June 2015 investment markets update
The current state of the SA and International markets can best be described as ‘volatile’. May 2015 was bad month for investors, the SA stock market fell by 4% during the month, while a balanced portfolio lost between 2.5% and 3.0%. Almost all asset classes lost money in May however most portfolios will still show positive growth for the year to date. This is very typical of the volatile times we are seeing at present.
Over the past 12 months, the JSE All Share Index delivered a total return of 8.5%. This is significantly lower than the past five year’s annual growth of 17.5%. It is likely that investors can expect 8.5% per year for the next few years rather than 17% because the markets need to normalise again. This is what happens when the markets perform exceptionally well for a sustained period. Investors basically borrow future growth and will need to repay it sooner or later. This is exactly what we are seeing now. The long-term growth of the JSE (since 1900) was about 12.5% per annum. When you have enjoyed a decade of 17.5% growth, it is only logical that you have to experience growth closer to 8.5% somewhere along the line.
If we look at the US index of the 500 largest companies, since 1960 it has only happened in three years that the market did not at some point lose 5% during the year. Deutsche Bank points out that the market on average decreased by more than 10% every 357 trading days (approximately every 18 months). We have already seen more than three and a half years without such a 10% decline. This is the third longest period since 1960 without a 10% decline. Add to this that the US markets are currently about 12% above the long-term average valuations and you can expect more volatility in the months ahead.
What does this mean for investors?
Very little, except perhaps:
- Even at a lower growth rate, shares (as a growth asset class) still outperform the other asset classes when it comes to growth above inflation, although investors should temper their expectations and realize that this growth will not be a straight line.
- If you want to invest new money, do it over a period of time (phasing it in monthly over 12 months) so any decline gives you the opportunity to buy in order to lower levels. Remember, it is important to start investing than trying to guess when the “time” is right!
- If you want money withdrawn from the market, you can go ahead and do not wait for higher valuations – you might get a rude surprise
Four great future variables
If you like to make predictions and believe you can do it better than the rest of the market (that is, the other seven billion people who share this planet with you), then these are the four major variables that will determine the future (according to a recent McKinsey & Co. report):
1. Urbanization in emerging countries
As recently as 2000, 95% of the Fortune 500 companies (the largest 500 companies in the world) were based in developed economies, primarily in North America and Europe. By 2025 (when the Chinese economy could be larger than the US economy), there will be more large companies (with an income of more than a $ 1 billion per year) based in emerging countries than in Europe and the US combined. The world is rapidly urbanising at about 65 million people per year (it comes down to eight new cities the size of London every year). This means that more than half the world’s economic activity will be generated in the 440 largest cities in emerging countries by 2025. It is only about 10 years.
2. Accelerated technological change
It took 50 years for half of the US population to be connected to a telephone. It took radio 38 years to reach 50 million listeners, while China’s mobile text- and voice-messaging service, WeChat, has more than 300 million users and it is only a few years old. Five years after Apple introduced the iPhone, there were more than 1.2 million apps, which were downloaded 75 million times. Less than 20 years ago only 3% of the population on Earth had access mobile communication. Today there are more SIM cards than people in the world (more than 60% of people have mobile phones and more than 30% of mobile Internet access). Suddenly companies like Uber, Alibaba and Whatsapp are changing the world around us.
3. New old people
More than 60% of the world population currently lives in countries where population growth is under 2.1%. This is the percentage growth that is needed to keep the population constant, taking natural death in to account. In Germany it is expected that the current working population of 54 million will decrease to 36 million in the next 45 years. The question is how this will affect the capital base and economic activity in Germany and Europe. Add to this that people are older and lead more active lifestyles which leads to a greater life expectancy, then this older, more active population will play a major role in future economic activity.
Everyone will trade with one another. The time when world trade largely took place between the US and Europe is over. To give one example, China’s trade with Africa has grown from $9 billion in 2000 to $211 billion in 2012. More than one billion people crossed borders in 2009, over five times the number in 1980. This movement of goods and people will mean that contact and trade between people, countries and companies will be much more integrated.
In the South African context we can add the black middle class, which has grown considerably. In 1994 there were about 350,000 black people who were part of the middle class (they made up 10% of the middle class). Currently there is an estimated three million black people in the middle class, this means that more than 40% of the total South African middle class is black. Most of these middle class people live in the larger cities (just under 90%), with the same aspirations as any other citizen. As our population becomes urbanized from the current 64% to an estimated 70% of the population in the coming decades, this demographic phenomenon will shape the economic and political landscape in the next decade or two and not the person in the “Rondalia replica” official residence.
We are often pessimistic about where the world is going and how the world is deteriorating. In the year 1800 there was no country where the life expectancy more than 40 years, today there is no country where the life expectancy below 40 years of age. In South Africa, life expectancy in 1800 about 34 years, today it is closer to 58 years, although still well below the 80 plus mark, in among others, Japan, Australia and Spain. This is partly due to successful immunization programs, better nutrition and antibiotics.
The current drought in California (studies reckon the worst in 1200 years), where large dams are empty, boats are stranded on dry land and mighty rivers are so small that you can jump over them, has people reconsidering the use of water. An interesting article in the New York Times asked the following question:
Which of the following use the most water:
1. A 10-minute shower?
2. A handful of nuts?
3. A batch of laundry in a washing machine?
4. A Hamburger meatball (“patty”)?
The answer is quite unexpected. A 10 minute shower uses 90 liters of water, the handful of nuts about 40 liters, the bundle of laundry almost 130 liters, but a 100-gram hamburger meatball (“patty”) uses almost 1500 liters of water in its production. This is specifically because proteins (in this case the cattle), drink a large amount of water. To take this further, an egg use almost 200 liters of water while a liter of milk “consumes” about 880 liters of water to be produced.
Take these numbers and add them to the urbanization and growing middle class figures mentioned above, then it simply means water will become increasingly important, not to mention the role of the farmer.
Here is a link to the article to which we refer.