How to Achieve Above-Average Returns Over the Next Decade
After more than a decade of above-trend market performance, many developed markets have begun a process of mean reversion.
Many leading global banks and asset managers estimate that the average annual performance of corporate stocks in the United States will be just 5% in USD terms over the next decade. This is far less than the annual growth of more than 20% often observed over the past decade.
I agree with the view of many experts that US equities should outperform their European counterparts simply because of the underlying philosophy of European politics.
On the one hand, Americans can use the blunt tools of monetary policy much more effectively than the single currency bloc. The Americans are also much more brutal when it comes to allocating scarce resources efficiently. Conversely, Europeans would rather keep alive a less efficient system of capital allocation, whether in the hands of government or the private sector, than cause some temporary discomfort to their citizens.
The return to the long-term average performance (understand the average) of the equity market was of course caused by the structural change in monetary policy.
After hitting lows not seen in more than a millennium, interest rates in the world’s major economies have flip-flopped, shaking the very fabric of investor sentiment.
While accommodative monetary policy has made it easier to invest in equities, the return to what many consider normal is causing much confusion among investors. Now, bonds, among other things, are starting to look more attractive. More choice, on top of all the market uncertainty, surprised investors and caused them to reconsider their asset allocation decisions.
But over the past couple of weeks, it looks like investors have slowly started to regain their confidence, realizing that the long-term story that favors stocks hasn’t changed and volatility simply allows for good buying opportunities. .
It is important to understand that lower average stock returns do not mean that some companies will not continue to offer returns well above 5%. It just means that, now more than ever, active management is of utmost importance.
This means that simply buying a passive instrument that follows the market, overweighted by the biggest technology companies, mainly American, which benefit the most from historically low interest rates and control of the yield curve, does not sufficient to generate above-average returns.
To achieve above-average returns over the next decade, investors need the right structures and exposure to the right asset classes.
The big word “fresh”
Please note that I intentionally do not mention fees.
Indeed, retail investors in South Africa have an unhealthy appetite for lower fees, which will undoubtedly lead to undesirable results in the future. Fees are well regulated to protect SA investors who partner with reputable and regulated partners.
But steadily falling fees are distorting the market’s ability to effectively set prices and allocate resources by driving foreclosures, cutbacks, layoffs and even industry consolidations.
Structuring and asset allocation
How you structure your investments will become of utmost importance over the next decade. In other words, in which legal entity and in which tax jurisdiction you own assets.
Savvy investors who structure their wealth in the most tax-efficient way will clearly be the winners.
After effective asset structuring, asset allocation decisions will become increasingly important over the next decade.
On the one hand, it will become increasingly important to invest in alternatives, such as private equity and hedge funds.
It will also become increasingly important to consider certain long-term thematic investment themes, such as investing in water and investing in a more socially responsible way.
It will also become increasingly important to determine in which geographical areas you invest.
Contrary to the decline, i.e. the return to normalcy, that we are beginning to see in the developed world, many emerging countries (including South Africa) that have struggled over the past decade, are slowly starting to reappear, offering very attractive returns.
Unfortunately, by not structuring their wealth effectively and investing in the right assets, most retail investors, especially those who have been fearful of the markets over the past year, will miss out on what could be above-average performance over the next decade. .
Dr François Stofberg is Senior Economist and Managing Director of Efficient Group.