2018 proved to be a difficult year for investors. Most asset classes finished the year in negative territory and the misguided impression for long term investors to capitulate and move into cash has become greater. We urge you to resist for many reasons.
South Africa continues to struggle through a low growth environment. We are slowly realising and adjusting to the fact that there is much more needed than a change of leadership before we see some traction in our economy. In saying that, President Ramaphosa has made moves in the right direction to turn things around. The big question is how the severe structural damage caused by the Zuma era has affected the ability to turn things around. The presidential elections later this year as well as the land debate will no doubt create a lot of political noise and market volatility as investors find their feet.
Overseas there are also strong reasons to sit tight. In the US, the Fed has suggested they will continue to raise interest rates into 2019. This coupled with the potential global trade war between the US’ and China, further adds to the potential volatility of both global and local markets in the short term. In Europe, the outcome of the Brexit deal remains unresolved. In the East, China continues to show signs of slowing growth.
What does this mean for the long-term investor? For the last few years investors have seen relatively prolonged periods of low returns and hearing the words “stick to your long-term goal’ is starting to sound a bit long in the tooth. Its important not to be tempted to ‘do something’ to make a change and fix what’s not working. This is commonly how wealth is destroyed over time.
A recent extract from an article by Victoria Reuvers further explains this point: “We know equities deliver real returns to patient investors. Let’s use the SA market as an example. If an investor had been exposed to the South African equity market from 1 January 1995 to 31 August 2018, they would have generated an annual return of 14.5%. This period includes tough market conditions, including the emerging market crisis in 1998, the tech bubble of the early 2000s and the global financial crisis in 2008/09 – plus the last five years during which the local equity market has been relatively flat. After inflation is accounted for, this is an annualised real return of close to 8% per annum for just less than 23 years. Despite the evidence, the temptation exists to attempt to time the market – that is, pick entry and/or exit points. This can be very risky and you risk losing out on big market movements. Often, the best time to invest it is when things feel most uncomfortable. If you had tried to time the market over the past 23 years and missed just the best 100 days of the total 5,782 trading days, your return would have been -2.4% per annum, instead of 14.5% per annum for the full period.”
So, for the long-term investor it’s important to ride out the volatility. It can feel uncomfortable, particularly in a time like now when we have had low returns in 2018 and we are heading into a potentially volatile 2019. Its easy when markets are going up and returns are good but it’s the uncomfortable times when true value is added by sitting tight, keeping a cool head and avoiding the temptation to capitulate.
Moving into 2019 and beyond it is important to consider these three simple points:
- Don’t attempt to time the market
When markets are rising potential investors are keen to invest, but when prices fall people get nervous. People often ask: “When is the best time to invest?” or “Should I sell?” Given how difficult it is to pick the bottom, or time the market, the best strategy is simply to invest consistently over time. Starting sooner rather than later is also good.
Remember, selling is only half the decision as you must still decide when to buy back. If the market runs away from you, you could be left in the cold!
- Reign in your emotions
When market prices fall sharply, your initial instinct may be to sell and limit your losses. However, you were happy to own these businesses at a higher price, why would you suddenly want to sell at a lower price? If anything, as uncomfortable as it may feel, as prices fall you should be taking advantage of the opportunities and investing additional funds.
- Make sure your portfolio has balance and suits your risk appetite
As a South African, rather than taking a large amount of South Africa-specific risk, it is a good idea to diversify globally. The ability for asset managers to find opportunities globally is much higher. Investing offshore should form part of a long-term investment strategy.
The Managers we recommend for our clients maintain a tried and tested investment thesis, identifying undervalued companies and holding them for the long term. At times like this investor sentiment and panic selling can make those same companies even more attractive. Those same Managers are using new inflows from pension funds and private clients alike to buy more of those good companies for even less. They are buying them at a discount from those who are panicking, it’s our job to make sure that’s not you.
In conclusion, by no means are we preparing for a dismal market performance in 2019. In fact, we could see the opposite. Financial markets are forward-looking and a lot of negative news has already been priced into the market. As a result, managers are finding cheaper valuations than they were this time last year. The main point to take away from this newsletter is regardless of the market performance in 2019 do not allow yourself to be captured by the noise and volatility, as a long-term investor your time horizon allows for this.