Ex­pect less from your in­vest­ments in next decade

You’ll need a change of mind­set if you want to make the best of the tricky new trad­ing en­vi­ron­ment, writes Bruce Cameron.

Weekend Argus (Saturday Edition) - - PERSONALFINANCE -

You, your fi­nan­cial ad­viser and your prod­uct provider are go­ing to have to make some tough de­ci­sions if you want to make the best of thin­ner in­vest­ment re­turns over the next few years.

The next 10 years will be more un­pre­dictable and re­turns will be lower than the last 10 years.

This was the view of econ­o­mists and as­set man­agers at two pre­sen­ta­tions this week – one by fi­nan­cial ser­vices com­pany MMI and the other by Corona­tion Fund Man­agers.

Karl Lein­berger, the chief in­vest­ment of­fi­cer at Corona­tion, says one thing you can be sure of is that “the fu­ture will not look like the past”. You and your fi­nan­cial ad­viser will have to take care that the pres­sures of a low-re­turn and chang­ing eco­nomic en­vi­ron­ment do not re­sult in in­cor­rect de­ci­sions, he says.

It is even more cru­cial in a low-re­turn and un­cer­tain eco­nomic en­vi­ron­ment that peo­ple who de­pend on their in­vest­ments for an in­come make ju­di­cious de­ci­sions on how much they draw down; if they with­draw too much, they will de­plete their cap­i­tal, he says.

“Don’t make the mis­take of ex­trap­o­lat­ing the one-way up­ward trend of the past seven years,” he says.

Lein­berger says the golden pe­riod of the past 15 years for South African eq­ui­ties, which was driven by com­modi­ties, is over. It is likely that the econ­omy will de­te­ri­o­rate fur­ther, re­sult­ing in higher in­fla­tion and a weaker rand.

While it has al­ways been a good idea to have off­shore in­vest­ments, now more than ever you will need a di­ver­si­fied port­fo­lio with ap­pro­pri­ate off­shore in­vest­ments (rand or for­eign cur­rency-de­nom­i­nated or rand-hedge lo­cal com­pa­nies that earn their prof­its off­shore) to gen­er­ate rea­son­able re­turns, he says.

But, Lein­berger says, the news is not all bad. The cur­rent un­cer­tainty has cre­ated ar­eas where there is a “dis­con­nec­tion” be­tween the val­ues of some com­pa­nies and the prices of their shares, which can be ex­ploited. As­set man­agers need to look for ways to gen­er­ate longterm sound re­turns, even if it means sac­ri­fic­ing short-term per­for­mance, he says.

Her­man van Papen­dorp, the head of macro re­search and as­set al­lo­ca­tion at MMI, says in­vestors who ex­pect history to re­peat it­self will be dis­ap­pointed. He looked at two ex­am­ples.


There is a “new nor­mal” on the JSE, with price-to-earn­ings (PE) ra­tios more in line with in­ter­na­tional norms. This does not mean that JSE-listed shares have be­come over­val­ued.

His­tor­i­cally, the av­er­age PE of the FTSE/JSE All Share In­dex has been 12. This means if you bought a share, you could ex­pect it to take 12 years to re­cover your money. To­day, the PE is 17.5. Van Papen­dorp says it is likely that, in fu­ture, the JSE will have an av­er­age PE closer to its cur­rent value, be­cause the pro­file and value of the com­pa­nies listed on the ex­change have changed.

Only a few years ago, re­source com­pa­nies made up 40 per­cent of the to­tal mar­ket cap­i­tal­i­sa­tion of the JSE. To­day, th­ese shares com­prise less than 10 per­cent of the mar­ket value of the JSE, while com­pa­nies that earn most of their rev­enue off­shore, such as Naspers and Richemont, ac­count for more than 40 per­cent of the JSE’s value.

Van Papen­dorp says the cur­rent PE of 17.5 is in line with the his­tor­i­cal PE of 17 of the S&P World In­dex. He says that the higher val­u­a­tion has also been caused by for­eign in­vestors in­vest­ing in South Africa and push­ing up share prices. They cur­rently own about 40 per­cent of the listed shares.

He says for­eign in­vestors look­ing for emerg­ing mar­ket des­ti­na­tions pre­fer South Africa to coun­tries such as Rus­sia, where cor­po­rate gov­er­nance of com­pa­nies is weak or non-ex­is­tent. For­eign in­vestors are pre­pared to pay for the qual­ity cre­ated by the high level of cor­po­rate gov­er­nance in this coun­try.


The rand will not bounce back: don’t ex­pect a re­peat of what hap­pened in 2001 and 2008, when it re­cov­ered all its losses.

“We are not in the same boat this time; then, we were on the back of the great­est su­per- cy­cle of com­modi­ties, driven by China,” Van Papen­dorp says.

The cur­rent value of the rand and lo­cal in­ter­est rates will also be af­fected by the United States Fed­eral Re­serve in­creas­ing in­ter­est rates. When this hap­pens, global cap­i­tal will flow back to the US, fur­ther weak­en­ing the rand.

Both Van Papen­dorp and Lein­berger agree that you need to re­main in­vested off­shore, mainly in eq­ui­ties. Al­though eq­ui­ties seem ex­pen­sive, you need to com­pare the re­turns from this as­set class with the poor re­turns you would re­ceive if you in­vested in bonds, whose yields are at all-time lows, they say.

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