South African investors shouldn’t expect the same level of returns from US markets going forward, given the current state of the S&P 500, where returns are unlikely to match those of the past 10 years. Instead, investors should set their sights on local soil as emerging markets – including South Africa – are predicted to outperform developed markets over the next decade.
This is the view of Adriaan Pask, Chief Investment Officer at PSG Wealth, who’s optimism around the imminent outperformance cycle of emerging markets comes despite global asset manager, BlackRock, recently announcing its downgrade of emerging market equities from overweight to neutral due to the effects of the pandemic. Pask says that both on the equities and bonds front, returns from the US are likely to be lower on aggregate.
He explains that it’s fair at this point to say that the 40-year bull market in US bonds is over. “Don’t expect the type of returns that we’ve seen in the last 10 years from the US. Of course, there are exceptions, but at the moment if you look at the typical 60/40 portfolio, which is fairly static, investors are not likely to be able to position their portfolios in the correct way for long-term success. Similarly, investing in market-cap weighted ETFs in the US would not be good move right now.”
Alongside the predicted underperformance of the US market, Pask also believes local and global interest rates will have to rise again following a record low. He says that it’s not a matter of “if” but rather, a matter of “when.” “Currently local interest rates are at 50-year lows, and similar situations are being experienced in the developed world – such as in the US. However, they will have to rise again, and rise significantly. The big risk investors are faced with at the moment is that we need to be prepared in the event of another economic crisis, which will require the market to be stimulated, and a monetary tool is required to do that.”
Pask says that with all of this in mind, now is the time to invest in emerging markets (EMs), which have the potential to go through an outperformance cycle over the next decade. “The relative valuations in EMs are looking more attractive. Earning revisions and the sentiment in most EM markets are also optimistic. Looking at the export of commodities and the simultaneous weakening of the US dollar, in general, the market currently favours EMs.”
To expect an immediate improvement would be unrealistic, but there are several signs of progress, he says. “For example, we are seeing a lot of re-rating potential that favours EMs in general, which is good news for South Africa. South Africa consumer confidence is low, but it is recovering. As these indicators improve, so will sentiment and the expectations that ratings will improve. South African returns could be expected to outperform US returns in the next ten years. It’s a strong statement to make but that’s what the markets are indicating.”
He says that where market corrections are concerned, these should be anticipated and planned for. “Investors should expect a market correction every five years, so instead of being caught off-guard, this expectation should be factored into long-term plans as an attempt to future-proof their portfolios.
“Diversification is key when preparing for any eventuality. We therefore encourage investors to use multi-asset funds that actively allocate across a wide range of asset classes, both locally and abroad,” he concludes.
