Q3 2020 Review
“Sell in May and go away” used to be the conventional wisdom in global share markets based on the contention that investors were much less busy or interested in the Northern Hemisphere summer months and markets traditionally declined between the end of April and the beginning of November. Theoretically, investors who would have sold their shares at the beginning of May and bought back in again in November would have done better than buy and hold investors who hung on through the dry summer months.
Firstly, the adage, if it ever did hold water, no longer applies. September is easily the worst month for global equities and the last quarter, on average, positive. The months between May and September are not conclusively poor. This is at least partly due to the increasing numbers of amateur investors (as opposed to professional ones) in the markets whose interest remains piqued throughout the year and an ever larger proportion of those succumbing to the temptation of short-term trading on cheap to free dealing platforms using a variety of analysis and guesswork far removed from professional fundamental analysis and an increasing interest in indexed investing of one sort or another which is also devoid of any analysis.
Secondly, and then came 2020.
All rules, traditions and conventional wisdom became strictly unconventional with the advent of the dreaded Coronavirus causing the disease known as COVID-19. Common sense became distinctly uncommon as panic invaded all our lives as the virus was transferred around the world in record time affecting every walk of life as governments attempted to arrest the spread through a variety of lockdowns which, inevitably, while doubtless saving possibly millions of lives, had a profound and long-lasting effect on the economies of the world.
Investment markets have endured three quite conspicuously different quarters so far this year. The First Quarter was marked by widespread fear as investors sought to hunker down and see this pandemic out. The Second Quarter was one of pure greed as markets had been sold down so aggressively that investors found bargains in shares that should never have been sold down in the first place as they were either benefiting from the effects of the virus (tech companies) or were quick to re-invent themselves if they could to accommodate the lockdowns (brick-and-mortar retailers switching to on-line shopping). Feeling quite punch-drunk, markets seem to have taken a breather in Quarter 3, girding their loins for a Fourth Quarter full of a sick US President, a Presidential race that will go on regardless, unceasing anti-Chinese rhetoric from the West, unrest and a heightened awareness caused by racial tensions, the unending Brexit deal / no deal saga and an approaching Northern Hemisphere winter which will chase everyone back inside and into close proximity with each other.
The stark differences in the quarters can be seen in the charts overleaf.
Global and US investment markets (in USD)
Source: FE Analytics
The Q1 fallout shown in the blue columns followed by the red recoveries in Q2 could not be more opposite. The pausing for breath in Q3 is also evident in green. Global (and US) shares and bonds are slightly up for the year (in yellow), having been hauled into positive territory by the large tech companies, and property or real estate has been possibly permanently impaired.
As a colleague of mine used to say, “When you look like part of the world, you will behave like part of the world”, so South Africa did not escape the carnage. Added to the echoes felt from around the globe, we endured a tougher lockdown than most, which, while inflicting indisputable damage on businesses and livelihoods, doubtless saved possibly hundreds of thousands of lives.
The chart below shows a similar picture to above and we have added in Old Mutual Gold as gold shares and/or bullion feature in most of our portfolios currently.
South African investment markets (in ZAR)
Source: FE Analytics
The plummet in property in Q1 and the flurry of interest in gold in Q2 serve to skew the axes downward and upward respectively. The All Share Index (total return) is still slightly below the year’s starting point with the Capped SWIX (used as the benchmark by most institutional asset managers) still well below. This is mostly due to the smaller weighting of Naspers in the latter.
The challenges posed by COVID-19, while slowly becoming manageable, will prevail at least throughout 2021 and probably beyond as industries and individuals negotiate their respective new normals. Some businesses may forsake traditional offices, individuals will choose to work from home more, folk who had never shopped on-line before now click merrily and wait for delivery, that delivery will change format (driverless vans, drones) and we will all take a while to trust our fellow human being’s handling of the virus, especially if they forego masks and sanitisation.
The trick will be to find the companies that will thrive, those that will survive, those that will dive into obscurity and those that will just muddle through. The thrivers may well command high prices for longer while the survivers, divers and muddlers may be punished by the market until their fate is more obvious. Some cheap companies at the moment are cheap for very good reason. Good asset managers will find the thrivers and avoid the rest.
For amateur investors, investment advice has never been so critical. It is entirely possible that market-leading brand name fund managers will falter under the burden of size or reluctance to deviate from the index. Investment advisors worth their fees will be able to recommend the right asset managers to protect your retirement capital and savings and help them grow to fulfil your dreams.
So what does that mean for our portfolio construction?
|Global Equity - Neutral to overweight
In general, we prefer global equity to SA equity. However, there may well be mandates that oblige even an underweight to global equities. Given previous comments about thrivers, survivers and divers, “global equity” is not a single asset class and requires careful share selection and choice of fund managers. Outside of the handful of large US and Chinese tech companies which have rallied strongly as users have ramped up their use of tech in lockdown, there are bargains in the next few tiers of equities.
|Global Property - Neutral to underweight
Here, too, we are finding this is not a single asset class. Real estate exposed to bricks-and-mortar retail, office space and even some industrial space are battling while personal storage, cloud and physical data storage, and both general and last-mile logistics have a more assured future.
|Global Bonds - Underweight
With both long- and short-term rates anchored to zero the asset class is to be avoided. Long rates can only rise from these levels ultimately (but maybe not for a long while) and only the emergence of inflation will tempt central banks to raise at the short end.
|Global Cash - Neutral
We will hold it for liquidity to enable us to buy the dips and capitalise on corrections.
|SA Equity - Neutral to underweight
The experience mentioned above prevails in SA equities as well. The Rand-hedges and dual-listeds behave like global equities and, broadly, we like them. However, the parlous and precarious position of the SA economy means that so-called “SA-Inc” shares which depend on a local recovery should be avoided for the time being. Fund managers tend to favour the former class so we are happy to own them but still at an underweight exposure.
|SA Property - Underweight
Even the SA property companies with offshore exposure look cheap for a reason. High levels of debt and extreme uncertainty about the reliability of one’s tenants either to pay the current rent or renew the lease make the asset class uncertain.
|SA Fixed Interest - Overweight
We used to say we were being “paid to wait” by this asset class as it was returning high yields at low risk. However, 300 basis points of rate reductions with maybe more to come has compressed the returns gleaned from this group of assets. However, we still favour the less volatile returns over equities.
|Global Cash - Neutral to overweight
We need a float to benefit from opportunities and will tend to keep some liquid assets in reserve. The yield is still higher than inflation so there is no punishment in holding cash like overseas.
WATCH: Q3 2020 Asset Allocation viewsHead of Portfolio Management, Roeloff Horne, discusses our asset allocation views against the Q3 2020 macro economic environment
The content of this article is for information purposes only and does not constitute an offer or invitation to any person. The opinions expressed are subject to change and are not to be interpreted as investment advice. You should consult an adviser who will be able to provide appropriate advice that is based on your specific needs and circumstances. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable and given in good faith, but no representation is made as to their accuracy, completeness or correctness.