Glacier Quarterly 4 - 2018

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INVESTMENTS There’s a saying in financial markets, ‘If you panic, panic first.’ This certainly seems to be the prevailing sentiment right now on both global and local equity markets. Since late August, share prices have come under severe pressure, and many jittery investors are questioning whether they should remain invested in equities at all. In our view, the markets may be a scary place at the moment, but now is not the time to panic and bail out. Following an almost uninterrupted surge in share prices since February 2016, global equities have declined by 7% in US dollar terms over the past two months till the end of October. On our own stock market, the picture is also rather gloomy. As measured by the FTSE/JSE All Share Index (ALSI), shares sold off aggressively and are on average trading 15% below their values recorded late in August (see the graph below). Unfortunately for local investors, this decline has come after an almost four-year period during which local share prices moved sideways against a very pedestrian economic backdrop. The issues associated with volatile and lower share prices, both globally and locally, are of course not new. In June this year, we argued that investors got overly excited with the positive story after the election of Cyril Ramaphosa as our country’s new president, and that banking and retail shares became too expensive as a result – they later retreated to more realistic valuations. We therefore trimmed Standard Bank in our portfolios. On the other hand, rand hedge shares were, in our view, too cheap at that time. The poor performance of local shares since mid-2014 has more than once led to analysts questioning the wisdom of continued investment in this asset class. In our view, however, history suggests that over time, the relationship between risk and returns will continue to hold (see our article in August this year, in which we make the case for equities). In simple terms, if investors buy decent-quality companies at a reasonable price, it would be fair to expect that the return on investment will beat cash over the longer term. Investors often ignore this ‘law’ when equities underperform or when the news flow is particularly dismal. GLOBAL AND LOCAL EQUITY PRICES (OCT ’17 TO OCT ’18) Source: IRESS; SPW research 10
Of course we’re not for one moment suggesting that investors shouldn’t manage the asset allocation of their portfolios actively. Four years ago, we argued, for instance, that South African shares were too expensive and that we preferred offshore to local equities. We started to change our view early this year, however, when our analysis suggested that the valuations of local equities are on average starting to look more attractive. This is the crucial point: our view is that based on price, local shares are starting to offer attractive long-term, inflation- beating investment return prospects. Price, perspective and pattern In August, we said ‘investors considering leaving [SA] equities at this stage are ignoring the lessons of history at their own peril’. Since we expressed this view, equity prices have fallen by 12%. So were we wrong? It’s simply too early to tell. We like to be measured over the longer term, or through an investment cycle, as sentiment can drive asset prices way off their intrinsic values. We still maintain that price, perspective and pattern will drive future performance. Perhaps the most tangible way to explain this is by using the example of Standard Bank to illustrate how these three factors combine to produce future returns. We believe Standard Bank is cheap – the price is low – in terms of its own history when the share is trading at a price-earnings (P/E) multiple of nine times. If we monitor the five-year share price performance of Standard Bank after each time it traded at a nine-times P/E multiple, over the past 40 years, we should be able to determine if there’s a pattern in the share price performance following periods of low prices. The table below provides the evidence: The table clearly illustrates that every time Standard Bank traded below a P/E ratio of nine times, the ensuing five-year returns comfortably and sometimes spectacularly outperformed inflation. We would argue that the likelihood of this pattern continuing is high. Many cynical investors will be quick to point out that we’re ignoring the current perspective of a local environment with extreme policy uncertainty and low economic growth. This observation is true – which is exactly why we won’t venture a strong view of what will happen to the Standard Bank share price over the next 12 months. We simply can’t forecast events over the short term, let alone in a year in which we’re holding general elections. Dates (when SBK traded below 9x P/E) Average 5-yr return pa Average 5-yr inflation rate Average 5-yr real return Feb 1987 31% 15% 16% Nov 1987 39% 14% 25% Aug 1998 22% 6% 16% Jan 2002 32% 5% 27% May 2008 9% 5% 4% Source: Bloomberg; SPW research 11
Page 1: GLACIER QUARTERLY NOVEMBER 2018 QUA
Page 4 and 5: INVESTMENTS Finding balance in a wo
Page 6 and 7: INVESTMENTS We as South Africans so
Page 8 and 9: INVESTMENTS words, a diversified po
Page 10 and 11: INVESTMENTS EQUITIES: is it time to
Page 14 and 15: 12
Page 16 and 17: INVESTMENT INSIGHTS URGENT NEED for
Page 18 and 19: INVESTMENT INSIGHTS • An inverse
Page 20 and 21: SA 2019 STICK AROUND: SA turnaround
Page 22 and 23: SA 2019 campaigning, we’re probab
Page 24 and 25: SCENARIO PLANNING Breaking the late
Page 26 and 27: SCENARIO PLANNING Quality of Infras
Page 28 and 29: TRENDS SOUTH AFRICA 2019: investing
Page 30 and 31: economic growth stagnates - perhaps
Page 32: The information in this document is

Glacier Quarterly 4 - 2018

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