The JSE All Share Index has provided investors with positive investment returns averaging 22 percent over the past 25 years.
Rian le Roux, the head of economic research at Old Mutual Asset Managers, who was speaking at the Personal Finance/Old Mutual Retire Right seminars, says the JSE Securities Exchange has changed its profile over the past seven years.
The different sectors tended to move in tandem until 1990 but then performances start diverging.
Over the past seven years, choosing the right investment portfolio has been more difficult than the previous 18 years. While the retail index has gone downhill, the resources market has boomed over the past four years.
The financial index was spiking up and down, but has been steadily declining over the past year.
There are several conditions that need to be met for an equity market to perform favourably, Le Roux says. Since 1997, the following conditions have not been met by the South African market:
- Strong economic growth is needed. South Africa has averaged only 2.2 percent a year.
- Strong "pricing power" is necessary. When the price of raw materials increase, a company needs to pass the costs on to the consumer. If it cannot do so, which is what is happening in South Africa, the company has to absorb the costs and this decreases its profit margin.
- Strong profit growth is needed. There has been profit growth, but at the expense of jobs. Companies have shed employees in order to keep up their profit margins.
- No corporate/banking casualties. In the past 12 months alone, Regal Bank and Saambou Bank have been placed under curatorship and life assurance company Fedsure had to be rescued by Investec.
- A stable internal policy is necessary. There have been several shocks, such as changes to regulatory controls, unpredictable exchange rates, interest rate hikes, corporate scandals and controversies.
- External stability is preferable. The September 11 terrorist attacks in the US, the collapse of technology stocks, the fluctuating price of crude oil and regional political and economic stability have all affected the performance of the equity market.
Will things get better?
Owing to changes in the economy, there is a good chance investment returns will improve. While the economy is undergoing major structural adjustments, most are now done, such as the relaxing of trade and exchange controls.
There could be big differences in relative performances of the markets because of short-term interest rate changes which will create differences in relative performances. But investment returns should improve even if investment choices remain hazardous.
A word of advice
Le Roux advised seminar delegates to save as much money as possible and not to take chances with their savings. It is vital to diversify your investments.
Make sure that you give your money to a reputable money manager. Professional financial planners have resources and experience.
The closer you get to retirement, the less risk you should take.