It happened in a flash. We were all just getting into the swing of the first year in a new decade filled with promise, when boom, along came the coronavirus, Sars-Cov-2, causing the disease we all now know so well as, Covid-19.
It spread around the world in weeks, affecting millions. But possibly equally as bad or worse is the impact on peoples’ lives and livelihoods being caused by the lockdowns and economic shutdowns across the globe.
The initial impact on financial markets was catastrophic. Since then there has been some recovery, leaving the local equity market “only” down about 10% year to date.
So, where to from here?
It feels like there is no end in sight for the virus and resulting economic restrictions. What does this mean for markets and your investments? In the immediate term, we just do not know – no one does. However, over the long-term we are more confident to express our expectations. This is why!
Over the long-term – no, not 5 years, but more like 20 plus years, market returns are much more stable. In South Africa the 20-year average return for equities is about 13% per annum. This number can be much higher, which is fantastic, but when is it really low? The worst periods in history have been around the past world wars. During these periods the number fell well below 10%. However, after these dismal periods there has always been a recovery.
|Index||April 2020||Year to Date||1 year|
|FTSE JSE All Share Index||13.98%||-10.39%||-10.8%|
|SA Listed Property||7.0%||-44.5%||-45.9%|
|JSE All Bond index||3.92%||-5.14%||0.06%|
|MSCI World Index (rands)||15.25%||15.86%||23.8%|
|FTSE World Govt Bond Index (rands)||5.13%||36.6%||39.2%|
The relevance of examining past long-term returns is that, based on history, which does not repeat but does rhyme, we can be fairly certain of what patterns lie ahead. When returns over long-term periods have been very poor, they are followed by periods of very good returns. This is how market and economic cycles work, and results in generally stable averages over the extremely long-term.
To the end of April 2020, the 10-year return for the local equity market has been 9.1% per annum. This is already an improvement on the end of March’s 10 year annual return, which was a paltry 7.68% per annum – evidence of just how quickly things can change in markets. Notwithstanding this slight improvement since March, the 9.1% average per annum as of end April is still poor in historical terms for 10 years.
How does this inform our longer-term expectations?
In order for the 20-year average annual return to remain around a stable 13% per annum, we will need the next 10 year average annual returns to slightly exceed 17% per annum. This is a fantastic result. However, if you feel the environment now and for the foreseeable few years will be akin to those experienced during past world wars, then temper your expectations.
While we are very concerned about the current environment and feel it does warrant investment strategies containing maximum diversification and maximum offshore exposure, we do still believe in the long-term growth story that is equity market exposure. Over the long-term, bonds and cash are a much higher risk to not beat inflation and therefore not protect your wealth.
There is light at the end of this current dark tunnel of disappointment, but it may just take time, which luckily long-term investors have.
If you require professional advice contact one of our qualified independent Financial Advisors: www.harbourwealth.co.za