Try to hang on to some perspective

Many of you will know the story about the successful lawyer who bought a brand new car and parked it right in front of his office for all his colleagues to see. 

While he was getting out, however, a massive truck passed too close to the curb and tore the driver’s side car door right off. 

A policeman was close by and witnessed the whole ordeal. He immediately rushed towards the lawyer. 

But before the policeman could say a word, the lawyer started screaming about how his brand new car, picked up just the day before, was now completely ruined and that no matter what the panelbeaters do, it would never be the same again. 

Once the lawyer managed to collect himself, the policeman shook his head in shock and said to the lawyer: “I can’t believe how materialistic you are. You are so focused on your possessions that you still haven’t realised that your right arm was torn off along with the car door!” 

“Oh my gosh!” the lawyer replied. “My Rolex!” 

You may wonder what on earth this has to do with investing. Well, it’s all about perspective. As South Africans, many of us might feel like the lawyer whose car door has been ripped off by the rest of the world (from both an economic and investment perspective). 

You don’t have to travel abroad to know that your rands can no longer buy what they could five years ago.  

Looking at our local stock market, we only seem to see more of the same. Over the last five years (to the end of August 2018) we experienced 7.6% growth per year in the FTSE All World Index in US-dollar terms. 

Over the same period, the FTSE/JSE All Share Index grew by 10% per year in rand terms. 

But only when we convert our local growth into dollars do we gain some proper perspective. 

In reality, the South African market has declined by 0.6% per year over the last five years in dollar terms. 

What went wrong? 

A mere decade ago, famous investment experts like Mark Mobius claimed that emerging markets (including South Africa) offered the best investment potential. 

Were they wrong or did things just change so much that this is no longer true?

The short answer is that they definitely weren’t wrong, but in order to prove my point, we need to have a look at the reasons why investors like Mobius invested in emerging markets in the first place. 

In my opinion, the definition of emerging markets holds the key. 

According to Investopedia.com, emerging markets are so popular among investors because they offer the prospects of higher returns due to the fact that they often experience faster economic growth as measured by their gross domestic product (GDP).

Obviously, this higher-than-expected growth also comes with much higher risks due to emerging markets’ political instability, problems with infrastructure, volatile currencies and limited stock options. 

A decade ago, when everyone was still smitten by emerging countries, the South African economy was still healthy.

The South African GDP grew roughly 3% faster per year compared to the G7 largest countries in the world’s annual GDP between 2005 and 2009.

This made it worthwhile for huge investors to face the risks in favour of the possibility of higher returns. 

Since then, this growth gap has steadily decreased and South Africa’s economic growth has slowed down to such an extent that it’s now even slower than some of the much older established and developed countries. 

This means that despite its strong underperformance, South African shares, when compared to developed markets, still won’t encourage larger international investors to look for bargains in the South African market. 

But don’t lose perspective. 

As an emerging country, we play a very small role in a very large investment world. 

We can’t take all the blame for the slowdown in economic growth locally. The only thing the data above really shows us, is what went wrong. Past performance definitely doesn’t guarantee future performance. 

And I really do believe that things will eventually improve. 

Schalk Louw is a portfolio manager at PSG Wealth.

This article originally appeared in the 27 September edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.