Old Mutual Investment Group (OMIG) has increased their expected longer-term real return for local property to 5.5% a year and for local equities to 5% a year over the next five years, up from 4.5%. 

Peter Brooke, Head of Macrosolutions at Old Mutual Investment Group, said: “This applies specifically to the SA-oriented property companies. Those companies that have diversified into real estate overseas will have to contend with a rising cost of capital (as global interest rates rise) and a stronger rand. Conversely, the locally orientated companies will benefit from a falling cost of capital (on the back of expected interest rate cuts).”

Commenting on equities, he said: “The market is cheaper, driven by the derating of some shares and strong earnings growth coming through from resources. The main headwind for the equity market is the strength of the currency, but following its strength last year, we expect a more stable rand this year.”

As to South African bonds, Brooke said: “We expect a real return of 3% a year from local bonds and our preference is for nominal bonds over inflation-linked bonds, as inflation has peaked and should come down.”

He also added that cash has been an attractive asset class over the last year, beating equity, but it is not a long-term option: “With the economy on its knees and inflation falling, we expect rate cuts despite US rates rising,” he said.

According to Brooke, South Africa had a disastrous 2016, but there are a couple of one-off factors that should facilitate a better year ahead.

Brooke mentioned that the biggest factor is rain, adding that the drought has broken and that will mean a good agricultural harvest: “This, in turn, will bring food prices down and the consumer will have more disposable income.”

According to Brooke, another supporting factor is inflation. 

“While it recently hit an annual rate of 6.8%, we believe this is the peak and expect inflation to start coming down. A falling inflation rate will mean that we can expect the South African Reserve Bank to start cutting interest rates,” he said. 

Other factors supporting a stabilising SA are an improving global economic environment and the end of the commodity price collapse. 

“After a tough period in terms of returns, with most investors making very little money in 2016, we think things will start improving in 2017,” he said.

“Better earnings means better returns, lower cash yields means cash is less attractive and lower inflation means we can get better real returns. Hence, our outlook is a bit more positive and that comes through in our expected returns over the next five years, which are higher in real terms,” he added.

Within its own funds, OMIG has shifted from “defence to offence − investing cash into growth assets”. 

For instance, at the beginning of 2016 the Old Mutual Balanced Fund had 25% in cash and today it has 7%. 

“This active asset allocation materially increases the chance of us delivering to our clients’ long-term return expectations,” said Brooke.