Four trends to influence asset allocation strategies through 2012
A post mortem of investment performances through 2011 would probably centre on how unforeseen political events and natural disasters halted the expected global economic recovery in its tracks. In a space of just 12 months we had to digest populist uprisin
This turmoil affected investor sentiment and resulted in extremely volatile trading conditions worldwide. Investor sentiment was (and will continue to be) hampered by the apparent lethargy of the developed world in addressing their myriad debt and banking system concerns. “Policymakers and politicians will continue to exert their influence and impact the global economy negatively as the Euro-zone crisis and US fiscal policy gridlock continue to hamper growth,” observed Peter Brooke, Head of Macro Strategy Investments (MSI). He was presenting at the Old Mutual Investment Group SA (OMIGSA) quarterly press conference hosted in Johannesburg, 24 January 2012. As 2012 gets underway fund managers, financial advisers and investors will have to wrestle with similar challenges to those faced last year.
Long-cycle trends dominate the investment environment
Brookes identified four themes (or constants) which hampered growth during 2011 and remain in force to influence asset allocation decisions this year. The first of these themes is that of “big government”. The sluggishness in tackling Euro-zone and US debt is largely due to decision makers placing political ambitions ahead of economic prudence. Nobody wants to make unpopular budget cuts in the run up to the US elections, for example. South Africa has first hand experience of this phenomenon as service delivery and public administration take a back seat for political manoeuvrings in the run-up to the African National Congress (ANC) 2012 Elective Conference.
The second trend – “a low return world” – emerged in the aftermath of the global financial crisis which plunged much of the world into technical recession in 2008 – and persists to this day. Equities – the backbone of most investment portfolios – performed dismally last year. Brooke noted that the MSCI World Free Index returned -5% (in US dollar terms) in 2011. Local investors struggled too as the JSE All Share index limped to a total return (capital plus dividends) of just 2.6%. With domestic consumer price inflation pushing through 6% the real return on equities (in rand) would be around -3.4%! Whether you favour equities, listed properties, bonds or cash real returns will be hard to come by through 2012.
Cash is trash and the consequences
“We have constantly highlighted how the deliberate policy of low global interest rates is guaranteed to erode savers’ real spending power to the benefit of indebted banks and governments,” said Brooke. Central banks in Europe, Japan and the US have little choice but to keep their interest rates as low as possible through 2012. These near-zero rates coined the term “cash is trash” – or the third constant trend. South African investors are suffering too as rising inflation and low interest rates result in negative real returns from this asset class.
Fund managers have few options in this poor return environment. The “low return world” combines with “cash is trash” to create the fourth and final trend: a “quest for yield”. They will be forced to scour global markets for the best possible dividend, interest and yield opportunities on offer. And you can be sure the attractive yields on local government and corporate bonds and listed property will lure many of them to our shores.
To find out which asset classes portfolio managers favour we’ll take a quick look at the five-year return expectations published by MSI. Domestically the fund manager favours equities over listed property and bonds. They expect equities to produce real annual returns of 6.5% over the next five years – followed by listed property (5.5%) and bonds (2.5%). The “cash is trash” theme plays out for both local and international cash opportunities. Real returns from domestic cash (+1%) and offshore cash (-1%) won’t see too many people rushing for so-called risk free returns. Equities top the return table for international assets too. MSI expects international equities to return 6.5% (real) per annum in US dollars. The group is negative on international bonds (-1%) and international cash.
What should we make of all this? A good way to get a feel for fund mangers’ thinking on asset allocation is to consider their balanced portfolios. The Old Mutual Balanced Fund, at 31 December 2011, was invested 49% in SA Equities, 5% in SA Listed Property, 13% in SA Cash and 11% in SA Bonds and the balance offshore. Going forward, South African fund managers will have to structure their portfolios to include the best-returning asset classes on offer both locally and abroad.
Editor’s thoughts: The consensus 2012 growth forecast for the world’s most powerful G7 economies was recently cut from 2.4% to just 1.2%. South Africa – which depends heavily on developed world trade partners for growth – is forecast to grow at only 2.7%. Slow economic growth quickly translates into poor investment returns. Do you think the average retiree will be able to preserve retirement capital in the current “low return world”? Add your comment below, or send it to [email protected]
