The 2017 investment year is already well under way, and it is worthwhile looking at the performance and valuations of the various asset classes that Seed models, values and ultimately allocates to.
The graph below illustrates the performance of the primary local and global asset classes over the shorter term, with offshore assets also in Rand terms:
Source: Morningstar, 15 May 2017
The local equity market has delivered the best performance for the year to date, followed by global equities and local bonds. Global equities returned 9.5% over the year so far in USD terms, which translates to 5.5% in Rand after accounting for the Rand strength this year.
Over the 1-year horizon, local bonds stand out as the best performer, while global assets struggled due to the Rand’s strong run during 2016. Over 3 years, local equity failed to deliver, while local property and global equities performed well on the back of the global “search for yield” theme and a weakening Rand respectively.
Below I have unpacked the local equity market performance in a bit more detail.
The local equity market delivered a healthy 8.0% for the year to date, which is great for investors who only gained 2.6% in all of 2016. The performance this year has been driven by the Industrials sector, which delivered an impressive 15.1% compared to 1.6% from Resources and 2.0% from Financials.
The graph below illustrates the rolling 12-month returns from the three super sectors on the JSE over the last 5 years. It is clear that Resources had a phenomenal run during 2016 after two years of underperformance, but the recent collapse has brought returns in line with the other sectors again.
Source: Morningstar, 15 May 2017
Interestingly, even after the decent returns so far this year, our local equity valuation model currently predicts a higher return over the next 5 years than it did at the end of 2016. One of the inputs of our valuation model is the Price/Earnings (PE) ratio, which is the multiple of annual earnings investors are willing to pay for a certain company, sector or the market as a whole.
A high current PE ratio (expensive market) results in lower than average returns over the next five years, while a low PE ratio predicts above average subsequent returns.
At the end of 2016, the local market PE stood at 22.8, which was just off the all-time high of 23.5. During January, the Resources sector reported some very strong earnings, resulting in a halving of that sector’s PE and a significant increase in the ALSI’s reported earnings.
This means that, for the year to date, the ALSI’s price performance (+8.0%) has lagged the underlying reported earnings (+ 20.0%) and valuations have improved. This situation is illustrated in the graph below, using December 2016 as a base:
Source: Morningstar, 15 May 2017
Although valuations appear more attractive than at the end of 2016 on a PE basis, the local equity market is still in very expensive territory compared to historical observations, and Seed remains underweight local equities in our multi-asset class portfolios.
Cor van Deventer
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ADDITIONAL INFORMATION (where applicable)
Performance has been calculated using net NAV to NAV numbers with income reinvested. Full performance calculations are available from the manager on request.
DEFINITIONS (where applicable)
Annualised Return: Annualised return shows longer term performance rescaled to a 1 year period. Annualised return is the average return per year over the period. Actual annual figures are available to the investor on request.
Highest and Lowest: The highest and lowest returns, since launch, for any rolling 1 year period have been shown.