Goodbye 2020… Hello 2021

2020 is now associated more with the figure 19 than with 20 itself. Without a doubt, this will be the year that will go down in history as the year of the COVID-19 pandemic. It is with a big smile that I therefore close the book on 2020, for now, and look ahead with great enthusiasm to what I hope will be a much better 2021.

This week, I would like to recap on the performance of a few asset classes during 2020, and discuss what we might expect of them in 2021.

1. Local shares

What a year it’s been for shares in general! Following the FTSE/JSE All Share Index’s (JSE) performance for the five-year period ending 31 December 2019, during which it couldn’t even yield 6% returns per year, all hopes were set on 2020 to be the year of recovery. But when COVID-19 was officially declared a pandemic, global markets saw one of the biggest crashes since 2008, and by the 19th of March 2020, the JSE was trading at levels 30% lower than those seen at the beginning of 2020.

Since 1987 until now, the JSE has only declined by more than 30% on five occasions in total. Although it was trading at higher levels on all four prior occasions, the recovery experienced during this correction has by far been the most aggressive yet, and as at the time of writing, the JSE was trading in positive territory for the year.

 

Graph 1: Year to date returns of the various asset classes until 20 November 2020 (sources: @SchalkLouw & PSG Wealth Old Oak)

With the financial stimulus that is slowly but surely finding its way to local shares, and the lower interest rate environment that will most likely stay low for longer, it’s incredibly difficult not to get excited about the future of local companies.

The expected 12-month consensus price earnings ratio (P/E) forecast of 14.1 (source: Thomson Reuters) at which the JSE is currently trading, is everything but expensive. If analysts (consensus) are 100% correct with their price targets for JSE companies, it would seem that the JSE as it stands now (56 615 levels), still has a 26% growth potential. Even if these forecasts are on the more optimistic side (and despite the fact that this optimism is dramatically discounted), it remains an attractive investment, and I reckon it justifies an overweight position in your portfolio.

2. Offshore shares

While offshore shares (MSCI All Country World Index, or ACWI) experienced the same collapse as local markets, the recovery, especially in US companies (that make up 58% of the ACWI), has been even faster than the JSE’s recovery. Many experts feel that the US is currently trading on the more expensive side, saying that investors should exercise extreme caution when investing in these markets, and be careful not to base their decisions only on recent historical returns. After all, between 1999 and 2009, we saw how the US market delivered negative returns for an entire decade, after trading at similar valuations.

If analysts (consensus) are 100% correct with their price targets for ACWI companies, no growth is forecasted for the next 12 months. But its actually when you dig a little deeper that you realise that if you exclude the USA, there are still many investment opportunities hiding in countries like Europe and Britain, and in emerging countries like China. Based on this, I definitely won’t go as far as to reserve an underweight position for offshore shares in my portfolio (i.e. I would classify myself as neutral), but I most certainly won’t let last year’s “winners” take the lead in my portfolio.

3. Bonds

Simply by looking at where the world currently finds itself in the interest rate cycle, I would be very wary to invest in any international bonds right now. Local bonds, on the other hand, tells a different story. I believe that South African Government Bond Yield 10Y at around 9% currently, has most of the risks priced in, which justifies an overweight position in your portfolio for the next 12 months.

4. Property shares

I’m not going to argue too much about this asset class. I do believe that slowly but surely there are some opportunities starting to emerge in this asset class, both locally and offshore. Despite this, however, I think the risks far outweigh the possible opportunities in this sector and I would remain cautious. For now, I would maintain an underweight position in property shares in general, at least until we have more certainty regarding this asset class.

5. Cash

The position of this asset class in your portfolio can be determined quite easily. With basically no interest rates in developed countries and current local money market rates just below 3.5%, it would appear as though cash will deliver negative real growth for investors, if you work according to the International Monetary Fund’s (IMF) expected inflation figure of 3.88% for 2021 (year-end 4.3%). Considering this, cash will have an underweight position in my portfolio in 2021.

I want to conclude by thanking all my readers for your loyal and ongoing support during this incredibly challenging year. May you rest well and return in 2021 in good health and with renewed enthusiasm.


The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. The information in this blog is provided as general information. It does not constitute financial, tax, legal or investment advice and the PSG Konsult Group of Companies does not guarantee its suitability or potential value. Since individual needs and risk profiles differ, we suggest you consult a qualified financial adviser, if needed. PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider – 728

Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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