Asset Allocation View

Five year asset class view (as at 11/01/2012)

By Peter Brooke, Boutique Head

This page provides key insights into our latest thinking on asset class returns, as well as our boutique’s approach to managing assets, in an effort to help financial advisers and clients navigate the current difficult market conditions. This five-year outlook will be updated bi-annually or when investment conditions change significantly.

*The international return expectations above are in US Dollar terms; any rand depreciation will add to returns in rand terms.

Key take-aways

• Our themes of 'big governement'; 'a low-return world'; 'the quest for yield'; and 'cash is trash' are still in play globally.
• Risks continue to stalk markets: Eurozone debt and policymaker indecision; US debt and politial a manoeuvring; a slowdown in the Chinese economy; and rising local inflation.
• Global bonds have had their day; equity valuations have improved, with a preference for emerging markets.
• While volatility will remain the order of the day, there is opportunity to be found.

Overview

Our latest forecasts are summarised in the above table. In understanding these, clients should bear in mind three important factors:

• At Macro Strategy Investments (MSI) our number one job is to grow our clients’ savings in REAL terms, which means delivering returns above inflation. Therefore, when we forecast returns, we forecast real returns. These expected returns heavily influence how we invest money.
• Investing is a LONG-TERM commitment; we have managed money for some of our clients for decades. Therefore, our forecast returns represent what we expect to happen over the next five years. Our view, meanwhile, highlights how we are positioned in our funds and may take into account more short term factors.
• As active asset managers, we are constantly monitoring market developments on behalf of our investors to take advantage of shorter term moves, but within our long-term framework. Investors are discouraged from implementing this view on their own; they should rather leave it to professional active managers to make asset allocation decisions.

Understanding the MSI five-year asset class view

• Neutral (N) - Indicates real returns will be at or around the long-term historic average over the next five years AND that MSI’s weighting of the asset class in the funds it manages is roughly equivalent to that in the benchmark.
• Positive/Overweight (+) - Indicates real returns will be above the long-term historic average over the next five years AND that MSI’s weighting of the asset class in the funds it manages is somewhat overweight compared to the benchmark.
• Very Positive /Very Overweight (++) - Indicates real returns will be significantly above the long-term historic average over the next five years AND that MSI’s weighting of the asset class in the funds it manages is strongly overweight compared to the benchmark.
• Negative/Underweight (-) - Indicates real returns will be below the long-term historic average over the next five years AND that MSI’s weighting of the asset class in the funds it manages is somewhat underweight compared to the benchmark.
• Very Negative/Very Underweight (--) - Indicates real returns will be significantly below the long-term historic average over the next five years AND that MSI’s weighting of the asset class in the funds it manages is strongly underweight compared to the benchmark.

Asset class commentary

• Global Economics - Material macroeconomic risks continue to stalk the environment; policymaker indecision and political brinkmanship will continue to hinder growth in the developed world where rates will stay low, while in emerging markets monetary easing will be the order of the day.
• Local Economics - Global headwinds and an inflation peak in sight do not bode well for growth; however it is likely that rates will remain flat for 2012.
• Currency - After being the worst-performing major currency in the world for 2011, down 17.5% against the US dollar, the rand is trading at fair value. It will no longer boost offshore investment returns.
• SA Equities - Our forecast remains unchanged at 6.5%; equities are now cheaper and therefore attractive in our view. We favour shares with a high dividend yield, as that is where returns will come from.
• SA Property - We are neutral on property; it will continue to deliver returns, derived mainly from yield, but faces the threat of negative reversions.
• SA Bonds - They continue to be attractive and will contribute to returns through yield as they did in 2011, although with decreased risk aversion some chance of capital gain is possible.
• SA Cash - Low rates for longer mean lower returns.
• Offshore Equity - This was sold down last year and underperformed in spite of excellent earnings. This remains our preferred risk-adjusted asset class, with a focus on emerging markets.
• Offshore Bonds - After being the best-performing asset class of 2011 as a result of safe haven buying and quantitative easing, yields are now lower. Investors in these assets will experience negative return.
• Offshore Cash - This remains trash; negative returns and capital erosion.