WRITTEN BY: Claude van Cuyck – SIM
Market review
The last two years of equity market performance are another keen reminder that investing at the point of maximum pessimism is a long-term winning strategy. There are few who would have thought the FTSE/JSE All Share Index would have generated a return of 32.1% in 2009 and another 19% in 2010 - all of this while the world was going through the toughest global crisis since the Great Depression! Since the market index hit its low point of 17 814 in the wake of the crisis on November, 20 2008, the market (ex dividends) has gained 81%.
Let us revisit what we said to our clients at the beginning of the year and then do a short review of the past year. In the first quarter we made the following observations:
• We expected the low interest rate environment to support the consumer. This was certainly the case as household final consumption expenditure delivered four consecutive quarters of robust growth and real growth of 5.9%1 in the third quarter.
• We expected the strong rand to pose a risk to South Africa’s growth outlook. This has had a negative impact on our economy, with our manufacturing sector finding it difficult to compete. The rand/dollar exchange rate appreciated by about 6% during the year and has appreciated by more than 40% since October 2008!
• Valuation: although the market price-to-earnings (PE) ratio was 18 times its historical earnings going into the New Year, given the strong outlook for the recovery in earnings, the forward PE ratio was close to “fair value” in our opinion. Since we use a 14% required return to calculate our intrinsic values, this implied a long-term, reasonable, expected annualised return of 14%, which did actually transpire up to December 20. We believe this was a reasonable expectation. As you know, we do not forecast annual returns: rather, we focus on the long-term fair value of assets, hence this “prediction” of returns for the market was not really a forecast but rather what we could reasonably expect given our view of the long-term fair value for the market.
Market review
The last two years of equity market performance are another keen reminder that investing at the point of maximum pessimism is a long-term winning strategy. There are few who would have thought the FTSE/JSE All Share Index would have generated a return of 32.1% in 2009 and another 19% in 2010 - all of this while the world was going through the toughest global crisis since the Great Depression! Since the market index hit its low point of 17 814 in the wake of the crisis on November, 20 2008, the market (ex dividends) has gained 81%.
Let us revisit what we said to our clients at the beginning of the year and then do a short review of the past year. In the first quarter we made the following observations:
• We expected the low interest rate environment to support the consumer. This was certainly the case as household final consumption expenditure delivered four consecutive quarters of robust growth and real growth of 5.9%1 in the third quarter.
• We expected the strong rand to pose a risk to South Africa’s growth outlook. This has had a negative impact on our economy, with our manufacturing sector finding it difficult to compete. The rand/dollar exchange rate appreciated by about 6% during the year and has appreciated by more than 40% since October 2008!
• Valuation: although the market price-to-earnings (PE) ratio was 18 times its historical earnings going into the New Year, given the strong outlook for the recovery in earnings, the forward PE ratio was close to “fair value” in our opinion. Since we use a 14% required return to calculate our intrinsic values, this implied a long-term, reasonable, expected annualised return of 14%, which did actually transpire up to December 20. We believe this was a reasonable expectation. As you know, we do not forecast annual returns: rather, we focus on the long-term fair value of assets, hence this “prediction” of returns for the market was not really a forecast but rather what we could reasonably expect given our view of the long-term fair value for the market.
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