Retail investors should prepare for low-return future – Imara

Making do with less is always tough, but that’s the challenge now facing retail investors, according to Imara Asset Management South Africa, a fund manager and advisor that believes now’s a good time for a reality-check.

The period of double-digit equity returns courtesy of a buoyant JSE may be coming to an end, says Chris Botha; Director : Fund Management, at the Illovo-based firm.

“The good news is that inflation-beating returns are still possible,” he notes. “But downside risks have grown.

“The scenario is especially worrying for retail investors as they typically react when it’s too late.

“A sell-off after a market correction locks in losses. The time to take profit is before the market moves. Several factors suggest that time is approaching fast.”

Botha suggests ordinary saver-investors call their financial advisors to arrange a portfolio review.

“Reviews should be conducted regularly in any event,” explains Botha. “It’s usually a good time after several years of good equity profits. Many investors have grown used to gains above 10% a year. Sometimes the uptick has been closer to 20%.

“This can’t go on forever.”

He believes the major risk is a rise in US interest rates, prompting increases by the South African Reserve Bank.

“Low international rates have benefited both South African bonds and equities as foreigners looking for yield have been attracted to our market,” says Botha. “As global rates rise, there will be less need for foreigners to support our market.

“Our rates will go up to retain a measure of support, but higher rates are always negative for company earnings. Any expectation that earnings will stall will impact share prices and pose a risk for retail investors with heavy equity exposure.”

In these circumstances, he believes some investors will take some profit, reduce share holdings and beef up their cash reserves. Balanced funds – made up of a mix of asset classes – could also become a popular choice.

Market history tends to support Botha’s concerns.

Statistics show strong correlation between South Africa’s R186 bond and the US 10-year bond. When rates in the US rise, so do South African bond rates.

Market experience also indicates an inverse relationship between local prime rates and JSE price-earnings multiples.

“The JSE is already regarded as expensive by some, “ says Botha, “with P/Es close to 19 times, versus a long-term average just below 15 times. History shows that high P/Es can be maintained for some time, but why take the risk if you’re in no position to ride out a short-term capital loss?

“A portfolio review is indicated sooner rather than later.”