People tend to only remember things that have happened recently and then extrapolate them into the future. If you take the returns on the JSE All Share index over the last three years, you will see a return of 52%. If you look at the returns on the Resource 10 index, you will see a return of 84% over three years. If you look at shares in the USA, and specifically the Nasdaq, the return was 106% over the last three years. These returns are way above the long-term averages, and if you catch yourself thinking that 2026 should give you similar returns, or that the return you got wasn’t as high and good enough, then you are falling into the trap of recency bias.
Another important development to consider, is the recent outperformance of the South African shares relative to the USA shares, and the strengthening of the rand against the US$. If we look at the current situation in South Africa, we see the Resources companies, especially the gold and platinum miners, doing exceptionally well. If you look at other sectors of our market like Financial, Retail and Industrial, the returns are not nearly as high, resulting in your equity performance in the South African market being very concentrated. Does this situation sound familiar at all? It should, because this has been the situation we have experienced over the last five years in the US market where Big Tech companies, represented by just seven companies, have outperformed everything else, causing the performance basket to be very concentrated as well.
If we look at the recent strengthening of the rand against the dollar, we have to remember that our investment decisions should not be dominated by what the currency does. Currencies are unpredictable over the shorter term, and unless there are catastrophic fundamental reasons to consider, things like inflation differentials should bring currencies back to a level of purchasing power parity over the longer term. Over the last seven years the rand went from R12.32 to the $, all the way to R19.76 in April 2025 (-60%), and now back to R16.20. Most of the weakness in the rand over that period was caused by very concerning domestic infrastructure and political issues, but now that things are turning around for SA, we see confidence returning to our currency, and on top of that, the current US administration is making the US$ a very unfavourable currency to invest in worldwide.
So let us take a moment and consider the risk we take in our investment portfolios. At JWR we prefer to only invest funds that will be used 7+ years from now in 100% equity investments. We acknowledge that sentiment can cause a lot of volatility over shorter periods and prefer to have a balance of different asset classes over the first six years. So, if you have to commit your money for the next seven years to an equity investment without the potential to change your initial decision, where will you invest? Take the following factors into consideration:
- Currently the Big Tech companies (Mag7) in the USA are not performing as well as the broader market. They have been the star performers over the last five years but now investors are asking some questions regarding their valuations and astronomical capital expenditure into AI. Their earnings per share are still very good but if AI is not going to be broadly adopted throughout the world over the next seven years, they will most probably be the underperformers. But, if the AI revolution does materialize as expected, then these companies will not only be a fantastic investment, but also a very stable, low-risk one because of their size.
- The current Trump administration will only be in charge for the next three years. Trump’s policies are rubbing most of the world the wrong way and that is why the US$ is losing favour. If the next administration is more diplomatic and inclusive, will the might of the US economy and the $ bounce back, or will the damage be permanent?
- The South African equity market is driven largely by Gold, Platinum, Copper and some other metals. SA-centric companies like the banks and retailers are doing okay but not great. If the commodity cycle stagnates, as it will, how well will South African equities do relative to US equities? The structural problems in SA are being addressed and SOE’s like Transnet and Eskom are being fixed. The social problems of unemployment and crime are, however, not improving that much. How long will it take for the social issues to overtake any progress being made on the infrastructure side?
- Unlike the US situation, where there will be a new administration in three years’ time, in South Africa it is very probable that the ANC will be the dominant party for some time to come. Currently the policy of the ANC is to challenge the US administration by allowing things that irritate them, e.g. allowing Iran to do joint naval exercises in Simon’s Town; take Israel to the ICC; telling the world that we will fight with Nicolas Maduro against the USA; and collaborating closely with China and Russia. What do you think the impact on the rand will be if the US decides to really start an economic war against us?
- The current strength of the rand is linked to various very positive things happening inside and outside of our borders. If the current stability we are experiencing in SA is shaken for some reason by some stupid political move, what will happen to the rand? Will the rand be stronger or weaker against the dollar, euro or pound, seven years from now?
These are all things you have to think about on the risk side of your portfolio. It all boils down to where you think you have the least amount of risk to generate an inflation-beating return seven years from now.