The scourge of missing the boat

Maarten Mittner is a freelance financial journalist and a markets expert.
Maarten Mittner is a freelance financial journalist and a markets expert.

Investing in equity markets has become a perilous journey for most local investors, with a wide divergence in performances in 2019 resulting in some having gained, but others having lost out measurably.

An investment in resources in 2019, or exposure to a MSCI World Index ETF fund, would have been beneficial.

Naspers* also delivered a decent return of 18%, as the company continues to ride on the coattails of resurgent worldwide tech stocks. 

And Capitec and Clicks remain growth stars. But not all funds have exposure to these shares.Any investment in SA Inc. over the period would have been negative for an average investor. The FTSE/JSE All Share Index ended the year 8% higher. 

An investment in Old Mutual’s Gold Fund would have yielded 68%. Platinum shares would have resulted in a real bonanza, with Anglo American Platinum up 150% and Impala Platinum 300% higher.

Chances, however, are that the average investor had little exposure to these sectors, resulting in a generally miserable year for most of them. 

Most likely there would have been Sasol in a general portfolio, down 28% in 2019 and extending losses in the first two months of 2020. Or Shoprite, losing 35%.

Banks, bar Capitec, delivered the usual subdued performance, with Absa down an annual 13%, and Standard Bank and FirstRand both losing 9%. 

Property stocks are still in the doldrums.In contrast, the MSCI World Index rose 27% in 2019. Not all investors with a penchant for global markets would have benefitted, though, with Allan Gray’s Orbis global fund range retreating 9%. 

Over a 10-year period, however, Orbis returns remain at an average annual 15% growth rate.The divergent outcomes of 2019 are sure to place renewed focus on the different managerial investment styles – active versus passive or growth versus value. 

It was a dismal year for most active fund managers, who generally follow a stock-picking strategy as opposed to tracking an index.Will active managers get it right this year, having clearly missed the tech boom and resurgence in resources stocks?

Highly unlikely, it seems; active managers have become so risk averse that any reason in the book will probably be used to remain on the sidelines. Expect to hear comments that techs and miners are overvalued at present levels. 

And that mainstream stocks offer better “value”. Or buy low and sell high.Active managers predominantly look at revenue and cash flow before investing.

Not forgetting earnings and profit. Often investments are exited at too early a stage, with the tech giants and remarkable growth of Tesla serving as good examples. 

Four global tech behemoths – Alphabet, Apple, Microsoft and Amazon – have all crossed the $1tr market capitalisation mark. And Tesla is now more highly rated than Ford and General Motors combined. 

The rise of the tech giants has meant winners and losers have become more pronounced in the market – the losers mainly being those traditional companies shunning market hype, with the focus still on dividends rather than increases in market capitalisation.

Under these circumstances, passive index funds deliver higher returns with lower costs and less effort than with an active manager. The focus on value stocks has cost active managers dearly. 

Perennial outperformers of the past, such as Warren Buffett’s Berkshire Hathaway, delivered 11% growth in 2019. The S&P 500 rose 27%.In the past, growth and value phases in the market were linked to cyclical changes in interest rates and GDP growth. 

Value stocks usually gained in times of a relative economic downturn and growth stocks in the boom times. The problem is that the lines have become blurred, with the global economy in an extended steady growth period since 2008, largely due to dovish central banks, making it unlikely that the traditional growth and value cycles of the past will be repeated anytime soon.

Active managers have been waiting for the boom times to level off, much the same as when the dotcom bubble of 2000 to 2002 deflated. That was when companies such as were in vogue and Alta Vista was the biggest search engine on the internet.

Dovish central banks have ensured that easy money and growth stocks predominate. Berkshire Hathaway may hoard as much cash as it wishes in anticipation of a fall in equity values, and so benefit by snapping up undervalued companies. 

But it may be in vain.Cheaper passive funds as investment vehicles have become more compelling. That is, unless another huge downturn eventually materialises. Then an index fund would be the worst place to be.

Exposure to both local and global stocks will minimise risk. But this year is likely to be another difficult decision-making year for the average investor. Would it make sense to jump into the bombed-out local property sector? 

Or increase exposure to highly-valued mining stocks? Or should they stick with the fallen, such as Woolworths and Massmart in the retail sector, hoping for some form of recovery amid new management?

Staying long in the market favours those with a longer investment horizon. 

But it remains a nerve-racking journey for most. The chances of missing the boat remain big.

*finweek is a publication of Media24, a subsidiary of Naspers.

Maarten Mittner is a freelance financial journalist and a markets expert.

This article originally appeared in the 20 February edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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