Hope in turbulent times

Hope in turbulent times

By Menachem Kay


Be fearful when others are greedy and greedy when others are fearful
– Warren Buffett

This is my twentieth year in this industry. I have witnessed the Russian financial crisis, the dot-com bubble, the economic effects arising from the September 11 attacks, the market downturn of 2002, the great financial crisis of 2007/8, and some very flat years when the market gave us almost no returns at all.

I have also witnessed some wonderful years, where the world stock markets delivered amazing, high double-digit returns and it seemed we could do no wrong. But somehow the last four years have just felt different, felt worse.

I keep hearing investors telling me that they are fast ‘falling out of love with South Africa’. And who can blame them? The news flow has been less than flattering. It seems like every day there is a new revelation about a corrupt minister, a failing SOE or negative economic data.

To make matters worse, instead of our ministers falling on their swords as one would be expected to do under such circumstances, there is a culture of defiance in the face of overwhelming proof of corruption – personified, of course, by Mr Zuma!

Unemployment is stubbornly high and without substantial, sustained growth is expected to slowing increase. We have a populist and radically-fascist EFF on the far left, and on the other end of the spectrum, the DA, which seems capable of only ever scoring own goals.

Is there hope for South Africa or is it time to pack up and leave? While we at Octagon Financial have long advocated diversification and therefore hold a percentage of our clients’ wealth outside the country, the big question has always been, ‘How much should I hold offshore?’ Put differently, the question could be, ‘Is there still an investment case for South Africa? My answer is a resounding YES! Over the past few months I have begun to see another, not yet fully clear picture, emerge. In many ways I believe we have been here before. The driving factors that have led us to this point may be different, but we have faced what seemed like insurmountable odds previously, and made it through. And I believe we will again. There is little doubt that it won’t be quick or easy, and volatility will most certainly be our regular companion, but we have the right people in the country to turn this ship around.

Through these times I have tried to develop an objective approach, one that enables me to see the market from as realistic a perspective as possible. In so doing, I try to remain uninfluenced by overtly negative or panic-driven sentiment, and rather be informed by what I believe to be a golden rule in investing – focus on the true market valuation.

The first step to healing anything is acknowledging the problem. Mr Nhlanhla Nene, whom many of us revere, took the courageous (although obvious) step and resigned. But we missed it! We all missed what a momentous occasion that actually was. Instead of defiantly hanging on to his position, bullying all who had the temerity to protest, he apologised and resigned. I have now started listening to and viewing the news differently. Yes, we are still hearing daily news about SAA, the SABC, Eskom and other flailing SOEs, but under the very able guidance of Mr Pravin Gordhan, corrupt and ineffective boards are being replaced. Not based on nepotism or cronyism or political favours, but on merit. When last did we see that? I acknowledge that this will take time to correct, but I also believe that once we get the ball rolling and our corrupt ministers understand that their time is up, things will start to get better much faster.

Our president, Mr Cyril Ramaphosa, took over in a very difficult time. As many of you know, he does not actually control his national executive committee or his parliament. It is only after next year’s elections – and only IF he wins convincingly – that he can consolidate and begin making the changes that I believe he knows he has to make. Notwithstanding this delay, look at how many changes have already happened for the better! Yes, these have not occurred as quickly as we would have liked, but things are certainly better than before.

The case for remaining invested

It’s obvious from this assessment that we don’t need to sell our investments and go into cash. It’s tempting to want to do this and wait until the markets have turned and the volatility has died down before reinvesting in the markets, but I don’t believe that’s necessary.

My thinking is best illustrated by the outcomes of a study conducted by Investec Asset Management late last year: It is imperative to acknowledge that the market has inflection points – times at which it turns and gains so much on a single day, that it fundamentally changes the overall return investors receive over their investment period.

In the graph, calculated from 1 July 2007 to 30 June 2017, the five largest return days made more than 50% of the total return over 10 years, while the 10 largest return days made up 80% of the return over the 10 years. Missing the top 20 days gave this 10-year investment a negative return of some 10%!

So, where to from here?

As 2018 draws to a close and we reflect on the challenges it brought and even the market challenges of the last three years, it is time to look ahead. Will we finally get that positive upswing we have been waiting for? Given global political uncertainty, our national elections next year, and the noise and electioneering rhetoric that this brings, I believe that now is the time to focus on what really counts in the long term – true valuations. I believe there is plenty of value in the South African market and, indeed, around the world. It is easy to hear the noise, but there is real value in not listening.

I would like to take this opportunity to thank you, our valued clients, for your continued support during this year, and to wish everyone a wonderful, safe and well-deserved break over the coming holidays.