Investors can expect a ‘profound reduction’ in returns over next decade
A combination of factors, including an ageing population, low inflation and poor productivity, will lead to a slowing global economy and returns
Most South Africans are expecting their investments to earn returns way higher than markets are likely to deliver, according to a survey conducted by an asset manager.
Investors may have enjoyed good returns from global markets over the past decade, but a number of factors are likely to result in returns from these markets being significantly lower over the next decade, according to UK-based global manager, Schroders.
Schroders conducted a global investor survey that shows more than 60% of SA investors believe they will get a return of more than 10% a year from their investments over the next decade. One in five investors believe they will get returns in excess of 20% a year, while just less than half expect returns between 10% and 20% a year.
Only 28% have more realistic return expectations of between 5% and 10%.
More than 25,000 people in 32 countries — those with a fair bit already invested — took part in the survey and Schroders concludes that over-optimism among investors is a worldwide phenomenon that sets investors up for disappointment.
Schroders Global Investor Survey records that annual returns from the MSCI world index — an index of 1,600 shares around the world — were on average 11.3% a year for the decade starting with 2008. However, this average includes the good returns earned during the recovery — with some help from easy monetary policies and low interest rates around the world — from one of the worst market crashes in history during the 2008 global financial crisis.
Investors become complacent about the outlook, expecting this trend to continue when, in fact, returns are declining sharply year-on-year and the outlook for the next decade is gloomy.
A combination of factors, including an ageing population, low inflation and poor productivity, will lead to a slowing global economy and returns that will not match those of the previous 10 years.
Addressing a recent conference for Sanlam’s investment platform Glacier, Lesley-Ann Morgan, the head of multi-asset strategy at Schroders, says the manager expects a profound reduction in the returns investors can expect for the 10 years to 2028 when compared to the returns over the 10 years to the end of 2018.
Schroders is expecting returns from the US equity market to almost halve from the average of 13.9% a year leading indices delivered in the decade that ended in 2018, to an average of 7% a year for the next 10 years. The equity market will also deliver just more than half the average 8.8% a year it delivered over the past decade, to 4.6% a year for the decade ahead.
European markets will deliver only 5.1% a year on average for the next 10 years, while in the decade past, investors earned 9.5% a year, Morgan says.
Similarly, returns from bond markets will also be significantly lower. Morgan says the only exception is US bonds which are likely to deliver a marginally higher yields (income earned relative to the price) of 2.7% a year on average over the next 10 years compared the 2.5% a year they have delivered for the past 10 years.
UK bond yields will be significantly lower — down from an average 5.6% a year to 1.2% a year over the next 10 years; and euro bonds will also be sharply down at 0.9% on average from 5.8% a year over the past 10 years.
The current global macro-economic environment [is] treacherous. The shift to populism and the resultant risks have brought politics to the fore, which is inherently unpredictablePeter Brooke of Old Mutual Investment Group’s MacroSolutions
Morgan says the reason Schroders believes returns will reduce significantly is because growth in the labour force in developed markets will slow due to reduced fertility rates. Productivity growth will also slow. This will slow economic growth, she says, adding that some commentators expect economic growth in the US and the UK to be as low as 0.5%.
There will also be a number of disruptive forces, such as the unwinding of quantitative easing policies, which will put pressure on shares, bonds and other securities valuations or prices relative to earnings, she says.
Schroders estimates measures introduced to meet the Paris climate accord and contain global warming to 2%, and cut carbon emissions by four fifths by 2050, will shave 10% to 15% off the value of global companies in general, but not all companies will be affected in the same way.
Another disruptive force is that which comes from technology and the rise of automation, which will displace the workforce and change work patterns. The result could be greater inequality but within businesses there will be winners and losers depending on how companies embrace technology and use it to do something positive.
Morgan commented largely on global markets, when most South Africans are heavily invested in the local market.
Local market returns
Old Mutual Investment Group’s MacroSolutions has recently updated its outlook for returns. Peter Brooke, the head of this investment boutique at Old Mutual describes the current global macro-economic environment as treacherous. He says the shift to populism and the resultant risks have brought politics to the fore, which is inherently unpredictable.
At the same time, extreme monetary policy action has upset the normal economic cycle, he says, adding that he expects the US equity market to underperform as very high profits, high valuations and a strong dollar make it difficult for things to improve.
As a result, Old Mutual is forecasting a 5% real (after inflation) return from global equities. With inflation in developed markets at about 1.5%, you could get 6.5% before inflation and possibly more with rand depreciation, Brooke says.
Low equity returns and ultra-low global interest rates have the potential to support SA shares and bonds and other assets as they have become cheaper, he says. However, Brooke admits things are by no means easy in SA and there is a risk that if the government does not act decisively on the parastatals, particularly Eskom, this could lead to a downgrading.
Cash is unlikely to be a good bet because SA has enjoyed very high real rates, and the recent rate cut is likely to the be just the first. You are likely to only get 1.5% more than inflation from an investment in cash over the next five years, Brooke says.
He expects a real return on its [Old Mutual’s] balanced fund, which is invested across asset classes, to be 4.6% a year over the next five years. At an expected inflation rate of 5.2%, that is a 9.8% return.
Old Mutual expects equities will give a 6% real return — 11.2% before adjusting for inflation over the next five years — and listed property will give a 7% real return.
The five-year outlook for local bonds is that they will return 4% a year after inflation for the next five years, and while Old Mutual expects SA will be downgraded to junk status over the long term, it is comfortable investing in bonds because they have been priced with this event taken into account.