The Preamble

For the background to this series of posts: here, here and here. And the summary:

1. Small investors have some investing options.
2. You can invest occasionally in lump sums (the once-off investors) or monthly through debit orders (the monthly investors).
3. As for things to invest in, I’m a general fan of low-cost equity-index-tracker ETFs (as is Warren Buffett). But there are other possibilities as well.
4. This series of posts is there to see which would work out well.
5. Then there are some indicators at the end. Because why not.

Before I start talking about market corrections, etc, a look at the week everyone had:

Once-Off Investors

 

And in pictures:

Monthly Investors

And the debit-order guys:

 

In pictures:

 

Don’t you think that the last few weeks of that graph are interesting? Up to that point, everything roughly moved in tandem (except for Naspers – but that’s to be expected – as it’s one of the few assets on the list that isn’t very diversified). But then from about Week 25 onwards, it dipped about all over the place.

Two reasons:

1. There has obviously been some movement in the economy (see below); but also
2. In the first few months of investment, each additional debit order was quite large relative to the size of the total investment (in Month 1 – it was a ±30% addition; Month 2 – 25%; Month 3 – 20%; Month 4 – 14%; etc). And because you had large relative injections of capital, the overall return was stabilised by them (ie. the larger proportionate return was coming from the debit order). But as time goes on, the return on the accumulated savings is happening off a larger base – and it’s therefore having a larger impact.

Is that not incredible? If you’re investing R1,000 a month, then by month 9, any additional investment is only a 10% addition.

Which is to say: once you’re in the habit of saving, your investment strategy becomes exponentially more important as time goes on.

Interestingly – that’s also kind of a good analogy for Thomas Piketty’s argument in Capital in the 21st Century – in which he argues that there is only a brief period of time in which the growth return (your salary/saving habit) is greater than the return on capital (your total savings). And as that difference grows exponentially, you get a magnification of the split between the wealthy (the capital-holders) and the poor (the workers reliant on monthly payments).

The Indicators

So we haven’t had much new macro data – just movements in the normal culprits.

The exchange rate is continuing to pull back.

From what I’ve read on Twitter, and from what I’ve seen out in the field – over the last three weeks, a fair amount of cash exchange and forward exchange contracting took place in order to take advantage of the weak exchange rate. And obviously, with enough demand for rands, the exchange rate started to recover.

Bond yields are falling:

Some potential reasons:

1. The flow of money inward is going straight into the bond market.
2. A growing government confidence, after the finance minister announced that he expected to delay some of the government programs in order to slow down the growth in the deficit.
3. Panic in the stock market.
4. A combination of the above.

Speaking of the stock market:

The JSE is going through a market correction, according to the pundits. That is: it’s been hitting record highs, which is indicative of over-excitement, and therefore, all things that go up…

So here’s the 5 year graph showing all the market exuberance:

 

But here’s another graph showing a comparison with US equities (the S&P 500 index):

 

The two look to have been moving roughly in tandem. That is: the JSE “correction” looks a lot like what is happening in global markets.

I have a few problems with this type of thinking. Firstly:

1. The world today is very different to the world five years ago.
2. Five years ago, the Fed was just beginning QE round 2.
3. As of this October, we’re…well…5 years on – and the tapering is only finishing this month.
4. Meaning that there is so much more money sloshing around in the global market place.
5. Obviously there has been a steady increase in the stock market indices (where else was the money to go?).
6. But does that mean “exuberance”?
7. I think far from it.

The other issue to bear in mind is that the JSE market is denominated in Rands. I realise that this is some pretty poor financial math (you can’t really dollarise an index), but I’m going to approximate it anyway by converting the ALSi using the spot ZAR-USD exchange rate:

 

You’ll maybe notice that over the period that the stock market was “increasing” – in dollar terms, it seemed to be doing more stabilising?

I think that there is more of a hedge in equities than the market is giving it credit for. Specifically, there are some exporters in the market that are probably quite under-valued at this point in time – and that’s where we should be looking for more “correction”.

On the commodities front, oil continues to drop:

 

And even more sharply in Rand terms, as the currency strengthens:

 

Gold and Platinum might also be having a slight uptick:

Which is good news for the miners. Well – it’s a bit of good news, at least.

Until next week!

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.