In light of the pessimistic economic outlook, it is important to look for good quality equity and listed property shares that have strong dividend/distribution payment histories, attractive current yields and are going to grow the dividend/distribution income stream in the future
There have been two meaningful changes in the global investment landscape over the past six weeks. Firstly, various economic and corporate earnings data, both globally and in South Africa, have started to show signs of deterioration. Secondly, the labour unrest and violence-ravaged strikes in SA have raised the political temperature in the country ahead of the ANC's elective conference in Mangaung in December 2012. Pessimism about the future prospects for SA and the world abounds.
Notwithstanding these concerning facts, our investment outlook and asset allocation have not perceptibly changed at this stage. Investors may well ask why. Are we not being irresponsible and complacent by not adopting a more cautious or conservative approach for our clients' hard-earned cash? The answer is no.
We emphatically believe the larger risk to investors, particularly retirees, is inflation risk. To be clear, our starting point for portfolio construction is always to seek assets that can deliver returns in excess of inflation over the medium to long term. Yet when we look at asset classes globally, fewer and fewer of the mainstream asset classes are able to jump this basic hurdle rate for inclusion in the portfolio.
The policy aftermath of the global financial crisis drove short-term interest rates sharply lower and they have remained at record low levels since 2009. Importantly, they are likely to remain at these levels until sometime in 2015. In SA, the South African Reserve Bank (SARB) has adopted an aggressive monetary policy with the repo rate at 5%. In both instances, these interest rates are below the respective official inflation measures, meaning that negative real interest rates are on offer.
In the bond market, yields are not much more attractive. In the US, 10-year Treasury bond yields are below CPI and in SA bond yields are marginally above CPI. Corporate bond yields are slightly more attractive, but are still insufficient to offer a meaningful improvement in the outcome. Unless we see further declines in bond yields, investors are going to struggle to deliver CPI-matching returns from bonds, let alone the CPI + 5% return outcomes the liability profiles of many investors require.
Therefore, two important sources of positive real returns over the past 10 years will be the source of negative real returns for the next three to five years. Accordingly, investors are going to have to focus their attention on asset classes that at least have a fighting chance of beating CPI in the future. Investments in listed equity, listed property, private equity and hedge funds may provide the potential inflation-beating return solution.
The Grindrod Asset Management approach has been and will remain focused on looking for good quality equity and listed property shares that have strong dividend/distribution payment histories, attractive current yields and are going to grow the dividend/distribution income stream in the future.
We believe that while this approach may be somewhat more volatile in the short run, it is the only sensible course of action looking forward three years and beyond in a world starved of yield and increasingly exposed to unintended consequences of aggressive policy risks. Eprop
