Adapting to changes in the investment landscape

The investment landscape is an environment characterised by continuous change. From market valuations to country economic growth prospects, little in the investment world remains constant indefinitely. Consequently, investors need to remain flexible and open minded so that, over time, they can make the necessary alterations to their saving plans to ensure an acceptable long-term investment outcome. 

Many Investors, however, remain anchored to investment practices that worked well in the past such as the:

• Boom in commodity prices

• Ten-year rerating of bonds and property

• Ten-year boom in SA equities

• Ten-year boom in China 

Investors are often warned that historic performance is no indication of future performance. This is valuable advice but do investors really believe it? When it comes to offshore investing, evidence suggests that past performance plays a major role in the investment decision making process.

Despite compelling valuations offshore and demanding valuations locally, previous poor experiences have resulted in a reluctance by many South Africans to invest offshore. For the decade ending 2010, the JSE All Share Index rose by more than 400% whereas the S&P 500 increased by a mere 12% in rand terms. Clearly, SA has been the place to be. However, the divergence in performance has resulted in a substantial decline in equity dividend yields locally and a substantial increase in the yields of some of the biggest and most respected companies listed on first world markets. The chart below highlights the change in valuations since 2000 of some of these first world companies.

The economic growth prospects of SA and the US have also changed significantly since 2000. Whereas at the turn of the century SA faced superior GDP growth prospects to the US, today America is leading the global recovery and SA is struggling on a number of fronts. 

Much of SA’s recent economic growth has come from a significant increase in household expenditure. Major factors which have contributed to this increase over the past 5 years include loans made to low income groups and rapid growth in social transfers. Another driver of household expenditure has been employment by the public sector – approximately 86% of all jobs created in the past 10 years in SA have been in the civil service. This is not a sustainable foundation for economic growth going forward.

By contrast, the US is showing signs of leading the global economic recovery:

• Since 2010, unemployment in the US has declined from 10% to 7.4% 

• Housing starts have increased by 10% y-o-y

• House prices are up 12% y-o-y

• The capital adequacy ratios of America’s banks are among the world’s highest 

• America is well on its way to being energy self sufficient 

The investment case for bonds, both locally and internationally has also changed considerably. While 10 years ago an investment in bonds would have made sense due to high yields and a likely long-term trajectory of declining interest rates, today this is no longer the case. In first world markets equity yields are currently higher than bond yields and, with rising inflation in SA, it is highly improbable that investors in domestic fixed interest bonds will receive an acceptable real return over the long term.

The risk currently inherent in bond investments was evident when Ben Bernanke made the now-infamous "tapering” comment which resulted in a global sell-off of the asset class. The significance of this event should not be underestimated, as it could represent the beginning of the end of the artificially-low interest rate environment, which has been the norm for so long. 

From Marriott’s perspective, the investment implications of these changes and developments are the following:

• Maximise offshore exposure

• Avoid fixed interest bonds 

• Choose to invest in companies resilient to unexpected events such as food producers, telecommunication providers, healthcare providers and other companies which offer basic necessities.