Local assets still tops
DISAPPOINTING: GLOBAL BONDS HAVE ONCE AGAIN DETERIORATED
High yields in SA property make it hard to ignore the value.
The global macroeconomic environment is treacherous at the moment. The shift to populism and the resultant risks have brought politics front and centre. This is inherently unpredictable.
At the same time, extreme monetary policy action has de-emphasised the standard cycle.
In this world, it is prudent to focus more on valuation (price) and to hold macro views lightly, while focusing on building portfolios that are well diversified.
We have increased our expected real (after inflation) returns for SA equity by 50 basis points (bps) to 6% a year over the next five years, up from 5.5% in January and 5% this time last year. This is driven off a 4.3% forward dividend yield and a relatively depressed earnings base, which provides a good platform for better growth into the future.
However, this improved outlook will require a turnaround in the local economy.
Our expected real return has increased by 50 bps to a mouth-watering 7% a year, up from 6.5% six months ago. This is backed by a very high dividend yield, despite a negative expectation on growth. We remain pessimistic about the trading outlook for these companies, but with such high yields we cannot ignore the value.
Local bonds continue to offer high real returns and are very attractive in a global context. While, over the long term, we expect SA to be downgraded to junk status, we are comfortable investing in the bonds because they have been priced for this. Our five-year real return outlook for local bonds remains 4% a year. A big change in our asset class outlook is that interest rates in SA are now falling and we expect cash to deliver a real return of just 1.5% a year going forward. With the economy on its knees and no underlying inflation, we think further interest rate cuts from the SARB are appropriate. With cash yields falling, it forces investors to look at other assets.
The global equity market is schizophrenic, with the US equity market and growth shares expensive, while the rest of the world and value stocks are cheap. Longer term, there is no alternative to equity, but we are concerned about profits as we expect them to fall. As a result, we are cautiously positioned on global equity and have revised our five-year real return outlook down to 5%.
Following a stellar six-month period, global bonds are once again priced to give negative real returns. In fact, the whole of the German bond curve now offers negative yields! Our five-year outlook on global bonds has further deteriorated to -1% a year.
Improved outlook will require a turnaround in economy
We also expect global cash to deliver negative returns going forward. To combat the trade war induced global slowdown, central banks have swung to easier monetary policy. We hope they are successful, but monetary policy is starting to run into its limits.
Peter Brooke is the head of MacroSolutions at Old Mutual Investment Group