• James Twidale

The development of human time frames


As the year draws to a very sudden close, investors and advisors often reflect on the year that has been. How did markets do? How did portfolios fare? Most importantly, did they stack up in relation to long term investment objectives?

If none of the above panned out according to plan, then the new year often starts with a change in strategy and approach to give investors the feeling that they are starting afresh and off a clean slate. A bit like giving back the “broken toy” referred to in the October 2018 Newsletter

We have new year’s resolutions, we come back with renewed energy and big ambitions to right all our wrongs. It seems to be the same every year no matter who you are and where you come from. Many of these resolutions are the same; work harder, make more money, save more, gym/exercise more and finally stop smoking. Sadly, most of these resolutions will recur annually for the remainder of our short lives.

But unlike most of those things which are for the most part in your control, the investment market, business cycle and economic policies across the globe are not! None of these things work on calendar years and none of them have a predefined timeline or cycle. So; no matter how much you desire to measure these types of things in calendar years or pro-actively deal with them according to your own calendar year timeframe, they will not be influenced or shaped by your resolutions or ambitions to path correct based on what transpired according to your own calendar refresh.

In fact, if you look at market cycles, they tend to look fairly irregular in timing, length, height and depth. This is applicable to both business and investment cycles. This is nicely represented by the image below showing the length and height/depth of the respective bull and bear markets experienced by the S&P 500 from 1903-2016.

Source: Newfound Research

Is the moral of the above that you shouldn’t review your portfolios and market at the end of calendar year? The answer to that is no. Doing a sanity check at least once a year is always a good idea. The reality is often there is very little you can learn from it that warrants a change in plan or strategy. This assumes that you, of course, planned and invested correctly to start with.

Any decision that investors are inclined to make at reflection points like this are likely to be value destructive as opposed to value additive. It is counterintuitive, but they are called investor behavioral biases for a reason.

As South African investors and advisors there is probably another health warning to consider for 2019. It is called the National Election and it’s expected to take place in the first six months of next year. What this means is that there is likely to be a period of much uncertainty, potential market impacts and currency volatility. However, most of this is anticipated to subside once investors know who will be in charge and calling the shots for the next few years.

What this again potentially means is that the calendar year focus of many an investor is not going to have or carry any weight and therefore should be considered when you do your 2018 market review.

2019, we are all hoping is materially better than 2018 and turns the tide on what has been a dismal 3 years for South African investors, but by saying that I am falling into the human calendar year timeframe trap. What I should be saying is that I hope 2019 coincides with a change in both business and investment cycles for South African investors.

Father time works in mysterious ways for investors and patience is often tested the most just before a period of stellar returns.

Let us not come back to work with undue optimism around the markets for 2019 but also not reflect too pessimistically on 2018, because in the bigger scheme of things neither period is of any significance over a longer timeframe despite the feeling attached to both in the minds of investors. The calendar year is a human construct and has no impact on market and investment cycles and should not be the timeframe of importance when it comes to reviewing and assessing investment positioning, especially in an election year.

The month of November continues the 2018 trend of disappointment for local investors, despite seeing an overall improvement amongst the asset classes. International investors have, however, seen some gains in equities and bonds.

The JSE All Share Index (ALSI) has shown a 2.6% improvement in growth from last month led by Health care stocks, but Resources’ declined by a further 7.5% from last month, on the back of declining price of oil and platinum, which dragged the asset class (local equity) down significantly.

Industrials has seen an improvement of 7.3% from last month, led by Bidvest and Woolworths with heavyweights British American Tobacco (BAT) and Richemont continuing to drag the ALSI down due to disappointing figures. Financials, on the other hand, showed refreshingly positive growth at a mere 0.5%. Bank stocks Standard Bank and Nedbank have shown month on month gains.

SA property has not shown much improvement with Nepi Rockcastle continuing to have a negative impact on the industry and UK’s Intu Properties plummeting after a takeover offer for the firm fell through for a second time this year, due to fears around Brexit.

SA bonds were in the green, up 3.9% lead by longer dated bonds on the back of a strengthening rand (ZAR). Cash remains attractive, with a 0.6% increase.

The South African Reserve Bank (SARB) hiked interest rates by 25 basis points to 6.75%. Standard & Poor (S&P) has retained South Africa’s current debt rating and stable outlook, as well as its non-investment grade sovereign debt. The return of undesirable load shedding has had an impact on the economy and questions with regards to Eskom’s debt bailout by the Government remains to weigh on foreign investors.

The rand improved significantly against the US Dollar (USD), British Pound and Euro. This is more a result of USD weakness and Emerging Market (EM) strength, than it is a ZAR recovery story. Nonetheless the ZAR strengthened in excess of 6.0% against its hard currency counterparts which unfortunately for local investors with offshore exposure meant all foreign positive returns were negated by the stronger local currency. (Below is a chart of the ZAR vs the USD for the month of November)

Source: Bloomberg

Global Market Equities and Bonds rebounded over November with a slightly more optimistic global equity environment and bonds benefiting from the possibility of a slowdown in interest rate hikes going into 2019 in the US. This rebound is partially attributable to the anticipation that US president Donald Trump and Chinese counterpart Xi Jinping would come to an agreement at the G20 summit.

The slowdown in potential interest rate hikes has shown to be beneficial for EM, also benefiting from the large drop in oil prices caused by US and Saudi Arabia’s on-going discussions and indecision around the current global over-supply. (1 year oil price chart below)

Source: Bloomberg

2018 has been a year to quickly forget for all investors and this may or may not continue into 2019. South Africa has felt the discomfort more than others, and we can only hope to see a turnaround in economic development and investment prospects. With this unknown in mind, we will continue to encourage investors to diversify and invest across the globe and across asset classes.

On a final note:

Thank you to all investors and advisors who have made use of 1st Fusion investment vehicles and funds over the course of 2018. We know it has not been the easiest year and hope that 2019 brings with it a change in fortunes (subject to the above).

We look forward to working with you all going into the new year and wish you all safe travels and joyous festive seasons.

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