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Why you should weather the storm

Fund managers have preached patience. Financial advisors have urged clients to stay the course. But it hasn’t been easy. Equities are generally expected to do much better than cash in the long run, but over the last five years, local cash investors have had better returns than those who have invested in the stock market. 

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Source: Old Mutual Investment Group (* Average of the Asisa SA Multi-Asset High Equity Category)

 Many people are wondering if this situation will be a permanent feature going forward. It may be useful to go back in history to see what the situation has been over long periods of time, and whether the current situation is unique. The maroon line in the chart below depicts the rolling five-year return of the JSE All Share Index after inflation. The green line shows real cash returns in the same manner.  

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Source: Old Mutual Multi-Managers

there is a lot of volatility in the red line, but that is also cyclical.  For those investors who had the patience to stay invested, equities managed to outperform cash 80% of the time over all these rolling periods, one must believe that the macro-economic environment isn’t broken. While the South African economy faces many risks and challenges, it is coming off a low base. Economic growth has been low, but the view of Old Mutual Multi-Managers is that it will turn around. The second consideration is whether there is value in the market – in other words, if assets are cheap. The chart below shows the real returns of various asset classes over the very long term (the maroon dots). When the green bars are above the dots, they believe the asset class is offering value.

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Source: Old Mutual Multi-Managers

 In almost all cases, asset classes currently look cheap with the exception of global bonds, Watson says. Portfolio managers say based on their current expectations of asset class returns, the typical balanced fund could deliver around 9.5% in nominal terms per year over the next five years, compared to 7% for cash. The assumption is that inflation will be around 5%.

Many people are disappointed that change in the country hasn’t happened quickly enough, however change has been extraordinary. Just over a year ago, South Africa had a poor team in charge. Today, a much better leadership team is in place and President Cyril Ramaphosa wants to take the country in the right direction. It is going to take time. Confidence has to come back, but due to the depressed asset prices in South Africa and because of those poor returns over a number of years – the outlook for better returns is promising, specifically in South African assets.

                                                                                                                                                          Source (Old Mutual)

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