Surging ahead in 2015
South Africa is up against a host of structural problems, but it doesn’t all amount to gloom and doom for investors. On the contrary, 2015 may even be a better year than 2014, but with the likelihood of generally lower investment returns.
That’s the view of Peter Brooke, head of the Macro Solutions boutique at Old Mutual Investment Group. His team puts a considerable amount of work into its annual five-year forecasts.
The good news, he explains, comprises the oil benefit, likely fewer strikes, stronger consumption spending growth, better GDP growth, current account improvement, a more stable rand, lower inf lation, a better fiscal situation, and a stable monetary policy.
He concedes though that electricity supply remains the biggest risk.
“Three years ago the big story was to take as much money offshore as possible and buy equities. I wouldn’t bang t hat drum as hard today. In terms of diversification, we still place a premium on offshore equities, but if you have a lopsided portfolio where there’s too much offshore exposure, you could be running a risk.
“I f you’re invested in a typical domestic balanced fund with Richemont, British American Tobacco, Naspers* and alike, probably 50% of your money is already driven by global factors.” Brooke says that his team has generally cut expected returns for 2015.
“South African equities can be expected to generate a 5% per annum average real return over the next f ive years, which is slightly lower than our expectations last year, only half the f ive- or 10-year historical f igures, and way off the longterm (since 1925) real return of 8.1%.
“The very strong returns in the recent past have made the market expensive and that’s the challenge facing investors. JSE multiples relative to the global market are on the high side.
“We’re also concerned about profit growth of SA equities, negatively affected by lower trend GDP and the headwind from lower commodity prices.
“Our long-held theme of ‘China in transition’ and the subsequent favouring of Naspers over resource counters remain in place, as does that of a ‘ lowreturn world ’. In a low-yield world equity still offers the best yield.
“Late last year we increased exposure to consumer shares, although some retracted quite sharply. Currently, we’re focusing on shares with good dividend yields, although they offer much lower than historical returns because valuations are higher. Financials with their high
dividend yields look interesting.”
SA LISTED PROPERTY
“Although it has r un hard in recent years, we still retain a neutral position on it because of its ongoing potential to benefit from the macro environment, especially the lower oil price, improved consumer environment, and the lower cost of capital.
“The issue is price – it has been the best market performer for several years, driven largely by rerating and lower yields. We have cut average expected returns by 75 basis points to 4.5% per annum for the next f ive years.
“Historical data shows that the sector returned 20.3% nominal last year, an annualised 15.5% over f ive years, and an annualised 14.6% over 10 years.”
“In our presentation last July we said that the big story for the second half of 2014 would be SA bonds and that proved true. They’re benefitting from the surprise potential improvement of the domestic economy and currently have one of the highest yields in the world on both a rea l and nominal basis. They’re particularly attractive for foreigners seeking, say, 7.5% nominal.
“Long bonds can be expected to deliver an average real return of 2.5% over the next f ive years.”
“We are overweight this sector. Better growth and easy liquidity should provide a much-needed fillip to global equities.”
“In South African currency terms, global bonds did well last year, which helped our bonds. But given the record low yields, we remain negative on them for the medium term. They generated a 10.5% return in rand terms for 2014 and 0.7% in US dollar terms,” says Brooke.