Schalk Louw shares his outlook for the largest asset classes available to local investors.
2020 will undoubtedly go down in history as the year of the Covid-19 pandemic. It is therefore with great enthusiasm that I look ahead to what I hope will be a much better 2021. In this issue, I recap the performance of a few asset classes during 2020 and discuss what we might expect of them in 2021.
What a year it’s been for shares. Following the FTSE/JSE All Share Index’s (JSE) performance for the five-year period ending31 December 2019, during which it couldn’t even yield returns of 6% per year, all hopes were set on 2020 to be the year of recovery. But global markets saw one of the biggest crashes since 2008 when Covid-19 was declared a pandemic. By 19 March 2020, the JSE was trading 30% lower than at the beginning of 2020.
From 1987 until now, the JSE has only declined by more than 30% on five occasions. Although it was trading at higher levels on all four prior occasions, the recovery experienced during this correction has by far been the most aggressive. As at the time of writing, the JSE was trading in positive territory for the year (see graph).
With financial stimulus slowly finding its way to local shares, and an interest rate environment that will most likely stay low for longer, it’s difficult not to get excited about the future of local companies.
The expected 12-month consensus price-to-earnings ratio (P/E) forecast of 14.1 (according to Thomson Reuters) at which the JSE is currently trading, is not expensive. If analysts’ (consensus) price targets for JSE companies are 100% correct, it would seem that the JSE (at 56 615 points), still has 26% growth potential. Even if these forecasts are optimistic (and even though this optimism is dramatically discounted), I reckon it remains an attractive investment that justifies an overweight position in your portfolio.
While offshore shares (MSCI AllCountry World Index or also the ACWI)experienced the same collapse as local markets, they have recovered even faster than the JSE (especially US companies, which constitute 58% of the ACWI). Many experts feel that the US is currently on the more expensive side. They advise investors to exercise extreme caution, and not base their decisions only on recent returns. After all, the US market traded at similar valuations between 1999 and 2009, and thereafter delivered negative returns for an entire decade.
If analysts’ (consensus) price targets for ACWI companies are 100% correct, no growth is forecasted for the next 12 months.If you dig a little deeper, however, you realise that if you exclude the US, there are still many investment opportunities in areas like Europe and Britain, and in emerging countries like China. Therefore, I won’t reserve an underweight position for offshore shares in my portfolio (I’d classify myself as neutral), but I most certainly won’t let last year’s ‘winners’ take the lead in my portfolio.
Simply by looking at where the world currently finds itself in the interest rate cycle, I would be very wary to invest in any international bonds right now. Local bonds, however, tell a different story. I believe that SA’s ten-year government bond yield now at around 9%, has most of the risks priced in, which justifies an overweight position for the next 12 months.
I believe that there are some opportunities starting to emerge in this asset class, both locally and offshore. However, I also think the risks outweigh the possible opportunities and I would remain cautious. For now, I would remain underweight in property shares, at least until we have more certainty regarding this asset class.
With basically no interest returns in developed countries, and current local money market rates just below 3.5%, cash looks set to deliver negative real growth for investors – if you work according to the International Monetary Fund’s expected inflation figure of 3.88% for 2021 (by year-end 4.3%). Considering this, cash will have an underweight position in my portfolio in 2021.
Thank you to all my readers for your loyal and ongoing support during this incredibly challenging year. Rest well and return with renewed enthusiasm in 2021.
Schalk Louw is a portfolio manager at PSG Wealth.