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Be wary of partial truths

Be wary of partial truths

It may result in bad decisions that cost you in the long run

By Andró Griessel

16/5/2020

In times of extreme uncertainty, many of us are likely to be more susceptible to being influenced and will blindly follow the opinions or advice of experts without the necessary dose of scepticism.

It therefore worries me when I see an article with a headline that reads “JSE is one of the worst in the world”, because such a headline can be misleading on face value when not viewed in context. This can be detrimental to decision making.

The next phrase then follows in this promotional article: “Ten years later and the Cinderella story has ended, with the JSE being one of the worst stock markets in the world in rand terms, over a five- and 10-year period, negative returns abound”.

Allow me the opportunity to elaborate on these statements:

  • “JSE was one of the worst stock markets in the world in the preceding decade.”

In the table below we list 17 countries (ten emerging and seven developed) and their stock markets in their base currency over the preceding decade. For ease of reference the ten largest emerging countries were used as well as the seven most popular emigration destinations for South Africans (not surprisingly, all developed countries). Viewed within this list, South Africa came in third (out of 17) given their nominal returns, fifth after adjusting for inflation and second best out of the emerging countries.

Source: Portfoliometrix, Financial express & https://data.worldbank.org

  • “Negative return in rand terms, over a five- and ten-year period”

According to my data South Africa returned a mere 0.43% per annum in dollar terms. This still places us fifth on the emerging countries list. Thailand fared the best with a return of 6.38% per annum and Brazil the worst with -6.61% per annum. However, over the last five years, 65% of the mentioned countries (Australia, United Kingdom, Germany and Canada included) delivered negative returns in dollar terms.

The following is important:

  • The preceding decade was a bit of a nightmare for all emerging markets, with Thailand being the exception, see graph below.

When the commentator in the above-mentioned article refer to the poor returns of the JSE, it is done so with this graph in mind. Over and above the points already mentioned, the following is also important:

  • The JSE (and the rand) has lost a lot of ground in the last year against the global market index for emerging countries, but over the long term it’s been the story for all emerging countries and not South Africa in isolation.
  • The MSCI global index is dominated by the United States and have fared (apart from New Zealand) much better than comparative markets. To swap your rand for dollar exposure now would mean that you are paying a premium of 20% – 30%. When coupled with the fact that you would be investing in a US market that some analysts say are trading at a premium of 40% compared to other markets, it makes for a very brave investment decision.

Markets, and often the rotation between developed and emerging markets are cyclical and to extrapolate over- or underperformance into perpetuity is simply not wise.

For context, please view the graph of the decade preceding the last one. The roles were completely reversed. In my view a repeat of this is more likely to play out.

  • To quote returns of emerging countries in dollar terms when it is trading at extreme levels (like it is doing currently), is not a fair assessment of events and lacks transparency and context.

A more trustworthy indicator of wealth creation or destruction is what your return was after local inflation (the real return in your country).

If the currency of your country were to devaluate permanently, then your inflation rate would skyrocket.

  • I agree however with the notion that South Africa is on a very slippery slope and it appears that political will is lacking. The ability to make sound decisions for the country is faltering or being severely hampered by outdated ideologies.

Specifically the exclusion of small minority groups for emergency relief from government in the midst of the lockdown, is a significant outcry. This reality has definite implications for how you are going to allocate your capital (working- as well as accumulated wealth) and also the way in which you are going to think about the liquidity thereof.

To simply run after the perceived safety net of the dollar and the US stock market that are both trading at significant premiums, does not seem to be the logical answer.

You simply cannot protect your wealth by buying overpriced assets at a currency premium.

Andró Griessel is a certified financial planner and director of ProVérte Wealth and Risk Management. Contact him at info@proverte.co.za.

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.

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