The tide in the affairs of men

There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.

Julius Caesar Act 4, Scene 3, 218–224

The past year has dished up its fair share of turbulence. There have been patches of smooth sailing, but headwinds have generally outnumbered tailwinds with the net result that, of the major equity markets at the start of December, only the United States (US) is in positive territory for the year, with the S&P500 up a paltry 1% year-to-date. By comparison, the German DAX is down 13% year-to-date and London’s FTSE is down 10% for the year. Even so-called safe haven assets have been battered in 2018, with the US government bond index down 1% for the year to December.

South Africa set off the year on a stronger political footing. But, as can be inferred from the sea of red in foreign markets, the global environment brought a range of challenges, varying from Trump’s temper tantrums to trade wars and the turning of the tide on emerging market sentiment, which was fuelled by events in Argentina and Turkey.

Having opened the year on the highs of “Ramaphoria”, domestic business and consumer confidence fell away over the first part of 2018. This fall in sentiment has been aggravated by domestic recession, rising oil prices coupled with a falling rand, and a cabinet change that saw the appointment of Tito Mboweni as Minister of Finance. He, in turn, laid bare the challenges our country faces, and the demands we have to meet if we are to overcome them. In the domestic setting, lack of clarity on key policy issues – particularly on land expropriation without compensation – has further unsettled investors. On this front, we believe that policy stability is required to restore confidence and promote South African investment.

All considered, it has been a demanding year, with the JSE All-Share Index heading into the end of the year 13% lower than a year ago. The year has been particularly challenging for local mid- and small-cap stocks, the value of which are testing levels last seen during the financial crisis in 2008. In the same breath, some asset classes have managed to hold their own. For example, the South African preference share index is up 13% for the year, well ahead of the 6% return produced by cash.

As we reflect, the key question is whether the negative sentiment characterising local markets is well-placed or mis-placed. There is no doubt that the domestic challenges are large, yet there is good reason to believe that the economy will fare better in 2019 than it has this year. Cyril Ramaphosa is steadily strengthening institutional capacity, investment commitments should start to spill into broader-based investor confidence, and the damaging effects of the recent drought are passing out of the system. Regardless of near-term fluctuations, the essence of investing remains unchanged and is founded in observing a sound investment strategy, buying the right assets at good prices and then letting the result do its work.

Warren Buffett’s oft-quoted adage holds true: “… you only find out who is swimming naked when the tide goes out.” Over the past five years the tide has gone out of South Africa’s economy and investment universe, and the fault lines in investment strategies have been exposed in many places. Our portfolios have coped well in this environment, supported by key principles that make up the foundation of our investment process:

  • Effective investment management starts with managing risk before considering returns;
  • Asset allocation is the single most important determinant of long-term investment results; and
  • The ultimate driver of investment success is long holding periods that reward patient capital invested in good assets bought at the right price.

The “inconvenient truth” of investing is that markets are cyclical; prices ebb and flow – and investor sentiment alongside it. But inevitably the tide turns and prices return to reflect the intrinsic worth of assets. Our portfolios are made up of good assets owned at good prices, and our investors will reap the results of this process as the tide turns.