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The continued case for equities

Updated: May 2, 2023

An interesting article written by Alwyn van der Merwe, CIO at Sanlam Private Wealth.

The traditional risk-reward relationship associated with equities appears to have broken down – over the past three years, local equities have not rewarded investors for taking on the relatively higher risk of investing in this asset class. In fact, cash has outperformed equities over the period. Disillusioned investors are questioning whether shares are still a wise choice under the circumstances and some are looking to lower-risk asset classes to enhance overall returns. Is there a continued case for equities? Can we expect the risk-return trade-off investors rely on, to be re-established in the future?

The numbers certainly seem to justify investor angst. Since May 2015, the South African equity market has moved largely sideways and delivered lacklustre results – the total return for the market over the period was an unexciting 6.95% per year (dividends reinvested). Most economists continue to point the finger at the usual suspects behind this disappointing performance: the low-growth trap we seem unable to escape, exacerbated by poor macroeconomic policy making and execution.

While there are clearly legitimate reasons for the equity market’s disappointing returns, it should be remembered that when investors start to question a particular asset class, emotion – especially fear – is never far from the surface. In the face of short-term setbacks and uncertainty, people tend to lose faith in and ignore tried-and-tested long-term investment principles, thinking that ‘this time is different’. Jittery investors start overreacting and making decisions based on recent short-term experience at precisely the wrong time, which more often than not costs them dearly in the long run.

Focusing on the facts

It’s human nature to get excited about short-term gains and losses on the stock market, and it’s sometimes difficult not to get caught up in the ‘noise’ and media hype impacting the market. As professional investment managers, we need to focus on the facts, however, and the most important is this: over the long term – and by this we mean at least 10 years – equities have significantly outperformed every other asset class. No one can deny that over the short term, local equities haven’t been shooting the lights out. But taking a longer term view, nothing trumps shares when it comes to inflation-beating returns.

The facts speak for themselves: since 1960, there has never been a rolling five- or 10-year period in which equities delivered a negative return. In fact, the median return over five years since 1960 was 17%. A comparison between long-term equity returns, money market returns and inflation also illustrates the importance of equities. As can be seen on the graph below, an investment of R10 000 in 1960 in the money market would have returned R2.7 million at the end of 2017, while the equity market (dividends reinvested) would have delivered R80.4 million, a nominal return of 16.63% per year! Clearly, if you want to beat inflation over the long term, the equity market is the place to be.

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