Save more, expect lower returns and don't listen to daily investment news for the next five years: Peter Brooke

Investors should start getting used to the idea that real returns will be lower over the next few years, says Peter Brooke, head of Macro Strategy Investments at Old Mutual Investment Group SA. He was speaking at a media briefing earlier this week.

Investment returns of the last decade 'the noughties' were higher than the long term average, after inflation he said. A table of average real returns (after taking inflation into account) appears below. The long term average of South African equity returns over the last forty years is 7.9%, while the 'noughties' produced a decade-long average of 9.8%.

Over the last ten years, the worst performing sector was offshore equity, with a negative return of -4%.

According to Brooke, good returns in the equity, property and bond sectors could be attributed to three main drivers; the emergence of the 'Bric's' (a term first coined by Goldman Sachs as an acronym for Brazil, Russia, India and China) which had driven the resource boom, higher than average GDP growth which had led to a consumer, business and industrial spending spree, and conservative monetary policy characterized by low inflation and low interest rates.

In the US, the underlying economic conditions were very different; they had a decade where the average equity returns were  -3.6%, lower than that average returns of the 1930's. This low return can be attributed to, amongst other factors, a long de-rating after the tech bubble of the nineties. The table below shows US Real Returns in US $ (% per annum). Note that US Bonds outperformed equites by 8.7% during the first decade of this century. 

Moving onto the expected themes for the period between 2010 and 2020, the 'teenies', Brooke said that China and other emerging markets would continue to grow faster than the developed markets.  This was a 'forty year story' he said. This would favour resources, especially agricultural commodities, and would be good for Africa but bad for the environment.

However, various other factor would combine to 'put the brakes on the economy'. These included the developed market de-leveraging (paying off their debts and saving more), which would lead to lower consumer and capex spend. Many developed countries would issue more bonds, South Africa included, and raise taxes to pay for past excesses. Companies should anticipate lower profit margins and higher tax rates.  Commenting on the electricity and Eskom, Brookes said that the problem of payment for and increased demand for electricity was not going to go away.

During 2010 he expected interest rates to start to rise (China and Australia had already increased rates), and quantitative easing (printing money) to slow. 'Governments will start to address the potential problem caused  by the massive cash injections of last year, this will be a tricky balancing act, an art. If they increase interest rates too early, this may lead to a prolonged recession or a 'double dip' recession, if they leave remedial action too late there will be an increased risk of inflation,' he said.

Old Mutual's investment view for the next five years is reflected in the table below.

South African equities are expected to perform at a reasonable rate of 6.5%, which is lower than previous decades. To compensate for lower growth, investors should save more, look for alpha and buy growth, according to Brooke. But he expected the trading market would be more cyclical, so advised investors to maintain a flexible asset allocation.

'Stick to your plan, don't get sidetracked by the latest investment news, boring is good,' he said.