The reality is it almost never feels like the right time to get into equities. Either all the good news is in the price, and more, or the economic outlook is so poor that it makes no sense. Markets are pretty good at discounting the available information so taking a short-term view is not much different from gambling.
It’s a dilemma for pundits and speculators, but it shouldn’t worry long-term investors contributing regularly to a savings plan. Their return depends almost entirely on the market’s growth in earnings and dividends, not on its twists and turns along the way.
Given that no one can reliably time markets, taking a strategic rather than a tactical view on the appropriate share market exposure is likely to deliver a better outcome. That’s what we do at 10X.
Managing risk and emotions
It sounds simple enough but following through is hard. It’s all too easy to get caught up in the daily news flow, much like with your favourite soap opera. The real work of investing is managing market risk and emotions.
There were many times over the past 10 years when keeping long-term investors in a high equity portfolio seemed the wrong thing to do.
Take 2009. The bubble had just burst on the US subprime debt market, setting off the Global Financial Crisis, that was so big that it is now known by the shorthand GFC. Those who lived through it financially will remember how gruesome it was. Stock markets almost halved in value. Venerated institutions collapsed, others teetered on the edge, threatening a domino effect. The numbers were astronomical. This was capitalism touching the void.
The economic outlook was dire: negative global growth, rising unemployment, looming bankruptcies and debt defaults. The world was on the brink of a depression to rival that of the 1930’s. It felt like the time to shun equities and hold cash (except even holding cash in the bank was no longer safe).
Yet the JSE All-Share Index returned 32% that year. Little changed on the economic front; investors simply started pricing out the risk that the global financial system would seize up.
2010 also seemed like a good time to stay out of the market. This time the crisis was rooted in Europe. Greece had under-reported its government debt and deficit, and the Greek government effectively ran out of money. The potential spill-over effect threatened the entire EU project and put the future of the Euro in doubt.
Unimaginable chaos
The potential chaos was unimaginable. What upside could there be in equities? 19%, as it turned out. It became evident that the Europeans – much like the Americans in 2008 – were willing to spend whatever was necessary to avoid a financial apocalypse.
By 2011, the FTSE/JSE All Share Index approached 30,000 – pre-crises levels – yet the global economy was still in the doldrums. Many governments were implementing austerity measures, banks restricted their lending and consumers cut back their spending. The debt ceiling stand-off in the US threatened to shut down its government. Yet the JSE held up.
Come 2012, the IMF once more slashed global growth forecasts. Large asset managers lowered their exposure to equities, and invested defensively. “Whatever you do now, don’t invest in index funds, not at the top of the market,” they proclaimed. The JSE went up 27%.
2013 did not augur well for emerging markets, afflicted by expanding budget and current account deficits, and ballooning public debt. South Africa was one of the so-called Fragile 5, most at risk from these developments. Yet the JSE returned 21%, our rand hedge stocks sparing us from the fallout seen in other emerging markets.
Sentiment deteriorated even more in 2014. Remember the oil price collapse and what it meant for global growth and commodities demand? One more reason to be underweight SA equities, they said. The JSE still posted an 11% gain.
By 2015, our market was asking – no, begging – for a sell-off. Valuations were far above historical norms and investors were skittish in the extreme. Every minor development became a potential trigger for a crash.
Remember when Chinese policymakers intervened in the currency and equities markets, boosted government spending and cut rates, which all gave the impression their economy was slowing down much faster than people thought.
It caused panic selling around the world. In a matter of days, the JSE was 10% off its peak, the sharpest pull-back since the GFC. Was this the start of something big, everyone wondered.
Three finance ministers in a week
No, it wasn’t. Markets recovered just as quickly as they had fallen. More consternation came later when SA had three different finance ministers in a week. Our currency wilted but the JSE shook it off swiftly.
Shortly after that, the US Federal Reserve raised interest rates for the first time in a decade. Without decent economic growth in prospect, investors panicked again, and the major indices dropped 10% in no time. It took some soothing noises from the Fed to calm everyone down and restore confidence.
By now Mr Market had cried wolf so many times that when the next big, unexpected things happened – the UK voting for Brexit and the US for Trump – investors barely flinched.
Through these two years of negative news and nasty surprises, the JSE hung on, stubbornly refusing to break its narrow trading range. Returns were modest, but positive. The “inevitable” crash never came.
But we were ripe in 2017. What with the state capture saga, the credit rating downgrades, a suspect new finance minister, economic stagnation, failing state enterprises and rising budget deficit … surely our stock market had nowhere to go but down? It went up 21% instead.
Most hated bull market in history
No wonder it’s the most hated bull market in history, especially by those who moved to the sidelines in 2008. For them, there’s never been a right time to get back in. Yet the JSE has posted fantastic gains, a total return of 260% since December 2008, a cumulative 15,3% pa.
It’s reaffirmed our view that sticking to the long-term plan is more profitable than trying to predict the market’s plot. We will keep doing that even though the risks for 2018 are on the downside. Again. The momentum may be positive, but the JSE has gone up an unprecedented nine years in a row, and every winning streak must end sometime. And if we don’t address our fiscal imbalances, our local debt may still get downrated to junk. Who knows what the fallout will be, if any.
And what about the US? The economy is doing well, but can the lofty market valuations hold if inflation makes a comeback? Policymakers have been trying to write it back into the script for years. With wages finally starting to climb, this could be the year inflation steps out of the shadows. Rates could go up even more than expected.
And what about the US$20 trillion in financial assets central banks have stashed away on their balance sheets? Will those be returned to the market? With what impact? All will be revealed in time.
These are just a few of the issues that active investors are grappling with in setting their course for 2018. We’re as curious as hell as to what will happen, but we couldn’t – or not with a clear conscience anyway – speculate with our clients’ money on potential outcomes. As the last 10 years have shown us, whereas market timing might be a game worth winning, it’s not a game worth playing.
