Adriaan Pask | Aug 21, 2019 05:59
ALSI rolling five-year annualised returns: five worst returns over the past 40
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
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.
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.
Written By: Adriaan Pask
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.