On Tuesday, 24 July 2007 FAnews Online attended an Old Mutual Investment Group (OMIGSA) press conference titled "New retirement realities and their implications for investment." OMIGSA Head of Economic Research, Rian le Roux once again provided some thoug
Le Roux discusses two trends in his macro-economic view of household finances. The first is the cash flow trend, which details household income, expenditure and savings. And the second is the balance sheet, which compares assets with liabilities to document the stock of wealth accumulated over a period of time.
Early in his presentation, Le Roux mentioned that "South Africans, on a net basis, are now consuming (spending) more than they are earning." In the paragraphs that follow FAnews Online will investigate whether Le Roux believes this negative net savings rate is necessarily a bad thing.
Understanding the concept of net savings
First we should consider what economists mean when they talk about net savings. The net savings amount is the money that remains after total household expenses are deducted from total household incomes. If a household has an income of R10, 000 per month and has expenses of R10, 150 per month, the net saving is a negative R150 per month. And this is the situation which now exists in South Africa. The net savings rate has gone negative for the first time ever.
How can families survive if they spend more than they earn? The answer lies in the increasing supply of credit in the domestic economy, confirming that South Africans are upping their reliance on credit to fund consumption expenditure. Further evidence is supplied by the steadily rising ratio of total household liabilities as a percentage of after tax income. South African households, on average, have debt in excess of 70% of their after tax income. This rate is nowhere near as high as in the US or UK, but is still high enough to cause concern at the South African Reserve Bank.
Fortunately it is not all bad news. According to Le Roux, "While the net savings rate is poor, the gross savings rate in South African households is quite high." The reason for this is that as much as 10% of after tax income is diverted to consumption expenditure on investment assets and property. It is important to note that expenditure on a mortgage bond is effectively a forced saving, as the bond is gradually paid off over time.
Price boom means assets cover income 4 times
Household balance sheets have been improving too! Le Roux points out that "In recent years the net wealth of South African households has increased phenomenally." This massive increase has come on the back of higher asset prices rather than increased savings.
Investors have enjoyed such spectacular returns on property and equity investments in the last four to five years that assets now outstrip annual gross income by quite some margin. By adding financial and real estate assets, the average household now owns assets worth four times their annual gross income.
The reality is investors in coming years are going to be hard pressed to achieve similar investment returns. We can expect the four times cover to gradually settle back to less flattering levels.
Citizens will have to save more
"The consumption culture of the last several years implies that most South Africans have saved too little," says Le Roux. This low level of saving combined with a generally softer outlook for asset price performance makes for a very difficult retirement saving environment going forward.
While some pension funds have managed annual returns of more than 22.5% over the past five years the situation is unlikely to continue and investors will have to come to terms with more realistic equity market expectations. Recent market returns are an anomaly and will not hold for the long term. Le Roux believes equities will probably provide real returns in the region of 5% to 7% over the next decade.
This means young people saving toward their retirement will have to increase the amount they are putting away by some margin. At the same time, Le Roux advises investors who have benefited from the market over the last five years not to become complacent about making further saving contributions.
Le Roux ends on this note: "The bulk of the ultimate value, the stock of assets that you hold, does not come from the savings input. It actually comes from the investment return!" Investors should take note and adjust their retirement saving strategies to reflect the long term nature of the task at hand.
Editor's thoughts:
Over the last five years South African investors have been rewarded with significant returns as equity and property markets soared. All good things must come to an end and investors can expect 'normal' returns in coming years. The message from the OMIGSA press conference is clear. You will have to save more in future to amass similar fortunes to those you have accumulated in the last few years. Has the current asset price boom affected our attitudes toward saving? Send your comments to gareth@fanews.co.za.
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