Doubts over the sustainability of the global economic recovery and heightened fears of a double-dip recession weighed heavily on equity markets over the second quarter of the year.
Those concerns had the biggest impact on the outlook for commodities, and over the past three months resources counters fared the worst.
The FTSE/JSE All Share index lost 8,2% over Q2 to leave the equity market down 4,1% on a total-return basis for the first half of the year. The -11,9% return from resources stocks over the quarter negated the first quarter’s return of 2,1% and left that sector of the market down 10% for the half-year.
The impact reverberated through the resources-heavy Top 40 index, which gave up 9,4% for the quarter and was down 5,9% for the six months.
The negative outlook on equities fed through into industrial and financial stocks. Those sectors receded by 7% and 7,8% respectively from March to June. At the mid-point of the year, industrials had returned a negative 1,3% while financials were still up 1,3% following their strong 9,9% showing in the first quarter.
The Top 40 large capitalisation index bore the brunt of investors’ disillusionment with equities, but the mid-cap index did not escape entirely. It returned -0,7% for the quarter and 8% for the half-year while the small-cap index lost 3,6% for the quarter to return a positive 1,7% from January to June.
The local equity market’s decline of 4,1% for the first six months of 2010 was in line with the decline in global equity markets, though the small depreciation of the rand from R7,41/$ at end-2009 to R7,67/$ at June 30 shielded the market a little.
For the half-year, the FTSE 100 index lost 9,2%, the Hang Seng index lost 8% and in the US the Dow Jones Industrial Average and the S&P500 returned -7,6% and -6,3% respectively.
Back at home, the non-equity asset classes fared a little better than equities. Listed property added 0,6% over the quarter for a half-year return of 10,6% while the All Bond index returned 1,1% in Q2 for a year-to-date return of 5,6%. Listed prime-linked perpetual preference shares were flat over the quarter for a total return so far this year of 7,7%.
With no further changes to official interest rates in Q2, cash returns, as measured by the STEFFI Composite index, were 1,7% in the second quarter to add to the first quarter’s return of 1,8% and a rounded-off 3,6% for the half-year.
The non-equity asset classes have provided a varying degree of positive returns this year so far while the equity market has been a white-knuckle roller-coaster ride. Overall, the very short-term movements that we witnessed over the first half of 2010 highlight the ongoing need to diversify one’s investment portfolio across asset classes.
Equities shouldn’t be ignored, even though volatility is likely to continue for some time yet. Very often while you’re on that roller-coaster ride you scream to get off, but the exhilaration and satisfaction at the end of the journey are well worth the price of the ticket.
Investors with a longer time horizon looking to grow their nest egg for retirement need to accept that equities are the most volatile asset in the short-term, but that they do provide long-term returns that outpace inflation.
Investors going to the fair should enjoy the bumper-car bonds, the carousel of cash and the play-park properties and prefs, but even though it’s the scariest of them all, they mustn’t go home without riding the Rollicking Roller-coaster of Equities.
Craig Pheiffer is general manager: investments at Absa Asset Management Private Clients
Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information.