Peter Brooke 00:00
Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 26 of 2022, which means we're already past halfway through the year. Longer days will be very helpful for early morning paddling. And it also means we have to update our five year expected real returns, which we do bi-annually.
00:21
Last week, I alluded to some good news from the recent crash. And it is that all returns have increased. Global bonds, which include company bonds - corporate bonds, have led the way, with yields accelerating up to 3%, 2% higher than a year ago. We have to go back 13 years to get yields as good as this. So, while we don't expect a positive real return from offshore government bonds, you are no longer guaranteed to go backwards relative to inflation.
00:55
The bear market in global equities has also pushed down valuations and the All Country World Index is now trading on 15 times earnings. This means a higher dividend yield and should theoretically flow through to higher real returns. But we've actually kept our expected real return for global equity unchanged at 4%. This is because we are worried about earnings growth in the next couple of years. US margins are at record levels as they're rebounded from COVID boosted by some great operating leverage. As we head into a period of slower growth, this will provide a headwind. The South African equity market has also de-rated, with the forward price earnings ratio falling below nine times earnings. As a result, we have increased our expected real return target to 7%, which is in line with the excellent long-term average.
We have also hiked our expected return on South African government bonds to 6% real, which is the highest number we've ever published, having started this process in 2008. SA bonds are our preferred asset class, and we are overweight in our solutions. The improved valuations and the resultant increase in real expected returns, boosts the real return expectation on a South African Balanced Fund to just over 5% real. This is a welcome improvement and takes us back to March 2020.
02:22
We do not think we're out of the woods in terms of global rate hiking cycle, but at least now we have a valuation underpin, particularly in South Africa. Any further declines in asset prices will then provide a growing probability of delivery to return targets, as debit orders buy in more units at the lower levels. I hope you enjoy this perspective. Until next week.