Low economic growth around the world, low interest rates and massive uncertainty about how the European and American debt crisis will play out have made investment markets much more difficult to navigate, but there are still opportunities for fund managers to make money for you.
This is the view of a number of asset managers who have commented on the past quarter and the current outlook for markets. But despite the doom and gloom, they are seeing opportunities in shares and other securities that have been sold down to very cheap levels.
Peter Brooke, the head of MacroSolutions at Old Mutual Investment Group South Africa (Omigsa), says: “Investing in today’s world is like canoeing on a river with a weak current. You have to really paddle hard and know what you are doing to get to where you are going, with no help from the environment.”
Brooke says that during this past quarter the macro-economic themes that started to play out on the world stage in 2010 – in particular the US$6 trillion of excess borrowings and governments’ attempts to deal with this – have continued and even intensified.
Brooke is of the view that we are only halfway through the debt mess, which is causing lower economic growth around the world, lower earnings expectations, political turmoil and market volatility.
Neville Chester, a senior portfolio manager at Coronation Fund Managers, says there is a huge amount of uncertainty about global economies, and no one can accurately forecast what will happen.
He says in this uncertainty investors have abandoned rational thought processes and react to daily news flows, with behaviour that is often short-lived.
He says the market rallies on news such as that about further economic stimuli, but these stimuli may not be good for real (after-inflation) asset prices.
Eldria Fraser, chief investment officer of Prescient Investment Management, agrees the massive overhang of debt is creating uncertainty in investment markets as markets are driven by sentiment resulting from decisions taken by central banks.
She says with elections coming up in many countries, there is likely to be more uncertainty, as political decisions will be influenced by how popular they will be with voters.
However, Chester says politicians are playing to rising populism around the world. They do not always stick to the promises they make to gain votes, he says.
Brooke says a consequence of the excess debt around the world is exceptionally low interest rates globally, which is driving investors into avoiding cash investments and searching the world’s markets for better yields. “We’ve seen more than 35 interest rate cuts around the world in 2012 so far, and don’t rule out more,” he says.
These exceptionally low rates have led to a desperate hunt for yield by investors, which has seen many bond markets trading at unprecedented low yields, Brooke says.
Chester says fear about the global economy is causing investors to invest in bonds, such as United States treasuries, which have negative real returns. Common sense no longer prevails, he says.
Global equities, on the other hand, are experiencing net outflows, and the sell-off of global shares is creating buying opportunities for managers seeking shares trading at low valuations (low prices relative to expected future profits).
Brooke says South Africa has not been immune to the themes playing out globally, with bond and property yields falling by 0.8 percentage points to 7.2 percent and 6.7 percent respectively. This led to impressive capital gains, with listed property delivering a phenomenal 19.2 percent for the first half of 2012.
“Unfortunately, these re-ratings mean we will see lower returns going forward,” Brooke says.
“We have cut our five-year, real (after-inflation) return forecast for local property and bonds by 0.5 percentage points each to five percent and two percent, respectively,” Brooke says.
He says investors need to note that these are well below historical levels, although they are still attractive compared with the negative real returns on cash and bonds globally.
“As a result, we wouldn’t be surprised by a continuation of foreign flows into the local bond market,” he says.
Brooke’s expected real return for both local and offshore equity remains unchanged at 6.5 percent, but the caveat is that the risks to this return forecast remain high due to the prevailing macro-economic environment.
Chester says Coronation prefers global equities to local ones, because even after a good quarter the manager is finding many stocks with healthy balance sheets and attractive dividend yields.
South African equities, are, however, more fully priced, he says, although Coronation is finding value in some sectors, notably the resources sector.
However, Chester cautions that the global financial crisis is far from resolved.
Fraser agrees that local and global equities are the best investment bet, because earnings are still strong. But she says Prescient is making use of derivatives to protect its funds against a fall in global markets because of the uncertainty.
When it comes to offshore equities, Brooke says the majority of returns will be via dividend yield and not capital appreciation, which sees equities outperforming but not delivering “juicy” returns.
Johann Els, senior economist at Omigsa, says South Africa is feeling the chill as the contagion effects from the European crisis and concerns over slower growth in Europe, the US and China, in particular, have finally begun to take their toll on the local economy.
He has downgraded his 2012 growth forecast for South Africa from three percent to 2.8 percent.
