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Just when you think that every possible big-screen superhero has been thought of, writers, artists or creators manage to come up with a new one with new superpowers.
If I could choose a superpower, it would definitely be the ability to see into the future: to read tomorrow’s newspaper today, for example. You might argue that knowing the future still won’t help you at all against a future enemy that is stronger than you in every way.
Well, if I knew beforehand that a strong enemy was going to cause me trouble tomorrow, I would just sleep in and avoid any trouble altogether.
That superpower would, of course, also come in very handy in the investment world. But the reality is that no one has that superpower, so no-one can predict the future of our markets.
What we do have, however, is a set of tools that can help us to formulate forecasts (expectations) – a lot like we have for weather forecasts.
While I have been soaked on the golf course on a few rare occasions after consulting my weather app and believing that it was NOT going to rain, weather forecasters have to rely on past data and weather patterns in an attempt to predict tomorrow’s weather. Portfolio managers, analysts and economists also have to consult data patterns to try and forecast possible future outcomes.
On our local front over the past few years, two main subjects have dominated the investment world. The first is our extremely poor economic growth. The other, which, coincidentally, happens to go hand in hand with poor economic growth, is the lack of growth in our local stock exchange.
I’m using the word “coincidence”, because although this relationship goes without saying, I was quite surprised with the results when I juxtaposed a graph of the annual South African GDP growth with the FTSE/JSE All Share Index’s (JSE) earnings growth. I had to take a second glance to tell these two graphs’ movements over the past 25 years apart.
After further analysis of the data, it became clear that although SA GDP and JSE earnings growth were both one-year historical data points, it would appear as though the market usually waits for actual economic growth (or in this case, the lack thereof) to take place before reacting to it.
JSE earnings growth versus SA GDP growth
I took my analysis even further by having a look at the average earnings growth when GDP growth was less than 1.5%, when it was between 1.5% and 3.5%, and also what the average was with GDP growth in excess of 3.5% per year. The results were astonishing.
Whenever annual GDP growth fell below 1.5% over the past 25 years, not only did the average JSE earnings growth fall flat, it actually shrunk on an annual basis (by 0.16% per year on average). When GDP showed relatively normal growth of between 2.5% and 3.5%, our earnings growth rose to an average of 10.88% per year (or put differently: inflation + five percentage points). During good years, where GDP grew by more than 3.5% per year, JSE earnings increased to an amazing 22.4% growth per year.
You may wonder why this data is so significant.
Earlier, I mentioned how portfolio managers, analysts and economists formulate consensus forecasts or calculated predictions.
We have already seen that South Africa’s current GDP growth of 0.87% (which is slightly higher than the last 4-year average of 0.78% per year) until the end of the second quarter of 2019, has been slightly higher than economists’ consensus forecasts. When we look at consensus forecasts for next year, you will see that between the International Monetary Fund’s (IMF) expected 1.5% growth and Thomson Reuters’s 1.6% expected growth, both of these forecasts should place us in a much better position in the field of expected earnings growth.
No one knows what will happen tomorrow – and I don’t want to leave anyone standing in the rain next year based on these data points.
But do keep tomorrow’s forecasts in mind, and don’t let yesterday’s negativity cause you to lose out on good investment opportunities tomorrow.
Schalk Louw is a portfolio manager at PSG Wealth.
