South Africans are ready to start the year on a healthier and brighter note. This time last year many of us had vastly different expectations than where 2020 took us, including:
• We expected muted economic growth as policymakers and the private sector were set to continue to muddle through the complexity of implementing meaningful structural reforms.
• Globally, lower equity market returns were anticipated. The same was expected from the JSE, although we anticipated that the local market performance would exceed money market returns.
• We expected fiscal pressure due to problematic SOEs and an anticipated ratings downgrade to junk.
• While we expected the rand to depreciate slightly, we anticipated a benign inflation environment and a single 25bps rate cut.
For the first two months of 2020, these expectations played out. However, the world was turned upside down in March when Covid-19 spread to the rest of the world and stringent lockdown regulations took effect globally.

The JSE
The JSE All Share Index (ALSI) started 2020 just above 57 000 points. On 24 March the index dropped to just above 38 000 points – a 33% decline. April and May, however, saw a strong recovery with the index rebounding to just above 51 000 points at the end of May. As of 8 December, the ALSI had reached 59 000 points and has delivered a total return of 7%.

Lesson: Stick to your strategy
Investors who stayed the course despite the major volatility experienced in March would have been happy with the returns achieved – particularly against a backdrop of a global pandemic. A common mistake made by investors is to sell out of investments during an adverse market event and then enter the market again when stability occurs, which can result in permanent capital losses. Long-term investors need to ride out waves (or tsunamis) of short-term volatility, keeping their long-term goals in mind. Chopping and changing positions frequently is not a successful long-term investment strategy.

Gold
The price of gold at the beginning of 2020 was just under R21 000 per ounce. Gold reached a high of just over R36 000 per ounce in August and was up 31% year-to-date as of 8 December. The increase in August was a combination of both an increase in the physical commodity as well as rand depreciation. The strengthening of the rand towards the end of the year saw the price per ounce decrease to just above R28 000.

Lesson: Physical commodities move differently to the equity market
Commodities like gold are a powerful diversification tool, in that they act as a safe-haven investment during adverse market events. The world tends to turn to physical commodities when there is market uncertainty. The incorporation of gold into a portfolio can assist in spreading overall risk and shelter investors from equity pullbacks during times of uncertainty.

In a bull market, diversification can be overlooked by investors as prices are increasing. However, when the unexpected happens, the impact of weak diversification is magnified. A balanced portfolio means investing in assets that do not necessarily move together. Looking at past data only confirms how crises resulted in gold price increases; confirming the balancing effect a physical commodity like gold can have on a portfolio. Gold can also act as an effective hedge against rand depreciation. As gold is valued in dollar terms, a depreciation in the rand is positive for investment return.

Bonds
Local government bonds received a double whammy in 2020. An expected downgrade to junk by Moody’s saw the country’s sovereign instruments fall out of global investment-grade bond indices, which resulted in selling pressure leading into March. Global risk-off sentiment following the announcement of hard lockdowns globally resulted in a further spike in bond yields. The South African 10-year government bond yield stood at just over 9% at the start of 2020 but peaked at 12.38% on 24 March. The yield on this instrument, which acts as a proxy for the bond market, has since steadied to 8.85% as of 8 December. The JSE All Bond Index delivered 7% in 2020 – a decent return for patient investors, despite the challenges faced in this area of the market.

Lesson: A less popular asset class that can provide a steady income stream to investors
Government bonds are bought by investors as they provide a predictable income stream in the form of regular predetermined payments. In times of market uncertainty, fixed returns well above inflation can offer investors a solid platform to outperform the increase in the cost of living as well as spread their risk.

When held to maturity, investors receive their capital back and thus preserve capital over a fixed period. Like gold, bonds behave differently to equities providing investors with another useful tool in balancing their portfolios. Government bonds are one of the less popular asset classes, due to their complex nature. However, investors can consider these types of fixed income securities in their portfolio when looking to reduce portfolio risk through different asset class composition.

US market performance
The Nasdaq Composite index fell by approximately 2 400 points in the four weeks from 12 February to 11 March but has since recovered to 12 349 as of December 2020. In February 2020 the Nasdaq Composite index stood at a little over 9 700 points, resulting in a 39% increase in the index.

The Dow Jones Industrial Average fell just over 10 000 points to 20 000 points during March but recovered slightly towards year end. Year to date, the Dow Jones Industrial Average is up 5.89%.
The S&P 500 fell just over 1 000 points to 2 600 points during March but has since recovered to just over 3 600 points. The S&P 500 index achieved growth of 14.1% during 2020.

Lesson: Do not put all your eggs in one geographic basket
The JSE makes up less than 1% of global market capitalisation. Successfully diversifying a portfolio means investing in different geographies outside of South Africa. The US market allows investors to obtain exposure in technology stocks, something the JSE can only offer through Naspers. Investments in US technology companies found investors obtaining exposure to a new sector that was set to thrive under the lockdown regulations. The global lockdown resulted in increased demand for technology, thus we saw a major increase in the prices of the stocks exposed to the sector.

Diversifying your share portfolio not only relates to different sectors, but geographic locations as well. Should the JSE see a reduction in growth, your international performance might balance returns out. By limiting your investments to South Africa only, all your risk is concentrated in one location. Risk needs to be spread globally, giving your capital the best chance to outperform the increased cost of living and to achieve sustainable long-term returns.

In closing
Although 2020 presented many obstacles along the way, it also gave us a new outlook on life. Boardrooms were replaced with Zoom and Microsoft Teams and parents juggled family and working from home. Many of us became more comfortable with using technology for everyday purposes like buying groceries, clothing and medication.

One aspect of investing that was magnified during the lockdown was the importance of diversification. Introducing different asset classes and geographies into a portfolio can certainly be put down as one of the major lessons from last year. Perhaps the most important lesson learnt was to “stay the course”. Long-term investing goes hand in hand with being patient and recognising that big short-term movements are exactly as described – short term. The lessons learned in 2020 must be taken advantage of and used to make better investment decisions into the new year.

Source: Nicholas Riemer, FNB Wealth & Investments