Recent research out of the USA by the McKinsey Global Institute has indicated that over the past 30 years returns on US and Western European equities and bonds have been considerably higher than the long term trend.  This would tend to point to returns for the next 30 years being lower. This research highlights four major factors that drove returns higher and will now drive them lower:

  • Inflation has been brought under control but is likely to rise going forward.
  • Interest rates have fallen to historic lows and there is little room for them to fall further.
  • Economic growth has been strong due to productivity gains and increased employment.  Without substantial productivity gains in future and with employment growth slowing, further strong economic growth will face headwinds.
  • Corporate profit margins have been boosted by new markets, cheap labour and falling tax rates – factors which are unlikely to continue to be available.

US equities have on average over the last 30 years returned 7.9% but are expected to fall back to under the 6.5% long term average.  US bond returns are expected to fall from 5% to under 1.7% – a dramatic fall.

Whilst South Africa is not mentioned in the research (not surprisingly considering the market capitalisation of our stock exchange represents less than 1% of the world market’s capitalisation) we do tend to follow world investment returns over the long term.  This means that we can expect lower returns on our retirement funds and flexible investments in the future.

Whilst the following three “solutions” are simple they aren’t always easy to digest:

  • Work longer to allow investments to grow for longer and at the same time shrink the retirement period when you need to draw income from your investments.
  • Save more and spend less.
  • Stay healthy – health care costs are both rising at a rate in excess of inflation and these costs increase as you get older – a double negative.

Whilst this not a very positive picture we think it’s important to at least be aware of these factors and build them into your future plans.