In January 2016 South Africa was in the grips of a terrible drought with “no sign of abating”, and the South African Weather Service had just declared 2015 the driest year on record. While the rainfall has come, crops are shooting, with a bumper harvest now anticipated, we still have water restrictions in Gauteng and haven’t yet forgotten that we’ve just experienced the worst drought in decades.
Similarly, when it comes to investment markets, while much global and local political uncertainty prevails, green shoots are sprouting and the worst months are tailing off.
Although the December returns are still subdued, January 2017 has been a very buoyant month for domestic and offshore markets. This implies that our one-year performances to January 2017 are looking far more acceptable across the board.
Long-term returns did not dip that much during the last year or two of volatility, but some clients are reluctant to take a long-term approach to investing when their short-term returns suggest that they would have been better off with their cash in the bank or to reduce debt. It’s tough to convince clients to maintain their investments or even add to them during these testing times. In fact, about as tough as convincing a farmer to plant crops not knowing for certain when the drought will end! It is, therefore, comforting to see our short-term returns moving more in line with their long-term equivalents, and calculated risk being rewarded once again.
While local returns, in rand, remain lower than foreign performances, it is important to remember that the rand has strengthened 15% against the dollar in the last year on the back of other emerging markets and a commodity rally. Therefore, the dollar-equivalent returns of our markets are substantially higher – a phenomenon that we are not accustomed to as South Africans!
The post-mortem of 2016 tells us a couple of interesting things. Firstly, the media, capital market participants, spread-betters, and political analysts are no longer credible forecasters of binary political outcomes! Brexit, Trump and the Italian referendum all proved this. Perhaps it is the fact that people around the globe are seeking change and are prepared to risk radical measures in order to achieve it. Or perhaps fake news sites and Russian hackers have taken propaganda – a ploy that is as old as the written word – firmly into the digital realm. The point remains that so-called experts are better at forecasting the weather – a phenomenon that we still have limited influence over – than they are in determining the outcome of our collective decisions.
Secondly, what we have learnt from 2016 is that the self-same media, capital market participants, and other talking heads are of no relevance in forecasting the actual impact of said events. Even if one had managed to call the Brexit or Trump result correctly, the consequence is completely contrary to that hypothesised at the time. A Trump victory was said to certainly lead to a global equity market sell-off, a weaker dollar and lower commodity (excluding gold) prices. In reality, what we have seen is a Trump-induced rally in global equity markets, a strong dollar and a pronounced sell-off in US treasuries. This is akin to a weather app forecasting a severe lack of rain, only for flood waters to miraculously flow through the streets under clear skies.
We, therefore, emphasise that our approach to investing is not to forecast the outcome of these binary events and to arrive at decisions with conviction as to what impact they will have on the different asset classes. Rather, our approach is to ensure that we are aware of all the possible outcomes, inform ourselves as to the possible influences on our clients’ investments, and then to ensure that the portfolios are built to withstand the potential impacts. Essentially, it’s like “weather-proofing” your wealth.
At least, for now, we are grateful that the performance drought has lifted, the rain has come, and that the prospects for an improved harvest are more positive