Equity markets and the rand.

If you are one of those people who watch the equity markets on a daily basis you should have realized by now that you should stop doing so. The volatility in the share market  and our currency will drive any normal person to drink. Seeing movements of sometimes almost double digits within one month is insane, especially if you look at a historical average growth in shares of around 6% per annum after inflation. If we look at the JSE over the past two years we see monthly movements of -3% (January 2016), +6% (March 2016), -3% (June 2016), +4% (January 2017) and +7% (October 2017).

The rand cannot be described as a bastion of stability. After blowing out from around R7/$ to around R16/$ not so long ago – a 128% weakening – it strengthened to around R11,70/$ again currently – a 27% strengthening. This roller coaster ride will be reflected in any rand-based international investment. Just to give you an idea, if you invested in the American S&P500 index in January 2016, your return in $ would have been 33%. Over the same period the rand strengthened by 25% so your return translated back into rand would have been a mere 8%.

If we look at the Johannesburg Stock Exchange only, the JSE All Share Index has given you a 15% return from 1 January 2016 till 1 March 2018. If you looked at it in late 2017, however, it would have given you 20%. The point is that shares are volatile if you look at them over specific periods but over the longer term returns are always smoothed out to some extent. If we look at the performance of general equity funds we see the following:

Many factors have given rise to the volatility we have seen over the past few years, human emotions being one of them. Low interest rates worldwide were another factor and in a South African context specifically there has been political instability. We are seeing investor activism starting to play a role in our small South African share market and this will create more market reports like the one by Viceroy, which caused the Steinhoff crash and the volatility in shares such as Aspen, Capitec and Resilient. The current euphoria around Cyril Ramaphosa is creating a strong rand but it might slide back again if the realities of our economy and politically sensitive topics like land expropriation without compensation come to the front.

We have to adhere to the tried and tested investment principles of matching your investments to your liquidity needs and diversification. If you have time on your side, invest in a diversified equity portfolio and make use of the strong rand to diversify offshore if you have not done so yet. Then you have to stick to your investment plan and try not to make changes based on short-term volatility.