Despite nearly R1tr sitting in the collective investment space in South Africa, the country remains equity shy, and if global trends are to be followed, this situation is going to get worse in the next few years, which could potentially have a very negative impact on personal and corporate balance sheets.
According to the Association of Savings and Investment in SA (ASISA) money market funds held assets of R252bn, or 25% of industry assets, at the end of December 2011. However, if one looks at the broader fixed interest category, which includes bonds, money market and related funds, almost 50% of the SA savings industry is parked in low-risk vehicles.
Craig Gradidge from Gradidge-Mahura Investments says that he has always had a sneaky suspicion that South Africans were underexposed to equities and his suspicions were confirmed in a December 2011 research report from McKinsey & Company entitled The Emerging Equity Gap: Growth and Stability in the New Investor Landscape. Gradidge comments: “The research found that the financial assets of private investors in emerging economies were concentrated in bank deposits and Government securities, unlike those of investors in developed economies.
Private investors in the US had roughly 47% of financial assets in equities while Western European households came in lower at 34%. In contrast, Chinese and Latin American households were at 14%, emerging Asian households at 10% and MENA [Middle East and North Africa] households at 18%. Interestingly, the highest exposure to equities in emerging economies was by developed Asian households which had as much as 32% of financial assets invested in equities.” SA fared reasonably well compared to other emerging economies with the research finding that 23% of financial assets of private investors were invested in equities as at December 2010. India had the lowest exposure to equities with an allocation of only 8% by investors there. Brazil and China were at similar levels with 15% and 14% respectively, while Russians allocated 19% to equities.
The report makes for interesting reading as it estimates that by the year 2020, overall allocation to equities will be around 22% across the globe and there will be a $12tr gap between how much cash investors will wish to hold in equities and the amount that companies will need to fund growth. “Our central finding is that, short of a very rapid change in investor behaviour and the adoption of new policies in the largest emerging economies, the role of equities in the global financial system may be reduced in the coming decade.
This has important implications for economic growth, how companies fund themselves and how investors reach their goals,” commented the McKinsey research team. What’s the implication for this on corporate and personal balance sheets? On the corporate front, this could potentially take a very big chunk out of global growth prospects in the coming years. With bank funding proving harder and harder to come by as capital regulations change, corporates have sought out equity- funded deals to drive growth.
“Empirical evidence suggests that if legal protections for shareholders are strong, financial systems that include robust capital markets – in addition to bank financing – promote faster economic growth than purely bank-based ones,” the report notes. Gradidge and other local investment professionals believe that the impact of this could be brought back to the personal balance sheets of local investors. While institutional investors and high net worth individuals have access to many options to generate high rates of return including private equity, hedge funds and real estate, mass-market retail investors don’t have the same tools in their arsenal.
As the above table shows, investment in money market products has served you well in the last few years but over 10 years or longer, equities start to deliver superior returns.
If investors are reducing their exposure to equities over the next five to 10 years, it could hurt long-term returns. If one looks at the international trends and compare the US and Germany from a household “wealth” perspective, the graphic below, illustrates quite clearly the difference between the conservative average German and the more equity gung-ho average American. While it could be argued that the average German has seen less volatility in his wealth, a smart American with decent equity exposure has done far better for himself.
Commenting on the most recent statistics out of ASISA, Jeremy Gardiner, a director of Investec Asset Management, notes that the majority of “new” money flows – about R12.2bn – in the last quarter of 2011 went into asset allocation funds while roughly R10bn flowed out of money market funds. “With cash not even forecast to beat inflation this year, investors are probably realising that they’re ‘going backwards’ by having too much of their investments parked in cash,” notes Gardiner.
Marc Ashton
marca@finweek.co.za
Finweek 1 March 2012 Pages 30, 31
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