You’ll need more than lo­cal as­sets to de­liver the goods this time round

The fac­tors that boosted the re­turns of most lo­cal as­set classes over the past decade are un­likely to be present over the next 10 years. Laura du Preez re­ports on where South African and off­shore mar­kets may be headed and what this means for your in­vestme

Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

In­vestors have en­joyed ex­cel­lent real (af­ter-inflation) re­turns from most lo­cal as­set classes over the past decade, but you should ex­pect a much slower up­ward grind from th­ese mar­kets in the decade ahead.

This means you will have to save more, and you will not be able to rely on a bull mar­ket to bail you out if you have not saved enough for your re­tire­ment, be­cause the big up-and­down mar­ket swings of re­cent years are un­likely to be re­peated soon, Peter Brooke, the head of the Macro Strat­egy In­vest­ments bou­tique at Old Mu­tual In­vest­ment Group, says. (See “What you can do in the face of lower lo­cal re­turns”.)

Mean­while, the past decade was a lost one for lo­cal in­vestors in off­shore as­sets, but, once again, you should not ex­pect more of the same in the decade ahead (see “Re­duced debt bur­den is key to sus­tained bull run in global eq­ui­ties”).

Brooke says over the decade to the end of last year, in­vestors earned an av­er­age real re­turn of 9.8 per­cent a year from lo­cal eq­ui­ties, 17.7 per­cent a year from listed prop­erty and 6.1 per­cent a year from bonds.

Brooke says th­ese were ex­cel­lent re­turns, and they re­sulted in a good per­for mance by bal­anced funds (as­set al­lo­ca­tion funds that move be­tween eq­ui­ties, bonds, prop­erty and cash). The do­mes­tic as­set al­lo­ca­tion pru­den­tial medium eq­uity funds, for ex­am­ple, had an av­er­age an­nual real re­turn of 12.9 per­cent over the past 10 years.

GROWTH BOOST­ERS

But you should not ex­pect the same in the decade ahead, be­cause the re­turns of the past 10 years were boosted by fall­ing inflation, lower in­ter­est rates and high gross do­mes­tic prod­uct (GDP) growth – fac­tors that are un­likely to char­ac­terise the next 10 years, Brooke says.

The past decade was one of the best for South Africa’s GDP growth since the 1960s, be­cause the gov­ern­ment in­vested in in­fra­struc­ture and con­sumer spending grew, he says.

In ad­di­tion, lo­cal listed com­pa­nies ben­e­fited from the growth in emerg­ing mar­kets – such as China, In­dia, Brazil and Rus­sia – and a boom in com­modi­ties.

Listed com­pa­nies also ben­e­fited from a growth in real earn­ings of about seven per­cent a year over the past decade, Brooke says.

But the growth in earn­ings will be flat­ter in the decade ahead, he pre­dicts, with real re­turns from eq­ui­ties likely to be about 6.5 per­cent a year over the next five years.

Brooke says al­though the big in­vest­ment theme of China and faster growth from emerg­ing mar­kets is set to con­tinue to ben­e­fit com­mod­ity pro­duc­ers in South Africa and else­where, its ef­fect is not likely to be as pro­nounced.

“Real com­mod­ity prices nearly tripled in the past decade, and we can’t ex­pect a re­peat of this phe­nom­e­non,” he says.

He also does not ex­pect South Africa’s GDP to grow as fast in fu­ture be­cause of slower growth in the de­vel­oped economies due to a with­drawal of the money cen­tral banks have made avail­able dur­ing the credit cri­sis.

South Africa’s growth will also be ham­pered by ca­pac­ity con­straints, such as elec­tric­ity and ed­u­ca­tion, he says.

Brooke says fall­ing inflation helped to boost the bond mar­ket, but inflation and in­ter­est rates are likely to be flat­ter over the next five years. Hence Brooke ex­pects a more pedes­trian real re­turn of three per­cent a year from gov­ern­ment bonds over the next five years rather than the an­nual 6.1 per­cent that bonds earned over the past decade.

Brooke says he ex­pects an an­nual re­tur n of 6.5 per­cent from lo­cal listed prop­erty over the next five years. Listed prop­erty, which was buoyed by fall­ing in­ter­est rates, was the best-per­form­ing as­set class of the past decade.

He says al­though the re­cent re-rat­ing in listed prop­erty prices has low­ered ex­pected re­turns, the in­come earned by listed prop­erty will con­tinue to grow.

There could be greater de­mand for prop­erty in the fu­ture be­cause of the lack of new build­ing projects ap­proved in the eco­nomic down­turn, Brooke says.

Re­turns from lo­cal bonds, prop­erty and eq­ui­ties are likely to be more bor­ing in the decade ahead. But you will still be bet­ter off in­vest­ing in a port­fo­lio that is ex­posed to those as­set classes in line with your ap­petite for risk rather than in cash, Brooke says.

He ex­pects a real re­turn from cash of about three per­cent a year over the next five years, be­cause he be­lieves the lower in­ter­est rate en­vi­ron­ment achieved by the Re­serve Bank’s mon­e­tary pol­icy dur­ing the past decade is here to stay. “The phe­nom­e­nal cash re­turns of the 1990s will not be re­peated.”

Pru­den­tial Port­fo­lio Man­agers is also of the view that over the next decade in­vestors in the South African mar­ket are un­likely to ex­pe­ri­ence the same de­gree of out­per­for­mance rel­a­tive to listed as­sets in the United States given how those as­sets are priced cur­rently.

Chris Wood, a port­fo­lio man­ager for the Pru­den­tial Eq­uity Fund, says dur­ing the past decade the rand en­joyed an ex­tended pe­riod of strength against the US dol­lar that boosted the US dol­lar re­turns of South African eq­ui­ties rel­a­tive to those achieved by an in­vest­ment in the Stan­dard & Poor’s 500 in­dex. This was be­cause the rand started the past decade at a rel­a­tively weak level against the US dol­lar.

Pru­den­tial does not ex­pect the trend of rand strength to per­sist dur­ing the com­ing decade.

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