Stay abreast of COVID-19 information and developments here
Provided by the South African National Department of Health
HOW TO WEATHER
THE 2020 MARKET STORMS
Alwyn van der Merwe
Director of Investments
Aug 13, 2020
Listen to Alwyn's views here:
Here is a transcription of the video:
To say that the first six months of this year was a very volatile time in financial markets, locally and globally, would certainly be the understatement of the century. We started the year in global equity markets on the front foot, but when the novel coronavirus broke out, financial markets came under severe pressure. Local equities sold off aggressively, with our own equity market selling off about 36% from the highs it recorded late in February. Globally, equity prices lost about 34% in dollar terms of their values.
However, the markets recovered significantly since the lows that were recorded on 23 March this year. Global equity prices went up by about 42% from those lows. You would recall that at the time the markets sold off, we thought it was overdone. When we position portfolios, we position them for a through-the-cycle scenario. So the ‘overdone action’ by financial markets provided us with an opportunity to increase risk in our client portfolios. Not only locally, where we added about 5% in multi-asset portfolios to equities, but also internationally in the Global High Quality Fund, where we used the liquidity that built up in the fund over a period, to reduce that liquidity significantly when we bought equities at much lower prices.
Unlike other bear markets that we’ve studied over the past 100 years, we’ve seen a material recovery – global equity prices recovered about 40% off the lows. And the South African market is about 25% up from those lows. Which simply means that the equities that we bought in that weakness, those purchases look very good and clients had the benefit of the increased risk that we’ve built into the portfolios, both locally as well as internationally.
However, if you compare the current recovery in equity prices to previous bear markets, I think it is fair to say that this recovery is certainly different to the past. In the first place, it was much faster. In the second place, what you’d normally find in recoveries is that the value equities lead the recovery, with the household names that had the performance behind them at the time when you went into the bear market, lagging in this recovery. This time it was different, when the momentum stocks continued with very strong momentum, and we can now clearly say that those stocks are quite expensive.
So what do we do now? Given the very strong recovery, you can understand that the prospective returns for global equities in particular have been reduced significantly. So as a result of that, we would suggest that we take some money off the table, or some profits on those shares that performed very well. It might sound very opportunistic, but just to put this in perspective: you would normally expect equities to do about 5% above inflation per annum if you look at the longer-term experience. That gives you, with inflation at about 1% or 2%, a 7% per annum prospective return for equities. Global equities are at 42%, so this means that in the last three months, we had seven years of performance, arguably off a low base. Given this very strong recovery, we’ve sold equities at these arguably expensive prices to lock in some of the profits that we’ve built in by the increased risk.
I think it is also important that we look beyond local and global equities. Looking at other asset classes such as global bond yields: in the US, 10-year bond yields trade at about 0.7%, which means that if you hold those bonds for 10 years, your return will be 0.7% per annum over the next 10 years. I think most of you as clients would recognise that not many of you would be happy with that kind of return. So the only reason we would hold global bonds in the portfolio is that in times of crisis, these assets normally respond as a shock absorber. But in terms of prospective returns, the returns are very muted.
Looking at cash as an investment opportunity – of course, cash returns globally are almost zero. And in South Africa, as a result of the cut in interest rates that we’ve seen, you can only get about 4% pre-tax returns if you invest your money for the next 12 months in liquid fashion.
So I think it is true to say that if you look across the spectrum, the prospective returns we’re talking about look quite muted. And therefore I think we need to be very nimble to use shorter-term opportunities to the benefit of our clients.
To conclude, the elephant in the room that we seldom speak about, is gold as an investment. Normally in times of uncertainty, gold performs quite well. This time around, it was not different. If you look at the performance of the gold price since the beginning of the year in dollar terms, it’s up 17%. However, if you look at gold shares that get the geared performance from the higher gold price, those gold shares are up almost 90% since the beginning of the year. We did not invest in gold shares because we think the longer-term prospects for the gold companies where the gold price is trading now, is not that great.
However, you can make a point that you should have some gold in the portfolios when interest rates are low and when uncertainty is high. Given the performance that we’ve seen in the gold price, we think most of that is probably behind us. So while we regret not having gold or gold shares in the portfolio over the past six months, we think that there are other shares, particularly value shares, both locally and globally, that are likely to perform better than gold. And therefore, for the time being, we will stay put, except if the gold price comes off and presents us with a better opportunity to invest.
In short, uncertainty will prevail. We’re not exactly sure how the COVID-19 virus will play itself out internationally and in South Africa. We’ve seen a significant bounce in risky assets, and we’ve taken profits. We have now put a portfolio together that has less risk. Should assets come off, for whatever reason, we would use that opportunity to increase the risk in the portfolio again like we did at the time when assets sold off in the first quarter.
GOLD: TO BUY
OR NOT TO BUY?
Director of Investments
TWO-SPEED GLOBAL MARKETS:
SHOULD WE BE DANCING NEAR THE DOOR?
Senior Investment Analyst
OUT THE HEADWINDS
Member of SPW Investment Team
DIVERSIFICATION IS KEY
THROUGH THE CYCLE
Senior Investment Analyst
PROSPECTS STILL POSITIVE
TIME TO REDUCE RISK?
Director of Investments
South AfricaSouth Africa Home Sanlam Investments Sanlam Private Wealth Glacier by Sanlam Sanlam BlueStar
Rest of AfricaSanlam Namibia Sanlam Mozambique Sanlam Tanzania Sanlam Uganda Sanlam Swaziland Sanlam Kenya Sanlam Zambia Sanlam Private Wealth Mauritius
GlobalGlobal Investment Solutions
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.