Old Mutual Investment Group

Old Mutual Investment Group sees domestic equities, property and bonds delivering higher returns in 2017, on the back of improving economic prospects.

It expects peaking interest rates and inflation in South Africa to create a positive environment for interest rate sensitive assets such as domestic property and bonds.  It sees inflation averaging at 5.4% in 2017 compared with 6.3% in 2016 and the benchmark repurchase rates falling to 6.5% by the end of 2017, down from 7% currently.

According to Peter Brooke, head of Old Mutual Investment Group’s MacroSolutions Boutique the 13.5% return on domestic bonds year-to-date as at November 24 2016 is artificially high due to an oversold bond market.

Instead, he said SA cash – with a 6.8% return in rand terms – is the best performing local asset class thus far. SA listed property delivered returns of 4% and the FTSE-JSE Share Weighted Index (SWIX) returned 2.5% over the same period.

After starting the year with the highest level of cash in its fund ever, the group is seeing more opportunities in equities as the domestic equity market de-rates.

“We’re not at the stage where the JSE is cheap yet. It is on a 13x forward but it does offer a real return in the region of 5%. We’re not back to levels that we have enjoyed for the last 100 years of around 6.5% but value is starting to incrementally rebuild,” he said.

As a result, the group upped its long term expected real returns on SA equities from 4.5% to 5% and SA property from 5% to 5.5%.

“When we look at a balanced portfolio and we just use our static benchmark, in other words a passive offering, the expected real return on a balanced fund has picked up to 4%. It is the first time it has been at the 4% level in two and a half years, so we are starting to see a little bit of a better return coming through,” he said.

The group also warned against “excessive pessimism” over the South African economy as its prospects start to look up.

“Load shedding is long past, commodity prices have stabilised and have actually recovered a bit, rainfall is improving, the food inflation shock will reverse in the months to come and the labour environment has stabilised notably this year,” said Rian le Roux, chief economist at Old Mutual Investment Group.

He added that the National Treasury’s commitment to fiscal consolidation is expected to reduce pressure on monetary policy and lead to a lower interest rate from mid-2017.

The group has forecast GDP growth of 1.3% for 2017 but warned that improvements are likely to be slow due to the strained consumer environment, depressed business confidence, low levels of private investment and an expected rise in taxes.

Still, the expected improvement in global economic growth is likely to provide some support. However, a potential break-up of the Eurozone, a hard landing in China, aggressive interest rate hikes in the United States and domestic political uncertainty remain risks.