Asset Class Outlook

We update our medium-term (five-year) asset class outlook twice yearly, or if conditions change significantly. This outlook influences both our strategic and tactical investment decisions. Please be aware that there are risks in simply implementing these views into a portfolio without carefully considering the dynamic nature of the environment and how change impacts each asset class. As we continuously examine this environment, we have been very successful in converting our asset allocation outlook into performance for our investors.

Note: These are long-term, real (after inflation) returns expected over the next five years,  as at 30 June 2018. The international return expectations are quoted in US dollar terms; any REAL rand depreciation will add to domestic investor returns. To understand the table consult 'The symbols' below.  

Asset Allocation View - June 2017

Key take-aways

In developing our forecasts for the different asset classes, there is some good news and some bad news.


The good news is that we expect to see a higher real return coming through for all the local asset classes than we did three to four years ago. There are a number of reasons for this, but probably the most important factor is the change in politics. You may remember that for the past number of years, our theme for the local market was “SA Suffers”. Right now, it may not feel like things are improving, as we deal with the lagged effect of years of the bad policy, low confidence and low growth. However, we believe the current pessimism in SA is overdone and that things will get better, but that is unlikely to happen until after the election. We invest with a longer-term view and looking out into 2020, we think the winds of change are blowing in SA.

A major concern we have is on the global side. Global equity has been the best performing asset class and our fund returns have benefited from our maximum overweight exposure in this asset class. Trump came into power promising to “Make America Great Again”. Criticism of Trump notwithstanding, the truth is that America is great: Apple’s market cap has just breached the US$1 trillion mark, the S&P 500 Index’s earning are coming through strongly and US GDP growth is over 4%; resulting in the longest bull market, in terms of duration, that we have ever seen.

However, when looking forward, good news now typically means bad news in the future. Currently, the US is benefiting from a high degree of stimulus on a very strong economy. We are concerned that US conditions are very good and should deteriorate. We are not expecting this to play out over the short term, but it is a growing risk going forward and is a mounting concern for investors in global equity markets.

While we are taking a more cautious view on the US, we are expecting better returns from the SA asset classes than what they’ve experienced recently. As a result, we would not recommend selling out of South Africa and investing all one’s assets globally. Pulling these expected real returns together, the returns on an average balanced fund are higher, but are still only around 4.1% a year. This compares to balanced fund real return target of 5%, or around 10.5% including inflation (CPI+5%). The challenge of achieving additional returns in this environment requires active asset allocation supported by cheaper shares.

Our analysts’ calculations show that they believe we have 5% additional upside relative to the market. Or put simply, the stocks comprising our portfolios are cheaper than the market, which should result in them delivering a higher return. That’s how we add value.

Asset class commentary



We have increased our expected real return to 5% a year over the next five years, up from 4.5% a year. Very simply, as investor and business confidence recovers on the back on an improving political landscape, a lift in SA’s GDP growth rate from an annual 1.5% to 2% would add 0.5% to the expected real return from the equity market. In addition, another reason we expect a better return from the JSE is that it has got cheaper. The forward price:earnings (PE) ratio of the market has de-rated from three years ago, when we were telling investors to brace themselves for a low-return world. If we exclude highly-rated Naspers, the market is even cheaper. This means we can get a better return for our clients in light of a potential recovery into 2020, especially as earnings are now depressed.


Following the underperformance of the SA property sector, the yield available has increased. This means our long-term real return outlook has increased to 6% a year. We remain cautious about the outlook for the sector in terms of growth, as the economic environment is tough and property companies have built too much capacity – both in offices and shopping centres. This will keep rents under pressure and they are unlikely to increase as fast as they normally would. However, the cheap valuation means this asset class should still deliver a decent outcome. As the economy expands, the high quality, diversified property companies we hold should do well.


We are more bullish on SA bonds and expect a real return of around 3.5% a year over the next five years. The change in politics has resulted in both a lift in SA’s growth outlook and reforms within the state-owned enterprises. This markedly reduces the possibility of SA going down the same path as Turkey, so our risk is better. In addition, we have a hawkish SA Reserve Bank that is pushing to keep our inflation rate at around the 4.5% level. The combination of these actions is good for bonds, which are now offering a good real yield. The same factors support cash and our real return outlook is revised up 0.5% to 2% a year.



At the moment global growth is good and we are confident that will continue to be the case for the rest of the year. However, risks are increasing as the high levels of liquidity in developed markets start to shrink, driven by interest rate hikes in the US. As a result, we have revised our five-year real return outlook down from 5% a year to 4.5% a year. Our view has also changed from previously being positive to now being a bit more cautious.


As expected, the global bond bull market has ended as interests rates have risen. Despite this, we still remain negative on this asset class as global yields are, broadly speaking, too low in real terms. The one exception is the US, where rates for both cash and bonds have risen – and are offering better value relative to the rest of the world. Our long-term outlook for global bonds and global cash remains unchanged at -1% a year.

The symbols

Neutral: Real returns will be at or around the long-term historic average over the next five years; the weight in each of our portfolios is roughly equivalent to that of their benchmark, where applicable.

Neutral +: Real returns will likely be at or around the long-term historic average over the next five years. However, as there may be some opportunities available for us to capture some alpha, the weight in each of our portfolios may be slightly overweight to that of their benchmark, where applicable.

+ (positive): Real returns will be above the long-term historic average over the next five years; our portfolios are overweight compared to their benchmarks, where applicable.

Neutral −: Real returns will likely be at or around the long-term historic average over the next five years. However, due to prevailing negative conditions, it is likely that our portfolios may be slightly underweight compared to their benchmarks, where applicable.

−(negative): Real returns will be below the long-term historic average over the next five years; our portfolios are underweight compared to their benchmarks, where applicable.