bleak medium term budget policy statement are already priced into markets, and though there does remain a further downside risk it is no cause for panic,” says Mahlutshana.