A new dawn begins
The new year has seemingly initiated a new dawn for South African investors. We have witnessed a pronounced improvement in market sentiment since December’s historical political events, with widespread strength in South African equities and the rand. Investors seem to be extrapolating these political changes into better economic prospects, and while we embrace the shifting attitude, we continue to urge our clients to look beyond the excitement and remain intently focused on the fundamentals of sound investing.
The lost years
To provide perspective on why we urge such patience, we do not need to look far. For several years now, many investors have felt short changed in terms of risk for reward, with poor consumer and business confidence the result of a tumultuous period for South African investors. In fact, the conditions have been so volatile that we observed many investors move their investments away from multi-asset funds to money market and fixed income funds (in some cases, at the point of maximum pessimism).
Source: Morningstar Direct
Of course, there have been many reasons to be fearful. The South African economy has experienced significant headwinds for several years now, despite an expanding global economy. Frustratingly, we have witnessed a widespread degradation of the South African economy as growth, unemployment, debt and inflation have all reached uncomfortable levels over this period. Political missteps, including curious cabinet reshuffles, poor policy execution and rumours of state capture have also driven investor confidence to worrying levels.
Yet, fear (nor greed) should have no place in an investors toolkit. Instead, we believe addressing behavioural biases are the key to unlocking investment potential, as they help us to focus on fundamentals, valuations and the merits of long-term thinking – all of which are pivotal in meeting investment objectives.
Understanding the difference between politics, economics and investments
A rational investor should only care about the political and economic developments if they impact the fundamentals of an investment. In this regard, we believe it is more important to be forward looking rather than backward looking. For instance, political turmoil and economic pessimism can create a massive divergence between the valuations of the rand hedge companies and South African focused companies (SA Inc). In a backward-looking sense, this is easy to justify. We know that rand-hedge shares became the darlings of the market by tapping into the growing global market and a weaker rand. We also know that SA Inc businesses fell by the wayside as confidence in the local economy plummeted. Yet, what an investor really wants to establish is twofold: a) whether the profitability of SA Inc companies may be fundamentally damaged, and b) how much is priced in?
Instead of the succumbing to the temptation to predict and extrapolate, we remain focused on holistic portfolio construction and selecting managers we believe have a durable long-term competitive advantage. We cannot control sentiment and it can be very dangerous to extrapolate political change into economic prosperity (and even more dangerous to extrapolate this into share-market gains).
Therefore, while we have seen a lot happen since the turn of the year, investors will be well served with a patient outlook. It will take time before we truly understand the impact political change may have, so we urge our clients to be careful not to overreact. Ultimately, the aim of consistent long-term outperformance is only possible if we can obtain an informational, analytical or behavioural edge – and at times like these, one should not underestimate the power of controlling our own behaviour.
Written By: Victoria Ruevers, Morningstar Analyst