We continue to live in risky times, but as we noted in our final newsletter for 2019, the markets last year outperformed expectations and delivered solid returns for investors. Looking ahead to 2020, our message continues to be that, while we’re not overly excited about global return prospects for the year, we are not anticipating a global recession.
Indeed, if there is one lesson to be taken from 2017, 2018 and 2019, it is that investors who sit on the sidelines because they fear a market crash or global recession is around the corner, tend on balance to miss out on the available returns from growth assets. That is not to say that we advise recklessness and ploughing forward without regard for the economic environment, but rather sticking to an asset allocation blueprint and a focus on long term growth and quality will nearly always pay off for the patient investor.
In retrospect, 2019 was an excellent year with strong performances across the board and particularly strong performances offshore. This means that, despite a slightly stronger rand, offshore returns far exceeded local, which was in line with our view and positioning.
Some might argue that 2019 was positive, but on the back of a negative 2018. This is truer locally, but even three-year returns have improved to be ahead of inflation and cash. Offshore, the 2018 pullback, which came on the back of a very strong 2017, was far overshadowed by the 2019 performance. The three-year return of the MSCI World now stands at 13.2% per annum in USD as at 31 December 2019.
A recap on the numbers for 2019 is a follows:
- For the year ended December 31 2019, the JSE was up 12%. The stock exchange was up 7.4% per annum for the three years ended December 31 2019 and 6% for the five years ended December 31 2019. The resources sector was up 25.8% for the year, while the small-cap sector was down 4.1%. Financials could only manage growth of 0.9% for the year.
- Our local funds outperformed their benchmarks – the Accumulator Fund was up 14.4% versus 12% for the ALSI, while the Preserver Fund was up 10.1%, ahead of its benchmark at 9%, and well ahead of cash at 7.3%.
- Thanks to an improvement in international sentiment being the result of positive noises around Sino-American trade relations, the rand ended the year 2.5% stronger. It can therefore be inferred that for the last two months of 2019 deteriorating domestic factors took a backseat in terms of influence on our local currency.
- Offshore equities handily beat the returns from the JSE, validating our preference for offshore markets. For the year, the MSCI ACWI was up 27.3%, the MSCI World was up 28.4%, and the S&P500 was up 31.5%, all in US dollars.
- The funds that we favour for our clients’ portfolios all enjoyed strong returns in US dollars:
- Fundsmith +29.8%
- Investec Global Franchise +26.4%
- Coronation Global Managed +22.9% (with 59.8% in equity)
- Nedgroup Investments Global Flexible Fund +18.6% (with 59.4% in equity)
- Coronation Global Capital Plus +13.6% (with 29.8% in equity)
- Rubrics Global Credit Fund +6.7% (with zero equity exposure)
View for the year to come
With Eskom load shedding kicking in before factories and schools open, as well as the World Bank predicting GDP growth of less than 1% in 2020, South Africa’s economy looks fragile. We remain concerned about high levels of debt at state-owned entities, the probability that Moody’s will this year downgrade South Africa’s sovereign credit rating, and the slow pace of economic reform.
These local challenges could be compounded if we see international investors lose their appetite for risk as a result of geopolitical or economic developments. As such, we anticipate that the rand may weaken in 2020 and that returns from the JSE will be tepid.
We believe that there is a far better set of opportunities offshore – offering both less risk and better potential returns – and continue to encourage clients to diversify their portfolios beyond local assets.
Economic data from the rest of the world suggests that the risks of a global recession in 2020 have receded. Easing of the trade tensions between China and the US, as well as the likelihood of a more orderly Brexit, could be good news for the markets. We could also see US President Donald Trump focus less on sabre-rattling and more on his re-election campaign.
That’s not to say there are no risks. Indeed, we believe that returns this year could be more subdued following last year’s performance and so we are looking to reduce downside exposure by implementing protection strategies on our new offshore funds. We continue to prefer a bias towards quality, which is likely to offer more risk protection in what must be the advanced phase of a bull market, and we will persist in shifting our clients’ portfolios in that direction.
We wish you the best for 2020 – may it be a year of growth and prosperity for you and your family!