Global connectivity and digital age: challenges and opportunitiesRob Price

Columbus Steel - 24 October 2017

• 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

Source: Econosseur

Source: fortune builders

Low return conditions

Source: investment news

-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

Source: pharside

Investments need to beat living cost increases

-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

Why?

Many traditional asset classes are overinvested

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

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

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

It’s not just a South African phenomenon

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

Investment returns are weak when assets are overinvested

▪ 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

Fear of the technological unknown

Source: Gnostic Warrior

Source: stock images

Map of the world in 1758

Source: map design sea

Thought they knew everything

Scared of unknown

America named after “Amerigo Vespucci” could’ve been called

Columbia after “Christopher Columbus”

▪ 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

How did we get here?Overvalued markets and interest rates

Source: Concover consulting

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

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

Frustrated people do unexpected things

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

Source: debt counseling south Africa

Many people don’t use debt effectively

Source: Thulani Madinginye

How do we improve long-term outcomes for our families?

Bringing it back home

SA economy

All eyes on the National Treasury

-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

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

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

• 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