Els says consumer spending, which has underpinned our growth for the past two years, is starting to flag, and business investment has decelerated. Moreover, he says, our exports are being hit by outright recession in key trading partners such as the UK and Europe, and anaemic growth in the US.
Chester says the lack of job creation is weighing heavily on the local economy and even the latest rate cut is unlikely to improve conditions.
This week’s repo rate cut, from 5.5 percent to five percent, will put a little bit of money back in the hands of a few mortgage holders, but it will not stimulate the sale of homes or the development of manufacturers. Hence unemployment will remain and the economy will fail to gain new consumers, he says.
Diversification is key
Savers are trapped in a volatile, low-return world, yet they can no longer take refuge in cash, Peter Brooke , head of Old Mutual Investment Group South Africa, says.
“We all have to save more, because there is no more free lunch. And, given that there is no one asset class that stands out as a good bet, investors would be wise to make sure that their investment portfolios are well diversified and that they invest with asset managers who undertake solid research, as well as have an active approach to management, so that tactical advantage can be taken of opportunities should they arise.”
Asset managers are in for a tough time, he says. “Managers will have to look harder for growth and employ their full tool box of instruments such as emerging market debt, convertibles and alternative asset classes in order to deliver on their mandates.
To make the most of the current difficult investment times, you must diversify more thoroughly and balance the risks and rewards investments offer, René Grobler, sales director, Investec Asset Management, says.
Some investments may look uncertain over the short term but may pay off over the course of your working life. Investors tend to invest in the best-performing asset class, fund, strategy or manager based on recent outperformance, she says.
But chasing outperformance can lead to poor investment decisions, especially in volatile markets.
Over the last decade, not one asset class has consistently outperformed every year and most asset classes have at some point been the worst- performing asset class in a year, Grobler says.
You need to diversify across the asset classes to get the benefit of good returns when the different asset classes deliver these.
If you chop and change investments, you may buy when the investment is expensive and sell when it is cheap – an error that can erode your valuable savings, Grobler says.
She says market volatility over the past few years has resulted in some dramatic falls in portfolios, but no one can predict what markets will do in future so you should not try to time the markets by selling your investments when times are bad, expecting you will be able to invest again in good times.
It is virtually impossible to determine the right time to get in or out of a market, Grobler says.
The opportunity cost could be substantial if you wait until you feel confident in the market, she says. You could miss the best days in the market by staying on the sidelines. Market gains often come in quick bursts and if you miss enough of them, you could lose all the long-term advantages of owning shares, she says.
Grobler says that, for example, if you had invested R100 000 over the past 15 years to June 2012 in the South African FTSE/JSE All Share index, your investment would have grown to R504 605.
However, if you had decided to get out of the market during volatile periods in these 15 years and as a result missed the market’s best 10 days (that is 10 out of 3 763 trading days) your investment would have grown to only R277 297.
Global gloom
Fears about the future of the eurozone as a result of the government debt crisis in European countries is the main feature of the renewed concerns about the global economy.
Neville Chester, senior portfolio manager at Coronation, says it is impossible to predict how the European issue will unfold.
However, he says Spain, Italy, France and Germany hold 78 percent of the eurozone’s debt while the other countries hold the rest of it.
If any of these peripheral countries leave the eurozone, it will not do much harm, he says.
Chester says it is possible that the eurozone could continue, with Germany dictating the rules and countries with large deficits implementing austerity measures. This will mean zero interest rates in this region, a recession, high unemployment and social unrest.
Chester says it is most likely that the eurozone will continue as is or without some peripheral countries.
A more serious possible scenario is that Germany, unwilling to foot the bill for other countries’ deficits, exits the eurozone.
The euro would devalue, while the reinstated German currency would appreciate strongly, making the German economy less competitive, Chester says.
Another scenario is that the whole eurozone could disintegrate.
Chester says this scenario would be very disruptive.
Adding to the gloom globally is the slowdown in growth in China.
As the second biggest economy in the world, China cannot keep growing at 10 percent a year, Chester says. If it slows to seven percent, he says, this will still be better than the growth in a lot of other developed countries.
However, with slower growth China may need less commodities, to the detriment of South Africa's economy, Chester says.
Another factor influencing global investor sentiment is disappointingly slow improvement in economic conditions in the United States and concerns about the durability of this growth.