It may be prudent to recap what we have experienced in the markets since the start of the year. The graph below indicates the performance of the main South African Asset Classes: Equities, Bonds, Listed Property and Money Market.
Two aspects of the performance are notable. The first is the dive which Bond and Listed Property markets experienced during May and June. This was initiated by indications from the United States Federal Reserve that they intended to begin tapering their massive bond purchasing program. Fears that this would reverse the flow of yield seeking money which has been pouring into Emerging Markets spurred international investors to sell out of South African bonds and Listed Property Shares (both these assets were delivering high yields in comparison to their developed market counterparts).
This dive in capital value was exacerbated in the Listed Property market due to the lower liquidity of the shares and the concentration of the index in a small number of shares. While this correction in the market did make these asset classes more attractive we are still wary as there is potential for further corrections in the short to medium term.
The other notable aspect of the graph is the volatility of returns we have experienced from the domestic equity market. While we have expected increased levels of volatility we have been pleasantly surprised by the performance that the equity market has delivered. We have to caution here that a large portion of the returns that All Share has delivered were concentrated in small number of shares which are, for the most part now considered overvalued.
An important message that we have to highlight to our investors is that while we have been able to deliver high returns, we anticipate that it will be very difficult to achieve returns in excess of 5% of inflation over the next 5 years. While it is our hope that the portfolios will continue to outperform we have to ensure that our investment clients’ expectations are aligned with our view of the market.
