In­vest­ment out­look for 2017 and be­yond

The Star Late Edition - - COMPANIES - Bonds are of­fer­ing a

try re-aligns its growth model from an ex­port and in­fra­struc­ture-driven econ­omy to a more bal­anced one where con­sumer spend­ing plays a strong role in driv­ing growth.

In South Africa, the chal­lenge of stagfla­tion (in­fla­tion above the top of the SARB’s tar­get band, but with eco­nomic growth be­low poten- tial) re­mains a ma­jor con­cern for pol­i­cy­mak­ers: bal­anc­ing the ur­gent need for growth, while en­sur­ing sound fis­cal and mon­e­tary pol­icy means Gov­ern­ment must stay on the tightrope.

These dy­nam­ics have im­por­tant im­pli­ca­tions for stock se­lec­tion. We there­fore ask the man­agers where they see the best op­por­tu­ni­ties in the eq­uity mar­kets, and why.

A low return en­vi­ron­ment – set to con­tinue?

As­set al­lo­ca­tion and in­stru­ment se­lec­tion in the con­text of so much un­cer­tainty is a chal­lenge.

Fur­ther­more, there is a strong ar­gu­ment that risk to­day is priced ir­ra­tionally. How else does one ex­plain that nearly $6 tril­lion (al­beit down from close to $9-tril­lion) of de­vel­oped econ­omy sov­er­eign debt trades on a neg­a­tive yield?

Or that the trail­ing div­i­dend yield on the S&P 500 share in­dex is higher than the five-year US gov­ern­ment bond yield?

While the real re­turns from bal­anced global man­dates over longer pe­ri­ods (5 years and up­wards) look im­pres­sive, re­cent re­turns have been me­diocre.

For 2016, the typ­i­cal man­ager with a global man­date gen­er­ated a return some three per­cent be­low the in­fla­tion rate, even be­fore fees.

Com­pen­sa­tion for the risk of as­set class own­er­ship is a crit­i­cal fea­ture of suc­cess­ful in­vest­ing. By and large, in­vest­ment man­agers can only do as well as the mar­kets al­low them to.

On the pos­i­tive side, yields on in­ter­est-bear­ing as­sets in SA are close to fair value in ab­so­lute terms and rel­a­tively at­trac­tive in a global con­text.

Nom­i­nal real yield of close to three per­cent; while in­fla­tion linked bonds can be purchased on a real yield of around two per­cent. In­vest­ing in credit (cor­po­rate bonds) of­fers a rea­son­able yield sweet­ener.

Against this back­ground, we ask the fund man­agers to give their views on where they be­lieve the best prospects for real (af­ter in­fla­tion) re­turns are to be found, their thoughts on pre­vail­ing val­u­a­tions, and where they are po­si­tion­ing them­selves within their multi as­set class man­dates.

In con­clu­sion, our ad­vice is to stick with your long-term strat­egy. If you can in­vest with skilled and ex­pe­ri­enced man­agers at rea­son­able fees, you can ex­pect that over time, they will tend to get more things right and make fewer mis­takes.

Do not try and time the mar­ket. Re­mem­ber, time in the mar­ket is far more im­por­tant than tim­ing the mar­ket. Martin Jankelowitz, Wil­lis Tow­ers Wat­son

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