Rob Dower
Quarterly Commentary

2017 Q2 Comments from the Chief Operating Officer

UK academics working at the London Business School (LBS) produced a book about 15 years ago called Triumph of the Optimists, comparing 101 years of stock market returns around the world. The most striking point from their data is captured in the title: across the world, those prepared to take risk by investing in equities have earned high real returns over very long periods, and more so if the start date was in a period of crisis. The data is updated each year under the sponsorship of Credit Suisse and republished, now under a less eye-catching title, but this main point still holds.

The data series now goes back 117 years. The global average annual return for equities over this period has been just over 5% above inflation. At 7.2% p.a. after inflation, the JSE is the best-performing stock market in the 23 country dataset – it was third behind Australia and Sweden in the original 2002 edition. This isn’t because our country has fulfilled its potential or grown faster than others; it is because the risk premium for investing in South Africa has been higher, or, put differently, over long periods in South Africa and especially when times have been tough, investors have tended to be too pessimistic.

No end soon to South Africa’s economic woes

It is hard to be optimistic about our economy at the moment. The political leadership is focused on short-term tactics to keep or win power and this will surely be so at least until the next election in 2019. The level and scale of corruption revealed daily in the news, and the heavy impact of our underperforming economy on employment and on millions of middle class South Africans, are alarming. More taxes and bigger government are certainly not the answer. Our government has overstretched its capacity for management and is using resources wastefully and too often corruptly. Sandy McGregor’s article makes this point: around the world, the consequences of big government are slow productivity gains and low growth. He argues that our country’s current economic woes are the result of a government that is trying to do too much, with less and less efficiency. The way to fix this is to cut waste, and not, as the current government seems wont, to increase taxes. 

And yet…

Things may be dire, but so many investors in South African markets are pessimistic right now that there are compelling bargains to be had. Immediately following Sandy’s piece, Simon Raubenheimer makes the case for Barclays Group Africa (which may soon revert to being called ABSA), a bank that is mostly exposed to South Africa. We were recently able to invest a meaningful part of client portfolios at a dividend yield of more than 7%, which we consider to be a great price. 

South Africa has been through tough times before. Coincidentally, the start date of the LBS long-term market returns data was January in 1900, the middle of the Boer war. It must have been scary to invest in local companies then. Those that did so, and those who bet on democratic South Africa at its birth in the early 90s, or on the recovery after the Global Financial Crisis in 2009, were well rewarded for taking a long-term perspective.

Interesting times for investing overseas as well

These are interesting times for investing. In South Africa pessimism rules, but there are bargains to be had. Globally, just a handful of technology stocks have been driving markets higher and yet they are not obviously expensive: our offshore partner Orbis, who shares our investment philosophy, is finding attractive opportunities in technology stocks, despite the fact that the Nasdaq Composite’s peak is 20% higher than its pre-dotcom bubble peak. Ben Preston explains why Orbis feels this time is different, by taking a look at Amazon and retail giant Walmart.

What to do as an individual investor?

It is natural during uncertain times to feel it would be better to exit the markets and hide your money under your mattress. But there are so many reasons why this is not the best way forward – not least because inflation is a bigger enemy than some of the more obvious foes. When things are unpredictable, it can be difficult to know exactly how to position your portfolio. If you don’t have the time or appetite to put your own portfolio together, a balanced fund could be the answer. Claudia Del Fante and Radhesen Naidoo take a look at how we manage risk in the Allan Gray Balanced Fund, and discuss why this unit trust could be the solution for investors looking to navigate the choppy waters.

While many investors may prefer to adopt a wait-and-see approach, staying out of the market may mean losing out over the long term. Unfortunately there is no magic trick that can turn savings into a comfortable retirement: you need time and commitment. Thandi Ngwane shares five investment principles that you can follow to give yourself a better chance of achieving this.

Inspiring achievements

As many of you know, the objective of the Allan Gray Orbis Foundation is to create a long-term pipeline of entrepreneurial talent in our country. In his update this quarter, Anthony Farr explains why the Foundation aspires for Allan Gray Fellows to do for entrepreneurship in South Africa what Jamaica has done for sprinting. He also describes what the Foundation can learn from the Jamaican sprinters, using some inspiring examples of home-grown achievement to illustrate how this works in the Foundation’s context.

Thank you for your trust. 

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