South Africa’s economic performance has been dismal the last few years, and so our equity market performance. But is it correct to deduct that equities are weak because the local economy is weak? Stanlib’s chief economist Kevin Lings demonstrates with an interesting chart that global sectoral trends can easily outweigh domestic economic factors. So how do you protect yourself against low returns? Easy, according to successful fund managers: diversify across assets and regions with a manager who is able to find the right opportunities for your money. – Editor
By Kevin Lings*
The performance of the South African equity market has, obviously, been very disappointing over the past five years. In particular, the All Share Index has grown by a compound annual average of only 2.8% since the end of December 2014. Furthermore, in Dollar terms, the performance looks worse given that the Rand has weakened by a compound annual average of 3.7% over the same period. Fortunately, dividend payments held up reasonably well in the period, which means that the total annual average return from SA equities, measured in Dollars, was at least positive – albeit only slightly positive.
Naturally, there is a tendency to link South Africa’s poor equity performance during the past five years to South Africa’s dismal economic performance (SA GDP averaged a very disappointing 0.8% over the past five year)  – and to some extent this is a valid comparison. However, it is not the whole story. Since 2014, most equity markets around the world, with the exception of the United States, also recorded a very disappointing outcome.
In fact over the past five years South Africa’s equity performance (in Dollars), has been very similar to South Korea, but noticeably better than Poland, Turkey and Mexico. Furthermore, none of the major emerging markets were able to increase equity values by an annual average of more than 8% (in Dollars). This is despite a respectable GDP performance in most emerging markets (for example South Korea achieved an average 3.8% GDP growth over the past five years, Poland 4.8%, and Turkey 3.5%, India 8.1%).
It is also noticeable that the equity performance of the major emerging markets is noticeably different to the period 2000 to 2007, when equity markets in all of the major emerging markets rose by well in excess of 10% a year (in Dollars).
All of this highlights that most equity markets in the major economies (including emerging markets) are heavily impacted by global economic factors and not just local economic conditions. Furthermore, changes in the global assessment of risk, liquidity, relative value (including currencies), and global sectoral trends can easily outweigh domestic economic factors.
- Kevin Lings, Chief Economist at Stanlib.Â
