The worst returns are usually followed by the best

The worst returns are usually followed by the best

Adriaan Pask  | Aug 21, 2019 05:59

South African equity investors ended 2018 on a sour note, with returns on the FTSE/JSE All Share Index (ALSI) falling as low as -11.38%. But if history is anything to go by, the poor returns of the past few years could turn.

Data shows that the ALSI is currently experiencing similar low return levels to those seen on five previous occasions over the past 40 years.

ALSI rolling five-year annualised returns: five worst returns over the past 40
I-Net Bridge Graph
Source: I-Net Bridge

While poor returns are a bitter pill to swallow for any investor, they are by no means an anomaly. It is more important to reflect on the subsequent returns the ALSI generated after each of the previous ‘worst return’ periods.
The red circles on the graph above highlight the lowest rolling five-year annualised returns generated by the ALSI since 1979. The data also illustrates that these ‘severe’ declines were always followed by a drastic upsurge in returns.

For example, after the market dropped in April 2003, subsequent returns jumped to as much as 41.09%. After the ALSI’s drop in March 1979, it also subsequently rose by about 15%.

On average, the ALSI rose by more than 24% every time the market reported depressed returns over these five periods – exceptional returns that would easily have been lost had investors given in to the urge to switch and invest elsewhere. Those who remained invested were rewarded with attractive returns in the aftermath.

ALSI three-year subsequent annualised returns after each depressed period

PSG Research Team
Source:PSG Wealth Research


Lessons from previous periods of poor sentiment
The aftermath of the 2008 global financial crisis (GFC) provides an unrivalled case study for our premise that the periods of the worst investment returns are usually followed by the best.

Bloomberg reports that from 2009, market participants saw a boom in equity markets, with investors generating returns as high as 20% in an environment where relatively cheap stocks were in abundance. The table above also shows how investors received more than 16% returns in the subsequent three years following depressed returns during 2012.

Now is the time to take advantage of poor sentiment
Valuations done in May show that South Africa has some of the lowest-priced shares in the world, offering excellent investment opportunities for savvy investors. Additionally, Bloomberg data shows that, based on the historical average of the market’s P/E ratio of 12.26 times (as at 31 May), the overall market is deemed cheap compared to the current P/E ratio of the market, which is slightly lower at 12.08.

If history is anything to go by, those who remained invested in equity markets amid the downturn of the 2008 GFC can attest to how rewarding it is to brave the storm, and to invest when everyone else is fearful.

Bottom line
We cannot deny that the South African investment landscape comes with its own set of challenges. However, the market has acknowledged these trials and has already priced in these risks to a large extent.

While the local bourse has delivered poor returns over the period in question, we would like to urge investors to remember that markets always run in cycles. And while it may be down now, it will eventually start rising – whether you are invested or not. So, don’t miss the upsurge – be patient and stay invested.

Adriaan Pask

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Monzi Modesto
Monzi Modesto

The bottom line is what everyone should stay reminded of. ”Brave the storm” & ”markets run in cycles “  ... (Read More)

Aug 21, 2019 11:10 GMT· Reply
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