Investors turn to income to bolster their retirement portfolios
Fund managers had their work cut out to deliver real returns last year. Each of their portfolio building blocks – cash, bonds, listed property and equities – delivered lacklustre performances in the 12 months ending 31 December 2011. Capital appreciation
At the group’s previous presentation they warned of steadily rising inflation and the real chance of the South African Reserve Bank (SARB) hiking interest rates in response. Inflation played along, increasing steadily through 2011 from 3.7% year-on-year in January to 6.1% by December. But consumers were protected from an interest rate hike due to the lacklustre global economic growth outlook. The outlook is largely unchanged for 2012. Coetzee emphasised that the local investment universe would be dominated by rising inflation and a fatigued consumer – with inflation likely to hover near the 7% level for the next five years!
South Africa’s consumer conundrum
It is well documented South Africa’s GDP growth is largely consumer driven. Unfortunately the consumer is sending mixed measures. On the one hand consumer spending is robust… On the other, consumer confidence is in decline. Consumer statistics at December 2011 point to a subdued consumption outlook. Why? Coetzee raised five concerns:
· Debt to disposable household income remains historically high, at nearly 75%.
· South Africa’s unemployment rate is “pegged” at the uncomfortable 25% level.
· The domestic savings rate, currently 0%, is appalling.
· The real median house price has declined 18% since 2008
· The consumer confidence index has declined 64% year-on-year.
The extreme volatility currently exhibiting in global equity markets and the likelihood of a repeat of last year’s poor asset class performances simply add to the subdued domestic growth outlook.
Global concerns will impact the domestic economy too. South Africa is unlikely to side-step the fallout as developed world economies tackle the sovereign debt issue. Greece has already (in principle) defaulted on its debt – with Portugal next in line. And countries such as Italy (128% debt to GDP), France (99%), US (98%) and Spain (74%) are under significant pressure to rein in government spending too. Austerity measures in any of these countries can have a significant impact on our international trade. The Euro-zone (25%) and United States (10%) are among our Top Five trading partners!
Beginnings of an unsecured lending bubble
Can the consumer underpin domestic growth going forward? Coetzee noted that much of the recent household consumption expenditure was due to “lower for longer” interest rates. “It will be a mistake to price in the low interest rate environment over the next decade,” he said. And the bad news for consumers is that the SARB could act against rising inflation sooner than expected. A recent statement by SARB governor Gill Marcus reads: “The most recent data seem to suggest that inflation is becoming more generalised, and may reflect the emergence of demand pressures.” In layman’s terms: Consumer demand is driving prices higher – so they need to be reined in!
Marriott is concerned that current household consumption expenditure is underpinned by unsecured debt. The year-on-year growth in “good debt” – money lent to borrowers to pay for houses – is a paltry 2%... In stark contrast unsecured lending is growing at 32%! Unsecured debt as a percentage of private sector credit has surged from just 8% in 2008 to 46% last year. There are real concerns that local consumer are using micro-loans – that are more expensive and less flexible than mortgage loans – to sustain their lifestyles. It is too early to predict an unsecured lending bubble – but current levels of consumption expenditure are clearly not sustainable.
Marriott expects consumption expenditure to slow over the coming years. And they expect inflation to climb further. “We don’t feel that CPI has fully priced in the depreciation in the rand, particularly over the second half of 2011,” said Coetzee. (His comment preceded the unexpectedly low CPI number, of just 6.1% year-on-year, announced for February 2012 recently).
The “hard times” investment scenario
Under current market conditions investors will have to focus on reliable income. Coetzee stressed that investors should not overpay for the income stream while making sure the income is enough to maintain its purchasing power. “It is a difficult environment, but there is something we can hold onto – the fact that we can use reliable income streams to create some degree of certainty in investments – especially for investors that are building their capital for the future,” he said.
Editor’s thoughts: Lacklustre market performances have turned the spotlight on income (yield). During 2011 the various asset classes delivered income as follows: listed property (8.5%), bonds (8.8%) and cash (5.5%)… Shareholders were also rewarded thanks to the JSE All Share index dividend yield of almost 3%. Are you concerned that a focus on conservative income solutions over equity-heavy solutions will impact on your clients’ long-term saving performance? Please add your comment below, or send it to [email protected]
