Over the past 10 years, the JSE’s All-Share Index (ALSI) has grown on average by 15% above inflation, providing investors with excellent returns while elevating the value of shares significantly. Considering that during the preceding 50 years, the average annual return was 7% above inflation, can we expect the ALSI to keep up its stellar performance in the long run? Or are we riding the wave of high returns?
Can 15% real growth be sustained?
The 15% real growth on the ALSI seen over the past decade consists of 12% capital return, and 3% dividend return. By contrast, the 7% real growth over the preceding 50 years was made up of 2% capital return and 5% dividend return.
Allan Gray’s Simon Raubenheimer addressed this issue recently at the company’s Road Show in October. Commenting that “valuations are stretched”, Raubenheimer was of the opinion that the current returns are unsustainable. That we should “temper our outlook going forward”. The ALSI has outperformed the world index by 5 times over the past decade, while shares in ShopriteCheckers outperformed the world index by a whopping 33 times –are these gains sustainable?
Concerns have also been voiced about South Africa’s widening trade deficit and the role this has to play in our financial markets. Over the past decade, the country’s imports have grown by 18.2% per year, while exports have lagged behind at 15.8%. South Africa is forced to borrow from overseas lenders in the current situation, since our exports are not rising to fill the gap.
One of the reasons that South Africa has yet to feel the negative effects of the trade deficit is the healthy interest in the ALSI by foreign investors. According to Gavin Wood of Kagiso Asset Management, the ALSI is currently 34% foreign-owned, up from 18% in 2002. Many of these investors are younger people looking for good short-term gains, but will they remain invested in the South African stock market? Their interest can only be retained by excellent performance on the JSE going forward.
Considering the fact that foreign investment is pushing up the Price: Earnings ratios of South Africa’s listed companies, and with experts warning that we should expect lower returns in future, I would remind clients that a balanced portfolio with exposure to different asset classes and choosing sound fund managers is key to ensuring a successful investment return.
The All-Share Index over the next 10 Years?
