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Global connectivity and digital age: challenges and opportunitiesRob Price
Columbus Steel - 24 October 2017
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• Low investment returns
• Overinvested financial markets
• Dislocation from real economy
• Strategic investment response
• Context creates comfort
• SA economy
• Technology creates opportunities
• Questions
Positive outlook in challenging conditions
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Source: Econosseur
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Source: fortune builders
Low return conditions
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Source: investment news
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-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1997 2001 2005 2009 2013 2017
Weak South African equity returns
Annual equity returns (alsi)
*monthly smoothed dataSource: Bloomberg; Alexander Forbes Investments
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Source: pharside
Investments need to beat living cost increases
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-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1997 2001 2005 2009 2013 2017
Negative real annual SA equity returns
Year-on-year equity returns, CPI adjusted (all share index, including dividends)
*monthly data, y/y % ch, smoothed by 12-monthsSource: Bloomberg; Alexander Forbes Investments
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Why?
Many traditional asset classes are overinvested
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There’s lots of money already invested in equity markets
0
2
4
6
8
10
12
1960 1964 1969 1974 1979 1984 1989 1993 1998 2003 2008 2013
R12.8tn invested into South African equities
Market Capitalisation, Billions of rands
Bloomberg; Alexander Forbes Investments
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Source: paypassion.net
• Mpumalanga GDP +/-R300bn = 2.3% of Equity market
• Gauteng GDP +/- R1500bn = 12% of Equity market
• SA GDP +/- R4600bn = 36% of Equity market
Size comparison of R12.8tn
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Equity market is 2.5 times bigger than the whole of South Africa’s GDP
0%
50%
100%
150%
200%
250%
300%
1969 1976 1983 1990 1997 2004 2011
Equities overinvested relative to real economy
Alsi mkt cap/ Nominal GDP ratio long-term average
Source: Bloomberg; I-net; Alexander Forbes Investments
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It’s not just a South African phenomenon
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Similar problem in America
0%
20%
40%
60%
80%
100%
120%
140%
1974 1980 1986 1992 1998 2004 2010 2016
Equities overinvested relative to real economy
S&P mkt cap / US nominal GDP ave.
Source: Bloomberg; Alexander Forbes Investments
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Investment returns are weak when assets are overinvested
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▪ Risk management is critical, not return chasing
▪ Alternatives can provide an alternative source of return
▪ Asset allocation presents another risk management tool
▪ Higher savings rates might be required to meet retirement goals
▪ Impact and socially responsible investing getting more attention
Positive investment outlook in trying times
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Fear of the technological unknown
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Source: Gnostic Warrior
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Source: stock images
Map of the world in 1758
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Source: map design sea
Thought they knew everything
Scared of unknown
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America named after “Amerigo Vespucci” could’ve been called
Columbia after “Christopher Columbus”
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▪ Risk management is critical, not return chasing
▪ Alternatives can provide an alternative source of return
▪ Asset allocation presents another risk management tool
▪ Higher savings rates might be required to meet retirement goals
▪ Impact and socially responsible investing getting more attention
Positive investment outlook in trying times
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How did we get here?Overvalued markets and interest rates
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Source: Concover consulting
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0%
5%
10%
15%
20%
25%
1984 1994 2004 2014
Long-term downward trend in interest rates
United States
Source: Bloomberg, SARB, Alexander Forbes Investments
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450
500
550
600
650
700
1953 1964 1975 1986 1997 2008 2019
US household assets are substantially higher than disposable income
Households Net Worth % Disp. Income
Source: St. Louis Fed, Alexander Forbes Investments
New debt floods into financial assets
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Frustrated people do unexpected things
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0%
5%
10%
15%
20%
25%
1984 1994 2004 2014
Long-term downward trend in interest rates
South Africa United States
Source: Bloomberg, SARB, Alexander Forbes Investments
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Source: debt counseling south Africa
Many people don’t use debt effectively
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Source: Thulani Madinginye
How do we improve long-term outcomes for our families?
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Bringing it back home
SA economy
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All eyes on the National Treasury
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-10%
-8%
-6%
-4%
-2%
0%
2%
1994 1998 2002 2006 2010 2014
Deficit means SA is spending more than earning & using debt to pay difference
Budget Balance (income less expenditure) as % Gross Domestic Product (GDP)
Source: Bloomberg
a budget surplus allows South Africa to reduce its
debt burden
Need to balance the books
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25%
30%
35%
40%
45%
50%
55%
1970 1980 1990 2000 2010
Government debt levels are rising steadily
Gross government loan debt as % of GDP (excluding parastatals)
Source: Bloomberg; Alexander Forbes Investments
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20%
22%
24%
26%
28%
1992 1999 2006 2013
South African government is too big relative to the size of the economy
Govt. Revenue / Nominal GDP
Source: Bloomberg
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• Difficult investment climate with low returns
• Alterations in portfolios to mitigate against risks and enhance returns
• Facing up to economic realities is good
• SA economy and government remain under pressure
• Savings are needed and should be encouraged
• Technology presents a major opportunity
Concluding remarks