Global equity markets ended September lower, as concerns over a second wave of Covid-19 infections across Europe and the possibility of a recurrence of infections in the US winter weighed on sentiment. US politics took centre stage during the month, ahead of what is likely to be hotly contested US Presidential Election in November. The first presidential debate between US President Donald Trump and Democratic nominee Joe Biden, was marred by President Trump refusing to declare that he will accept the election result if he loses. The US Federal Reserve left interest rates unchanged at its meeting midway through the month, indicating that they expect interest rates to remain close to zero through 2023, further reinforcing an increased tolerance for inflation in the medium term. Source: Morningstar
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Markets continued to climb higher in July, as investors shrugged off poor economic data releases and company earnings announcements, preferring to focus on the substantial liquidity injected by major central banks and governments across the globe. In a continuation of the recent trend, it was the large American listed technology companies that drove equity markets higher, with Facebook, Apple, Amazon and Alphabet (Google) all beating Q2 2020 earnings expectations. Economic data released in July was far less impressive, with US GDP contracting by around 33% on an annualised basis for Q2 2020, the largest contraction in close to 80 years. Source: Morningstar Summary The US-China trade war that began more than a year ago has been hurting the economy and trade of the two largest economies of the world, while also disrupting and re-shuffling the global supply chain. In addition, the United States hiked interest rates four times last year, increasing the rate to 2.25%, attracting funds back to the United States, first hitting emerging markets, and then hitting the US stock market. The US stock market had the second worst rate of return in December in the past 100 years (-7.8%). The South African asset management companies that I rate highly agree that the South African stock market and global emerging markets are at or near historical lows, and many good investment opportunities are found at this stage. We recommended long-term investors to continue to have exposure to growth (stock) assets, which could provide a 60% return over the next three years. *** Global The US-China trade war has been more than a year since the US declared it last year. President Trump of the United States believes that China was competing unfairly. The US trade deficit with China is huge and continues to expand. China infringes on intellectual property rights, as well as providing subsidies to public and private companies. Sanctions include imposing 10% tariffs on imported products from China, lawsuits and measures against ZTE, Huawei and other Chinese telecommunications companies, and containing Chinese companies in the 5G sector. From the recent statistics on Chinese economic growth and import and export volume, China’s exports in February fell by 20.7% from the previous year to US$135 billion, the largest decline since February 2016, indicating that the US-China trade war is having a significant negative impact on China. China's stock market fell 25% in 2018, but since the start of 2019, China's stock market has risen by 25% due to the recovery of global investor confidence and the Chinese government's monetary easing. In 2018, the US stock market was steadily rising, until it experienced a sharp 7.8% drop in December and a 6.1% decline over the year, the first annual negative rate of return since the 2008 global financial crisis. However, it has risen 11.48% since the beginning of this year. South Africa After Cyril Ramaphosa was sworn in as new president at the beginning of last year, there were high expectations from all sectors, which was termed Ramaphoria. However, the US-China trade war, the emerging market currency crisis, the ANC party’s two-faction fighting have caused the high spirits to evaporate quickly. The successive commissions of inquiry have opened up the lid on the rampant corruption and briberies during the Zuma era, so now we know that the National Treasury was hollowed out, and the infrastructure is crumbling. Eskom frequently broadcasts news of mismanagement, energy crisis and implements load shedding, which darkens investor confidence. South Africa’s economic growth rate last year is only 0.8%, and this year is not going to be any better due to the Eskom factor. South Africa's stock market fell 8.5% in 2018, the first annual negative rate of return since the 2008 global financial crisis. If former President Zuma sees the stock market return history, he will brag that, during his presidency, the stock market has risen every year and has never fallen! This is a bit ironic. South Africa's stock market has risen 6.3% since the beginning of this year. The four South African fund managers I rank most highly, based on my long-term observation, analysis and evaluation, agree that 2018 was a tough year for all investors: they lost money no matter where they put their money (except bank deposits and bonds). PSG pointed out that 2018 was a year of trying to avoid landmines: In 2018, the following well-known listed companies have brought huge losses to investors. The South African stock market is now near the bottom of the five troughs experienced over the past 40 years. Coincidentally, Coronation also has the same analysis: However, they also agreed that 2019 is a year of turnaround. The PSG research report pointed out that the annualized rate of return for the three years after the past five lows was as high as 24.3%, that is, the cumulative rate of return for three years was 92%. Even using the lowest annualized return rate of 16.4%, the investor's 3-year cumulative return would reached nearly 60%. This is the so-called reversion to the mean. Even if the South African economy does not do much, by going from the bottom of a market cycle to the average of a market cycle, with a little boost of investor confidence, the investors could receive this kind of return. PSG Asset Management is currently positive on the following asset classes (marked by green): South African domestically focused stocks, government bonds, overseas stocks and cash. Even though 2018 was a disappointing year for investment returns, we recommend investors not to give up on the stock market; continue to hold stock positions in the medium and long term, with exposure to South Africa and offshore markets. Allocate positions in shares, bonds and cash. During this trying time, I chose this pearl of wisdom from Warren Buffett to remind myself and investors:
Now is not the time to give up; it is probably the best investment opportunity since the 2008 global financial crisis. Share investing is an important way of creating wealth over the long term. When you buy shares issued by a company, you become a shareholder. Owning shares gives you the right to vote in shareholder meetings, receive dividends (which are the company’s profits) if and when they are distributed, and it gives you the right to sell your shares to somebody else. The importance of being a shareholder is that you are entitled to a portion of the company's profits, which is the foundation of a share’s value. The more shares you own, the larger the portion of the profits you get. Many companies, however, do not pay out dividends, and instead reinvest profits back into growing the company. These retained earnings, however, are still reflected in the value of a stock. You can buy shares of companies listed on a stock exchange, such as JSE, through a reputable stockbroker. Your return from owning shares comes from two sources: dividends paid to you, and increase in share price (capital gains). Dividends received are subject to 20% Dividend Withholding Tax; capital gains are subject to Capital Gains Tax. Share price can go up or down. When share price goes up, you make a profit on paper. When share price goes down, you make a loss on paper. Before you invest in shares, you must do your research. You should identify the companies you would like to invest in, have a good understanding of their business, management, prospects and financials. You should have a good grasp of how to calculate the value of a share. After you have bought shares in a company, you need to continue to monitor its business activities, management changes and financial performance, to determine whether it is appropriate to stay invested. Working with an experienced stockbroker with good research capability will add value to your share investing process. Having a good understanding of technical analysis will help buying shares at better prices. Share investing is a long-term activity. It is NOT buying and selling shares regularly in the hope of making quick profits. If share investing looks like too much work for you, rather work with your trusted financial advisor to invest in a couple of good equity funds (High Growth Unit Trusts). Example: Siya invests R100,000 in the shares of a listed company, at a share price of R10 each. So she owns 10,000 shares. Every year the company declares and pays R1 dividend per share. 10 years later the share price rises to R40. Siya’s share portfolio is now worth R400,000. Over the 10-year period, Siya has profited from her investment as follows: |
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