“Economic growth outlook at record highs”
“The economy has never been healthier“
“GDP growth to leap into never before seen numbers“
These are some of the headlines you haven’t seen lately in the news, and for good reason. We are currently in quite a “bad news” cycle, where good news about the economy is few and far between.
As humans we often extrapolate the economic bad news into predicted stock market returns. Why do we do this? The answer could be explained by the following simple exchange between two people:
1) I would like to invest.
2) Where?
1) In South Africa.
2) But… The economy isn’t doing that great and besides, what about the political instability that is so rife within emerging markets. Never mind the corruption!
See what happened there? The lines were immediately blurred to the extent where predicted investment return was linked to economic growth. This is normal. Not rational, but normal.
While the potential earnings of a company does depend to a degree on the economic conditions of the environment it operates in, we must remember that this is an aggregated viewpoint. We are standing at the top of the mountain – looking down and seeing it all as one, when we need to remember that some sectors of an economy can be in an up-cycle as others face headwinds. Asset managers refer to these as “pockets of value”.
Another important note to make here is that we are talking about the South African economy. About 55% of sales by JSE listed companies are made outside of the country, which does provide a good hedge when local sales come under pressure due to local economic pressures.
The graph below takes the Year on Year GDP and Year on Year JSE returns since 2004, and plots it on the same graph. We have divided the JSE returns by 6, to make the scale similar.
Judging from the graph, we wish those luck who feel keen to predict stock market returns after hearing GDP forecasts. We still firmly believe that the offshore component driving our stock market will provide a good hedge from purely local bad news.
Have a lovely weekend!
