Yes, markets were dreadful in October…

But it is not all doom and gloom.

It is the month of October, the most beautiful month of all …

The translation does not do it justice, but this is more or less what C Louis Leipoldt wrote when he captured the explosion of colour and revival in nature in his Afrikaans poem Oktobermaand.

Market watchers will probably describe October 2018 with a single colour: red.

While the local market has experienced three very difficult years, October was a particularly bad month for most global asset classes.

The table below highlights the total return percentages of various local and global asset classes for the month, year and three years ending October 2018.

There was almost nowhere to hide, says Peter Brooke, head of Old Mutual Investment Group’s MacroSolutions boutique. The extent of the fall had an impact on the 12-month and three-year total return numbers as well.

In the case of offshore equity, the October movement effectively wiped out the gains of the previous 11 months.

While there has been a lot of speculation about the impact of Italian politics, Brexit, the trade war and president Donald Trump’s ongoing tweets on markets, Brooke says this is largely noise.

“I think there is one big thing that is driving that [market volatility] and that is US interest rates rising.”

Although economic growth in the world’s largest economy is healthy and company earnings are intact, the higher cost of capital due to US interest rate hikes is causing price-earnings ratios to fall, Brooke says. With markets falling and earnings going up, the market is getting cheaper.

The withdrawal of liquidity was expected to be a big theme impacting on markets in 2018, and while there were incidents where Argentina, Turkey or emerging markets more broadly experienced a sell-off, US equities – technology stocks in particular – have now started to see the impact of this withdrawal.

Brooke says after such extreme movements, there is often a rebound.

“I don’t think this is a cause for panic, but it has had an impact on delivered returns.”

While October market volatility may have been tough to stomach for local investors after the JSE experienced three tough years, Brooke says the volatility has offered opportunities. Local equities are down 6%, but some share prices have fallen by much more than that, offering opportunities to buy.

The group believes that the real (after-inflation) return expected from various asset classes over the next five years has improved since July 1, 2018:

Brooke says almost without exception, every asset class is cheaper than it was in the middle of the year and is expected to offer a better real return in the long run.

As prices have fallen, yields have also improved.

Brooke says the yield on their property fund is now 9.5%, whereas a company like British American Tobacco whose share price has been hammered recently now has a forward dividend yield of around 7.5%. Absa Group is yielding about 7.7% and several other companies are yielding between 5% and 7%.

Many financial advisors have had a tough time managing the drawdowns from clients’ living annuities over the last few years and conversations were often not easy. For these investors, higher income yields in some balanced funds mean that they can draw an income without having to sell units during a period when the market is down, thereby locking in capital losses (provided the draw doesn’t exceed the income yield).


Leave a Reply