The last time we dealt with a true global pandemic was over 100 years ago and what hasn’t changed in that hundred years, despite all our technological advances, is the simple initial advice to wear a mask and keep your distance. It’s a reminder, that whilst lots changes, sometimes the simple advice is still the best.
The advice for those who were timing the markets would have been to remain invested. Those who tried to time the markets would have found it extremely difficult, with markets falling close to 30% between late February and March 2020, only to recover strongly enough to finish up close to 10% on average for local investments and up 20% for selected international assets. It’s tough to forecast market returns, especially in the short-term.
Even the performance of the rand must have surprised many a currency trader who were sure that the weakness of the economy, the recent downgrades from rating agencies and most importantly the devastating impact of the lockdown would have kept the rand extremely weak. Instead, it strengthened from a low of R19 to the USD to under R15 to the USD between April and December 2020.
The second wave of COVID was the true test of our preparation efforts. We all knew to wear masks and sanitize and remain socially distanced, yet still many hospitals were overwhelmed and this time many of us lost people that we knew.
Reading the news, it is easy to focus on the negatives, the government delay in procuring vaccines, the uncertainty over who will pay and how it will be funded and more importantly distributed. Yet, we feel that there is much to feel positive about. There are a number of proven vaccines (from East and West), there is the capability to produce enough vaccinations to meet global demand and some of these doses have already landed in South Africa and are awaiting distribution.
It’s important to keep track of reality, but we should try and focus on the positives.
Resources “out-rocked” everything else
The resources sector was one of the standout performers in 2020 with the FTSE / JSE Resources delivering over 20% (Total return) over the 12-month period. This was helped by weak currency and was supported by a stronger than expected recovery in global economic activity. Commodities such as Palladium reached record highs. Gold also reached a record high, but part of its performance may be as a result of investors trying to protect the value of their investments rather than demand for the commodity in industrial production.
Stocks and sectors that had a strong domestic exposure were hit hard, this included financials and mid cap equity stocks where revenue was reliant on the local economy, which, of course, was hit extremely hard by the lockdowns
What will happen to listed property in SA?
Over the last two years property has fallen over 60%. It started in 2018 with concerns over allegations of market abuse stemming from 2018, with SA’s poor economic growth only removing further investor confidence over 2019. The real impact came in 2020 with the introduction of lockdown in March as a result of COVID-19 along with the realization that it is likely that we may never go back to the way things were. We may work much more flexibly in future and this might decrease the need for pure office space.
As a result of this, we have started to reduce our exposure to listed property as a separate exposure in the CoreShares OUT indices.
Bitcoin has recently hit an all time high as investors rush into the asset class. It is being suggested that Elon Musk is considering adopting Bitcoin for use in managing corporate cash. Bitcoin is extremely volatile and it is not clear that these levels can be sustained without a continuing growth in the number of investors buying into it. Furthermore, even related crypto currencies such as Dogecoin have risen extremely hard on the back of a simple tweet from Elon Musk.
Make no mistake, Bitcoin and the underlying distributed ledger and verification technology will likely fundamentally change finance, but what is not clear is how investors can make money other than by pure price speculation, yet. Perhaps Bitcoin, or a similar variant will become the new global currency?
What is the outlook for global equities?
It is often said that markets can stay irrational longer than you can stay solvent and it certainly seems true when looking at equity markets. Looking purely at valuations, global equities, especially the US, and emerging market equities are quite expensive relative to history, the US even more so.
When I want context, I sometimes look at a measure called the Shiller P/E – it’s simply the price of a market (it’s share price if you like) divided by 10 year earnings. At the moment the US equity market is as expensive as it has been in the last 140 years or more except for the tech bubble in the late 2000’s and the stock market crash in the 1930’s.
This is probably partially as a result of the downturn in earnings as a result of the global lockdowns. This means that if economic activity recovers quickly then there is still scope for stockmarkets to rise further, but the market remains quite expensive still.
What is more difficult is deciding which sector, or area of the market will be the star outperformer. Many continue to feel that US technology (including Tesla, Apple, Alphabet) can still continue to run.
Back to home, what is happening in SA?
South African debt to GDP ratio is expected to reach 86% in 2021 and balloon to 114% by the end of 2025 as government costs continue to rise and growth is stunted, impacting on the government’s ability to collect tax revenue.
This is a key issue for our Investment Committee who worry that government is running out of runway and borrowing costs will continue to rise while punishing its relatively small tax base.
On the flip side, South African bonds continue to look attractive as investors across the globe seek out yield and we have a relatively transparent fiscus when compared to some of our peers.
This could mean that global investors will keep pouring money into local bonds and makes them an attractive investment paying interest of over 8%, depending on the bond.
How are we doing?
Whenever we discuss fund performance it is always worthwhile to remember that your individual returns are not the same as those below, and that’s because your individual return depends on when you invest money.
We monitor the returns of the portfolios on a quarterly basis, their absolute returns and those against peers. The returns shown below are the three year returns for each of the funds. Whilst the funds delivered respectable returns versus their peers, the results have been uninspiring and we are in the process of making significant changes to the indices that govern each of the CoreShares Funds.
What are we doing?
Well, we are making significant changes to the asset allocation for the first time in three years. We don’t believe in making changes every day and we believe it becomes extremely difficult to understand the value you add if you try and trade on short term information.
We prefer to keep trading costs as low as possible, and try to discern long term trends that we believe will hold over the next three to five years.
Our changes to the index allocations of the CoreShares OUT Indices can be summarized as follows:
· Increasing offshore allocations as high as possible, subject to regulation 28 restrictions
· Reducing our weight towards global and local listed property
· Increasing the weight towards cash in the lower risk portfolios
· Reducing our allocations to Inflation-Linked Bonds and increasing our exposure to nominal bonds.
· Increasing global currency exposure in the lower risk portfolios.
· Increasing the global equity weight in the OUTaggressive index to nearly half of the entire portfolio. This gets us ready should we decide to add a global fund in the near future.
The table below summarises the new board allocations, and we compare the offshore and local exposures between the new portfolio allocations and the existing.
We are in the process of working with CoreShares and the Regulator to get this changes implemented as quickly as possible and will aim to provide more information in the coming weeks.
We wish you all a 2021 that is filled with hope.
All our investments are exposed to risk, not guaranteed and dependent on the performance of the underlying assets. Past performance is not indicative of future performance. Results are provided for illustrative purposes only and are amount and time horizon dependent.