Investing in a low return world
What does 2010 have in store for investors? FAnews Online attended the 19 January 2010 Old Mutual Investment Group (OMIGSA) economic presentation titled 2010 and Beyond: A subdued road ahead for investors to find out. After OMIGSA chief economist Rian le Roux shared house views on macro economic trends (including growth, inflation, interest rates and currencies) the spotlight fell on Peter Brooke, head of Macro Strategy Investments (MSI), a boutique in the OMIGSA stable.
Brooke started his presentation with a brief summary of performances across asset classes in 2009. In nominal returns South African investors earned 32.1% in equities, 14.1% in listed property and 9.1% in cash. The only asset class that disappointed last year was bonds, with a nominal contraction of 1%. “Obviously we had a stunning return from equities, because we had the second largest crash ever experienced the year before,” said Brooke. He added that his boutique’s challenge was to analyse long-term trends and determine the strategic asset allocations to maximise investor return. Part of this process involves comparing asset class returns across different time periods and geographies.
The ‘decade from hell’
Time Magazine defined the decade spanning 1990 to 1999 as the decade from hell. A quick look at average annual returns in the United States over that period reveals why.
Research by Merrill Lynch shows a 3.6% per annum real contraction in US equities for the period. This is the worst equity outcome going back 80-years. Even the Great Depression of the 1930s provided 1.9% per annum real growth, though this result was largely courtesy of rampant disinflation. US Cash (+0.2%) and Real Estate (+1.7%) performed dismally through the 90s too!
South Africa, in contrast, enjoyed a very good decade. “For investors it was a great period, with the best growth since the 1960s, falling inflation and lower interest rates all leading to excellent asset class returns,” said Brooke. Local investors were spoiled for choice. Equity investments grew at 9.8% annually in real terms while SA Listed Property (+17.7%), SA Bonds (+9%) and Cash (+2%) completed a full-house for domestic asset class investment returns.
A five-year view on asset classes
What can investors expect over the next five years? The title of MSI’s press release eloquently shares the boutique’s investment thinking: Investors should brace for lower returns in the next decade. A number of factors contribute to this cautious assessment. China-led emerging market growth is likely to continue apace, but not at rates witnessed in the first decade of the new millennium. As a result investors cannot expect a repeat of the tripling of commodity prices over that period.
South Africa is also beset by a number of obstacles to economic growth. Brooke concludes: “We don’t believe South Africa will be able to grow as fast going forward partly because of slower growth in the developed economies due to de-leveraging, as well as local capacity constraints such as electricity and education among others.” Equity market returns will also be subdued on the back of the remarkable recovery through 2009. Brooke points to the 32% gain in share prices and the remarkable 82% spike in the JSE All Share index price-to-earnings ratio as feats unlikely to repeat in the short-term.
Local investors will have to get used to low returns with small differentials across the available asset classes. Over the next five years MSI expects 6.5% per annum real growth from domestic equities and listed property – while bonds and cash will provide real returns of only 3%. At Q1 2010 MSI is neutral on each of the domestic asset classes, favouring property and steering clear of cash. Internationally the group expects 7% per annum real growth from equities, 2% from bonds and 0% from cash. MSI is positive on offshore equities, but would avoid the latter asset classes.
How to invest in low return environments
Periods of low return are challenging for both investor and financial adviser. The best course of action for financial advisers is to communicate the lower return expectations to their clients. To prosper in the coming decade investors will have to adopt flexible asset allocation strategies to take advantage of opportunities as they arise. They will also have to consider increasing the amount of money they put aside for retirement each month. An upward adjustment to retirement contributions is just the ticket for moderate or low investment growth.
Editor’s thoughts: The five-year expected returns included in today’s newsletter are average real annual returns. Top fund managers will watch economic cycles and market volatility to find opportunities to outperform these averages. If you’re saving for retirement it might be wise to temper expectations and increase your monthly savings. Would you advise your clients to increase retirement contributions ahead of long periods of low market return? Add your comments below, or send them to [email protected]
