By Brian Butchart, Managing Director, Brenthurst Wealth
Investors seeking double digit returns for the next five years better prepare for risk and volatility in the quest to achieve returns beyond the averages markets have been delivering in previous years.
The economic recovery in the US is slow, European markets are just ticking over and not moving at a great pace, the slowdown in China has been well publicized for some time now and emerging markets have experienced all manner of problems predominantly related to the commodity cycle downturn.
Even though investment is a long term pursuit these difficulties translate into the need for investors to be prepared to invest for longer to build sufficient capital. This makes retirement planning especially very difficult, made more pronounced by the already significant increases in life expectancy. Younger investors will have to work much longer to achieve nest eggs comparable to that of a generation ago.
A research report by global management consultancy McKinsey & Co released at the end of April states that investors of all ages need to resign themselves to diminished gains. According to the report the last 30 years have been a “golden era” of exceptional inflation-adjusted returns thanks to a confluence of factors that won’t be repeated. These include falling inflation and lower interest rates, swelling corporate profits and expanding price-earnings ratios in the stock market.
“The next two decades won’t be nearly as lucrative, even on the optimistic assumption that the world economy snaps out of its recent slump and resumes faster growth,” according to the McKinsey report.
Global asset management company Blackrock said this in the company’s investment blog published mid-April: “Investors aiming for higher returns over the next five years should be prepared to stomach more volatility.”
South African investors face additional challenges, beyond the effect of the slowdown in China and the commodities cycle collapse. The country is experiencing the worst drought in decades which has already pushed food inflation to levels not seen in years. Interest rates are rising, placing additional pressure on households already stretched by higher electricity costs and much higher fuel prices. This does not bode well for a range of industries, notably retail and property. In addition political upheaval is creating downward pressure on the local market and especially the already hammered currency.
For the past year to 3 May the JSE All Share delivered a cumulative return of 0.2% in rand, while inflation averaged at 5.3%; which means investors in the local market achieved negative real returns. For the same period the MSCI World Index delivered 13% and money market investments just above 5%.
So where to go and what to do amidst this gloom and doom? It is more imperative than ever to consult with an accredited financial advisor that can assess all factors including risk profile, investment goals and an investor’s financial objectives.
The general outlook, locally and globally, is not good at all. McKinsey estimates that the US will show growth in the region of 1,9% for the year. For South Africa growth expectations have been lowered time and time again and currently is set at 0.6% for 2016, well below what the economy needs to create jobs and deliver investment returns.
However, this does not mean that double digit returns are out of the question. Asset and wealth managers have access to research and investment options individual investors do not and are also up to date with the demanding regulatory investment environment, especially changes in tax regulations.
Having a balanced portfolio, with bias towards offshore assets remains Brenthurst’s strategy to smooth out the volatility, and improve expected returns from the local market. Diversification between specific asset classes, regions and industries has become more important in the current market environment. With an experienced financial planner the investment road will still be rocky and plagued by volatility. However, better returns than the market averages are still possible, albeit much more difficult than in previous years.
SOURCES: www.bloomberg.com www.blackrockblog.com