The third-quarter collective investment scheme statistics released by the Association for Savings and Investment SA (Asisa) on Thursday illustrate two things: first, that investors still don’t trust the global recovery and second, that investment decisions are largely being made on the basis of emotional rather than fundamental reasons.
South African equities declined by 8,17% during the second quarter. As a result, a massive 71% of flows in the third quarter were channelled into fixed interest funds, with another 25% heading towards asset allocation funds, indicating investor pessimism and uncertainty about the future direction of markets.
Sadly for these investors, the second quarter was simply reflective of the volatility so typical of this phase of the recovery rather than indicating the future path, as was evidenced by the 13,3% recovery in SA equities in the third quarter.
Another noticeable trend illustrated by the statistics was the complete lack of appetite by South African investors for off-shore investment. This jaundiced approach is understandable given the lacklustre performance of both developed market currencies and equity markets — in which South Africans are typically invested — relative to the rand and South African equities.
Without sounding clichéd, this will not always be the case. Given what Finance Minister Pravin Gordhan said in his Medium-Term Budget Policy Statement, offshore investment is going to become a lot easier for South African investors and the timing — certainly from a rand-strength perspective — is probably pretty close to as good as it is going to get.
So what should investors be doing?
Central bankers around the world are terrified of being responsible for pushing their economies back into recession, so you can therefore rely on interest rates staying lower for quite a while longer.
In addition, as the global currency war rages, countries such as SA have found the currency strengthening beyond out control and if this persists we will need to drop rates again so as to neutralise the currency strength and ensure growth doesn’t collapse. Deflation in this environment is unlikely; mild inflation is more likely and global investors in their search for yield will head towards the currencies or markets that offer at least some yield.
Against this backdrop, cash returns will remain poor. Bonds, although not exciting, will at least give a return, and investors will therefore — through a lack of options — see equities as the place to be.
A word of caution though: in a low-inflation, low-growth environment, equity returns are unlikely to repeat the strong returns South African investors have enjoyed over the past five years.
Jeremy Gardiner is director of Investec Asset Management
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