/ 1 October 2009

Investing in a low-growth environment

While there are signs of an economic recovery, many strategists believe we are unlikely to see a return to the growth rates of the past five years.

Scenario planning guru Clem Sunter says there is a 60% chance that we will enter into an economic period similar to that of 1966 to 1982 where we saw low growth rates and high levels of inflation.

Over the period, returns from stock markets were flat and inflation significantly ate into retirement fund savings.

With warnings that market returns of 15% to 20% are over for now, how do you position your investments to ensure that you at least keep up with inflation and provide some growth for your retirement funds?

Save more
Savers have relied on asset performance to make up for their lack of savings. With house prices tripling and the stock market doubling over just a few years, many investors became asset wealthy and this feeling of wealth resulted in additional income being spent rather than saved.

Moreover, this feeling of wealth increased our appetites for being in the red — which is why we saw our debt, as a percentage of income, rise from 50% to 76%.

Many households are now reducing their debt and the savings from lower debt repayments will need to go into savings to boost our nest eggs.

Build a quality portfolio
Although shares will not be shooting the lights out in this environment, there is an opportunity to accumulate a good-quality blue-chip share portfolio that will provide dividend income in retirement.

Vanessa Hofmeyr, portfolio manager at Investec Asset Management, says that high-quality shares with strong earnings have lagged behind the stock market rally and so are favourably priced compared with some of the weaker companies that have seen substantial increases in their share prices.

Apart from an attractive valuation, these are also defensive stocks which should offer a lower risk investment in tough economic times.

Hofmeyr’s sector preferences include tobacco, telecoms, beverages and healthcare as these are very resilient in periods of weak economic growth.

  • Beverages: SABMiller — it has consistently delivered strong earnings that have also proved to be defensive.
  • Tobacco: BAT — although investors would need to purchase BAT as part of their foreign allowance, South Africans can invest through local company Reinet.
  • Telecoms: MTN — cellphones have become essential items and people will cut back on other expenditure before they will stop using their cellphones. MTN also has a strong growth strategy.
  • Healthcare: Aspen, Adcock Ingram, Netcare, Medi-Clinic — even in hard times people get sick.
  • Banks: Standard Bank and FirstRand — the banks have lagged behind the recent market recovery and offer value at the moment. They will struggle in the next year as their bad debts work through the system, but Hofmeyr says the banks are robust and earnings will improve even with a lower rate of economic growth.
  • Resources : BHP Billiton — although resources tend not to do well in periods of low economic growth, Hofmeyr says you cannot discount China and its demand for resources. BHP Billiton has a strong balance sheet and good cash flow and would be well placed to take advantage of the growth in China.
  • Gold: In the 1970s, with rampant inflation, the gold price rose 700%. If we enter into a period of high inflation as a result of the extremely loose monetary and fiscal policies adopted by governments across the world, gold will be a major beneficiary.
  • Property: Listed property is unlikely to perform well. Highinflation, low-growth scenarios are not positive for property as higher inflation leads to higher interest rates. Hofmeyr says the outlook for returns from property ranges from flat to a negative 10%. She argues that there are good-quality companies offering double-digit earnings which are preferable to property.

Trade the volatility
Although the longer-term performance from the stock market in the 1970s was flat, there were significant rallies and corrections, of about 30%, which saw the Dow Jones index trading between 1 000 and 700. This created opportunities to make money by trading the market.

Today we have financial instruments that allow us to make money from both rising and falling markets such as single stock futures (SSF), contracts for difference (CFD) and futures.

Accumulating your long-term portfolio, you can boost returns by trading short-term price movements, although this needs to be done in a separate account for tax purposes.

However, Hofmeyr says that even in a long-term portfolio you need to keep an eye on valuations and take profits if shares become overvalued.

Blue chip shares are now showing value but, if you see prices doubling in the next year or two, that would be a time to take profits.

The volatility will provide plenty of opportunities to accumulate your portfolio as there will be as many corrections as rallies, providing an opportunity to buy into good-quality shares in weak markets. It is important not to panic about missing out on the next big run — rather wait for the cooling-down period.

Unless there is a significant improvement in global growth, most rallies will be short-lived and the market will give you another chance.

Low-growth vs high-growth returns

  • R2 000 a month for 10 years with an average return of 15% per annum = R541 000.
  • R2 000 a month for 10 years with an average return of 10% = R404 000.

Despite investing exactly the same amount, you will have saved nearly R140 000 less.

To have R541 000 saved in the lower-growth rate environment you will need to save R2 600 a month.