Financial Markets Performance Communique – 31 JANUARY 2021

Financial Markets Performance Communique – 31 December 2020

Thank you for your recent enquiry, as regards your portfolio valuations.

Listed assets around the world sold off aggressively in March 2020, as it became clear that the Coronavirus had been exported around the world, dashing hopes of quick containment as was the case in previous coronavirus outbreaks (SARS in 2003 and MERS in 2012). The scale of the sell-off is historic and will define 2020 in the same way that the Global Financial Crisis defined 2008, the rand crisis and 9/11 defined 2001, and Asian financial contagion defined 1997 and 1998. If there is one lesson taught by past crises, it is that markets eventually recover, with the period of dislocation presenting attractive buying opportunities for quality assets that were indiscriminately sold by panicked holders. 

Government Debt across the world has risen significantly leading up to the Coronavirus crisis, with further Government debt being accumulated during the Coronavirus crisis to assist Economies to recover. Government debt must be paid back at some point in time and hence Taxpayers will bear the cost of the ever-rising debt locally and abroad. In South Africa specifically, the Tax base is reducing, largely due to profitability being protracted (prior to the Coronavirus Pandemic) and now certainly negatively affected due to significant losses which will occur at a local economy level. Which leads to the conversation where upweighting your offshore asset class exposure is now imperative.

Our views over the last 6 years regarding offshore weightings have been justified with Global equities (in December, and to date) again reaching new highs on the first COVID-19 vaccine approvals by US, UK and EU regulators and the potential in the US of a $900 billion pandemic relief bill. Despite accelerating COVID-19 infections the US equity market gained in anticipation of a better 2021 given the vaccine roll outs and potentially more stimulus under the Biden administration. European bourses also rose on the 11th hour Brexit trade deal, which helped avoid trade friction and others issues related to a no-deal Brexit. The start of the EU vaccination drive also heralded a possible return to normal in 2021. Commodity exporting emerging markets outperformed again as the vaccine news supported risk-on sentiment providing a boost to industrial commodity prices. China underperformed on concerns about government antitrust investigations on Chinese internet companies.

Having managed portfolios through several past episodes of extreme dysfunctional markets, our position remains, that a Well- Diversified Multi-Asset class investment portfolio, with commensurate Risk/Return correlation advantage, remains your only ‘free lunch’ for committed long term investors – rather than making short term Tactical calls on positions OR ‘attempting to Time the Market!’

In times of low returns, it is tempting to shift toward Cash and Cash like investments, however, this is the time (notably when interest rates are at all time lows) where portfolios need to have exposure to Equities and Global Equities. As noted above, the best place to be is within a Multi Asset class Portfolio adjusted (or in accordance) with your Personal Risk Profile whether this is Cautious through to Aggressive.

The situation (as reflected in portfolios) are as follows for the period:

		31-JAN-21	31-JAN-21
DIVERSIFIED ASSET CLASS UNIT TRUST SECTOR RETURNS		12 MTHS to date	10 YRS to date
JSE ALL SHARE (Excluding Dividends)		10.96%	10.41%
LISTED PROPERTY		-33.44%	3.63%
INCOME (FUNDS)		4.93%	5.77%
ALL BOND INDEX		7.65%	8.56%
OFFSHORE BALANCED FUNDS (RANDS)		12.02%	14.34%
GROSS AVERAGE RETURN (EQUALLY WEIGHTED)		0.42%	8.54%
SOURCE – Morning Star & Indices Reports – 31 JANUARY 2021			Per Annum
			Compound

Let us be clear though; the current sub-standard return situation over the last 6 years is not as a result of poor Fund choices or poor Asset manager selection; by either individual funds and / or by the asset management companies themselves. Out of +/- 1900 funds available, we track those with Consistent, Top Decile Performance track records, over most periods (up to 15 years in duration and more) – which comprise of only about 70 Funds in total. 

Over the previous 32 years in the Investment / Financial Planning Business, the last 6 years have been the most challenging environment in which to meet (and exceed) client expectations as regards portfolio performance return outcomes!  Worse than all four of the previous market “Crash” periods; however, Money Market returns have only beaten/surpassed diversified portfolio returns 6 times over the last 50 years – of which 3 of these periods are over the last 6 years. Despite years of below average growth, long term (10 Year plus) average returns in diversified portfolios, have exceeded Money Market returns; proving again that one must stay invested in a diversified portfolio through “good and bad” market cycles – over time. 

Trusting you will find the above commentary enlightening – as to the current situation in the markets – however we will keep clients updated on these Market issues, on a monthly report back basis.