Investing in a low growth environment


When the economy is showing low growth, as it is currently, investors are likely to see lower investment returns from asset classes such as equity and property.

Vera Songwe, executive secretary of the Economic Commission for Africa (ECA), says global growth is projected to rise to 2.9 percent in 2018 into 2019. Growth in Africa has slowed down to 3.2 percent this year; and is expected to rise only slightly to 3.8 percent in 2018 with foreign direct investment (FDI) also on the decline.

As countries try to stimulate growth by lowering interest rates, investors start earning lower returns and moving into less risky asset classes such as cash, to avoid low returns eating into their capital. Sunette Mulder, senior policy adviser at the Association for Savings and Investment South Africa (ASISA), says the trend into interest-bearing portfolios continued in the second quarter of this year. SA interest-bearing portfolios attracted annual net inflows of R70 billion, of which R41 billion went into SA money market portfolios and R27 billion into SA interest-bearing short-term portfolios.

However, Mulder says that at the same time there were unusually high net inflows into South African equity portfolios of R20 billion for the year ended June 2017. She says these trends appear to be driven by investors either adopting a wait-and-see attitude in a volatile market while reaping the benefits of the high yields generated over the past year by interest-bearing portfolios, or anticipating a bounce back in the equity market.

The problem with this scenario is that with interest rates at current levels and after adding fees and taxes into the equation, the investors who have adopted the "wait-and-see" approach are guaranteeing themselves returns below inflation. On the other hand, investors that stay the course in equities and listed property can continue to enjoy inflation-beating returns over the longer-term.

Defensive investments

The financial adviser plays a key role in encouraging the investor to avoid looking at short-term market trends and remains focused on a long-term strategy, while staying true to the investment objectives that they have drawn up. While factors such as inflation, interest rates and political events are out of the client's control, he can control other factors such as how much he chooses to save, where he chooses to save and the timeline of his investment.

In a low-growth environment, an investor can look to income-generating assets to aid risk-adjusted returns, such as defensive stocks with healthy dividend yields. These investments are considered "defensive" as these companies are able to continue earning profits even when economic activity (growth) slows down. Thus, the performance of these stocks is not heavily reliant on the economic cycle. Examples of such businesses include healthcare, telecommunication and tobacco companies. Dividends from these investments can be re-invested to harness the power of compounding in a low-growth environment.

Within the Discovery Invest portfolio, local stock selection in the Discovery Balanced range of funds is driven by bottom-up analysis which seeks to identify those companies that receive relative earnings upgrades while trading at reasonable valuations. This approach has resulted in a diversified composition of local equities, where portfolio positions have been based on operational improvements and relative earnings expectations. Here, the bottom-up process has led to exposure to cyclical stocks which have been balanced against defensive ones, such as British American Tobacco. The defensive, rand-hedge business is a key holding in the portfolios as it has received positive revisions due to benefits from internal efficiency projects, its global brand drive initiative and budding growth in exciting "next generation" e-cigarettes. In general, the balanced investment approach in these portfolios is reflected in their diversity, in which the portfolio management team aims for no overexposure to any one macroeconomic or market event - such as local economic and/or political developments.

This article should not be taken as financial advice and is meant for information purposes only.

Discovery Life Investment Services Pty (Ltd), branded as Discovery Invest, is an authorised financial services provider. Registration number 2007/005969/07.


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