Investment returns in SA set to taper off in years ahead
Investment returns generated in local equity markets over the next decade are likely to be significantly lower than the returns achieved over the last ten years, with some investors concerned that South Africa could face the prospect of its own ‘lost deca
According to Felix Ubogu, Head of Asset Consulting at Liberty Corporate, the consensus among most investment managers is that the local equity market is fairly valued. “As a result, astute investors (retail and institutional) who are seeking a decent return on their investments will most likely need to look to other geographic regions and a broader range of investment instruments.”
“It is important to note, however, that lower returns does not necessarily mean no returns. These lost decades typically begin with periods of euphoria resulting in inflated asset prices. Currently, this is not the situation in which we find ourselves in South Africa.”
He says there are still a number of pension funds with domestic only portfolios. “There are several reasons for this including the view that it is optimum to match domestic liabilities with domestic assets. There is also a phenomenon known as ‘home bias’ where local investors prefer to invest predominantly in local assets, as they are more familiar with the local environment.”
“Clients are slowly starting to appreciate that whilst their domestic balanced portfolios delivered good returns ahead of global balanced portfolios over the last decade, this trend may well reverse going forward. “Investors have characterized the investment returns generated in developed markets over the last ten years, such as Europe and the US, as a lost decade.”
Ubogu says that for those investors looking to increase their offshore exposure, there are two types of regions they should be looking for.”Firstly, countries likely to contribute significantly towards world growth in the future and countries experiencing a confidence crisis are likely to provide good buying opportunities. As such, it would be ideal to seek value in countries such as the US, Europe and Asia.”
He says emerging markets should also be explored but it is important for investors to keep in mind the reduced transparency in these regions, as well as the higher investment costs and significantly reduced liquidity when investing in these markets.”
“One of the key benefits to diversification is that by spreading investments across various asset classes and geographic locations, the investor reduces the risk of their total portfolio. Secondly, when markets sell off, a depreciating rand can act as a buffer to protect the returns earned from foreign sources. Lastly, the opportunity set is significantly increased as offshore markets offer thousands of listed securities, whilst locally investors have a much narrower range.”
“Whether or not investors seek offshore exposure, it is crucial that they formulate a durable investment strategy that is able to withstand bull and bear markets. This means constructing a well diversified portfolio with exposure to both ‘protective’ asset classes such as cash and fixed interest instruments as well as ‘growth’ asset classes such as equities and property.”
“Constructing a portfolio that is spread across over various geographic regions is simply one tool that should be employed as part of an overall strategy to reduce portfolio risk and enhance total returns,” concludes Ubogu.
