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 SA 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.
One way to invest in a low growth environment, earn decent returns and still protect capital is by investing in structured products, such as the Discovery Capital 200+. A limited offer until 22 September 2017, this product offers a 100% return on the investment, before the deduction of fees, if the portfolio return is positive at the end of five years. The investor also benefits from conditional downside protection and unlimited returns.
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.