We sometimes forget what an extraordinary period the last 10 years has been for local investors despite the Global Financial Crisis. The local stock market has gone up over four times, with strong real returns from local cash and bonds as well. Meanwhile, the rand has strengthened from R11.42 to the US dollar 10 years ago to R7.47 by 29 February 2012.
Mahesh Cooper compares the past two decades and cautions investors about investing by looking in the rear-view mirror…
Ten years to February 2012
If we look at the last 10 years from the perspective of a rand investor, R100 invested in our stock market 10 years ago would have grown to R424, a return of 15.5 percent per year (9.7 percent per year above inflation). If that same R100 had been invested in cash, it would be worth R239, a return of 9.1 percent per year (3.3 percent per year above inflation). These are astonishingly high real (above inflation) returns, especially when over the last 110 years South African equities have achieved a real return of 7.5 percent per year and cash one percent per year1.
Contrasting the R424 from the JSE over the last 10 years, R100 invested offshore in the MSCI World Index (World Index) would be worth just R113 versus R81 in a US dollar bank account. This shows that over a 10-year period, as a South African investor you would have achieved a return of only 1.2 percent per year investing in the World Index or lost 2.1 percent per year by investing in a US dollar bank account.
Investors looking at these numbers often ask: "Why bother investing offshore when we have received such fantastic returns investing locally?"
It is important to remember that these are historic returns and just because they happened in the past does not necessarily mean they will be repeated in the future. We have often highlighted our concerns about the current level of the South African equity market and that it is unlikely to experience similar real returns over the next 10 years as it has experienced over the last 10 years.
Ten years to February 2002
It is interesting to contrast the last 10 years to the previous 10 years and perform the same analysis. A R100 investment into the South African stock market in 1992 would have grown to R392, a respectable 14.6 percent per year, lower than what an investor would have achieved over the 10 years to 2012. Over that same period, R100 invested in a bank account would have returned R374, or 14.1 percent per year. This means that over the 10-year period, an investor would have earned very similar returns from the South African equity market and cash. Importantly, inflation over this period was 7.5 percent resulting in a real return from shares of 7.1 percent per year and cash of an incredible 6.6 percent per year above inflation.
Article continues on page two: Mahesh Cooper looks at the last 20 years combined and discusses whether the good times will last...