Low-growth world a worry for investors

Your investment game plan should acknowledge that low returns and volatility may be around for a while, reports Patricia Holburn.

Investing requires confidence, a commodity that’s in short supply right now in South Africa, and many other countries. The United States might have one of the lowest unemployment rates in history, but its growth rates remain below par. Europe has started to show growth, but many countries in the region continue to struggle. East and south of these economic zones the emerging markets continue to grow, but at a slower pace than the last few years.

If the world continues to grow so slowly, not only will investment growth be harder to find, but returns will be lower.

Kevin Lings, the chief economist at asset manager Stanlib, says that when he looks around the world, the main concern is that there is just no growth. And in South Africa the possibility of recession looms. Lings was speaking at the annual Financial Planning Institute convention held in Sandton this week.

The developed world is expected to achieve some growth this year – in the region of 1.8 percent – improving slightly in 2017 to two percent.

This might sound reasonable – these are mature economies, and it is, after all, growth. Solid and stable, is how Lings describes it. But it’s not very exciting, and is below the longterm average of three percent. If this is a permanent change and growth remains around two percent, returns from equity markets will be lower.

Lings thinks it is a distinct possibility that this change is structural, and will be long-lasting.

We are still clinging to the idea that asset classes can perform at a fantastic pace and deliver double-digit annual growth rates, he says. But if the economy is growing at only two percent, double-digit returns are difficult to achieve on a sustainable basis. Clearly, we will have to mark down those returns.

Lings believes the change may be structural because, despite all the stimulus in the US, and the reduction in unemployment to 4.7 percent, growth has been slow. One of the reasons for this is the strong US dollar, which has made US exports uncompetitive and pushed the US manufacturing sector into a recession.

INFRASTRUCTURE SPENDING

On the emerging market front, there may be a similar pattern of lower growth going forward, as emerging markets move from seven-percent growth to more modest numbers. One standout is India, with growth of 7.9 percent.

The one thing India has got right, says Lings, is spending on infrastructure. “I think the answer to growth around the world is more fixed-investment spending. In some cases, such as India, this involves cutting out unnecessary spending to get the funds for the necessary spending. Just channel the money in the right direction.”

SOUTH AFRICA’S SHOPPING SPREE

South Africans love to shop, and it is retail sales that have, so far, prevented our economy from falling into a recession. Shopping can boost an economy and manufacturing, if you buy local. However, most of the labels on the goods we buy don’t show “made in SA”. The result for the manufacturing sector is that there has been no growth, and we manufacture today what we manufactured 10 years ago.

The strength of the retail sector can last only as long as salaries outpace inflation, a number that could hit eight-percent by year-end. Factor in another possible interest rate rise, and retail sales could fall, as they did this week.

Lings says South Africa could have done better, because when the global financial crisis hit in 2009, our finances were in good shape. Government’s gross loan debt as a percentage of gross domestic product (GDP) had declined from 50 percent in 1996 to 26 percent in 2009. This solid financial position gave us room to implement our own policy stimulus: money was borrowed and spent. A large chunk of this borrowing went the way of salary increases, with government’s salary bill doubling in five years.

Lings forecasts zero-percent GDP growth for South Africa in 2016. However, he does have some good news – although it comes with caveats.

The first piece of good news is that South African corporations have R700 billion in cash on their balance sheets. This could be spent on fixed investment, which would boost the economy. The caveat here is that it will only be spent when there is sufficient confidence, Lings says.

The second piece of good news is that there is a concerted effort to get the economy growing, and government has identified five initiatives to boost the economy. But Lings says this requires political will and the support of the entire cabinet, not just one person or institution.

Low returns are not the only characteristic of investment markets currently; high volatility is another. According to Hywel George, director of investments at Old Mutual Investment Group, the South African market has been more volatile in the past four months than in the past 20 years – and it’s likely to continue. Volatility is normal now, George says. But don’t sell when you see a scary 10-percent fall; stick with your investment plan.

Be realistic but don’t lose perspective, Thabo Dloti, the chief executive of Liberty, told planners at the convention. Get the basics right. People often abandon the basics when facing a challenging situation. If you do abandon the game plan, you won’t succeed.