As humans we are conditioned to recognize adversity over opportunity. As the quote by John Burroughs goes:
“There is hardly a man on earth who will take advice, unless he is certain that it is positively bad”
When money is considered we have seen investments flow out of SA into offshore assets at a steady trend over the past few years, but is it a one way bet against SA?
We love to reinforce a negative view, and there is much of it around. Reflecting on the year just passed, we have had to deal with more depressing stories of state capture, looting of public funds, the demise of the SOEs, corporate failures, land redistribution, credit rating downgrades, and weak economic growth. And none of these items seem to be improving. Bad news sells, and it’s everywhere.
The bad news realists have the stage and set the mood. Particularly at this time of year, when the confluence of the Gregorian Calendar and annual holidays cause us to ‘take action’, ‘plan for the year’ and ‘evaluate our options’ as a way of gaining control over things (investments) which are difficult to control.
The economic forecasts are out, predicting worse to come. Investment Outlooks offered freely, with no accountability one, two or three years hence if they are wildly inaccurate. Market commentators make a living breeding the party line which may or may not have value, but headlines sell. The media loves to feast on bad news too, and all of this spills over into our day to day lives.
The chart below confirms the mood: business sentiment is at its lowest point since we have data (1985 – PW Botha was president).
The relationship, however between sentiment and investment returns is weak at best, and should most often be disregarded. This is hard to digest, as bad news can feel so real. No matter how convincing the bad news, most often you should do the opposite with your money.
Bad news creates opportunity!!
While it is difficult to demonstrate a link between sentiment and future returns, there is a strong link between valuation levels and future returns. Therefore, choose your source of advice wisely!
At the start of 2019, Coronation made mention that “After being very negative about the South African equity market for most of the last five years, we are now much more optimistic about future returns: We have taken advantage of depressed sentiment to significantly increase the quality of our equity portfolio.” Their Coronation SA Equity Fund is up almost 10% so far this year, they took advantage of depressed sentiment to help generate this return. If anything, that makes sentiment a contra-indicator!
To briefly consider the standard trade right now, with assets flowing from SA to offshore: It’s a case of buyer beware. with confidence at very high levels across markets like the US, many sectors of the share market are also trading at high valuations.