What if we are in for a decade
of slow/low growth? Where
and how should funds invest?
JOSEPH BUSHA,
BSc, BSc. Hons, MSc, MPhil
• Gross Domestic Product (GDP) is value of all officially
produced & recorded goods / services within a country
• Primary measure of a country’s financial strength / health
• Main drivers of GDP growth rates
Production (mining, manufacturing, ..)
Sales (services, consumption, etc)
What if we are in for a decade of slow / low growth? Where
and how should funds invest?
What if we are in for a decade of slow/low
growth? where & how should funds invest?
Global Perspective
GDP
Growth
Rate
Interest
Rate
Inflation
Unemployment
7.60%
6.00%
5.30%
8.00%
or 3.50%
illustrations
0.00%
-0.50%
0.50%
2.20%
0.25%
3.20%
5.00%
1.80%
6.87%
-0.20%
2.60%
1.40%
4.90%
4.10%
3.80%
4.30%
8.00%
8.30%
24.90%
Other BRICS members
Brazil
0.80%
8.00%
Russia
4.00%
8.00%
5.20%
5.60%
6.50%
5.40%
Country
China
India
Image
Japan
UK
USA
SA
Troubled global economy. Threat of recession in the EU with
negative real growth and so is in SA
SOUTH AFRICA
……… In Focus & Facts
What if we are in for a decade of slow / low growth? Where
and how should funds invest?
What if we are in for a decade of slow/low
growth? where & how should funds invest?
Diamonds
South Africa
9.10%
Russia
22.40%
Australia
13.20%
Image or illustrations
Canada
18.60%
Botsw ana
19.90%
Botswana & SA excluding other African countries contribute
about 29.00% of world ‘s diamonds. Significant.
What if we are in for a decade of slow/low
growth? where & how should funds invest?
Platinum
Russia
13.01%
North America
Zimbabwe Canada
0.81%
3.65%
3.93%
Image or illustrations
South Africa
78.60%
SA & Zimbabwe contribute about 82.53% of world ‘s platinum
requirements – used in cars (catalytic converters), but…
What if we are in for a decade of slow/low
growth? where & how should funds invest?
Passenger Cars & Heavy Truccks Producers
South Korea
5.45%
USA
11.25%
China
35.63%
Germany
14.77%
Image or illustrations
Japan
32.90%
…. no significant production of automobiles. SA assemble a
sizable number of cars for domestic and export markets.
SA– In Focus: Growth & Inflation
25.00%
20.00%
15.00%
10.00%
Repo
5.00%
Graph goes here
0.00%
Inflation (CPI)
GDP
-5.00%
30/11/11
31/08/10
31/05/09
29/02/08
30/11/06
31/08/05
31/05/04
28/02/03
29/11/01
01/09/00
01/06/99
01/03/98
-10.00%
Average growth rate over the last decade is 3.52%. Current is
3.2% pa. Recent best growth years 2004-06. Real growth
Revenue, Expenditure & Debt as % of GDP
55.00%
50.00%
45.00%
40.00%
Exp/GDP
35.00%
Graph goes here
30.00%
Rev/GDP
25.00%
Debt/GDP
20.00%
2010/05
2008/01
2005/01
2002/01
1999/01
1996/01
1993/01
1990/01
1987/01
15.00%
On average consistently consumed what we don’t have. Percentage
of debt to GDP reached lows in 2008 and is on upward trend. BRICS
average Debt to GDP is 41.69%, SA at 38.80%, Russia 9.61%.
GDP contributing sectors performance
3.00
2.50
2.00
Wholesale trade
1.50
New commercial
vehicles
Gold Mining
1.00
0.50
Graph goes here
Other Mining
Manufacturing
1994/01/01
1995/01/01
1996/01/01
1997/01/01
1998/01/01
1999/01/01
2000/01/01
2001/01/01
2002/01/01
2003/01/01
2004/01/01
2005/01/01
2006/01/01
2007/01/01
2008/01/01
2009/01/01
2010/01/01
2011/01/01
2012/01/01
0.00
• Gold mining – one way down for a long time. Other mining okay, but
volatile. Overall mining contributes about 10% of GDP
• Manufacturing on the upside, contributes 13.65% to GDP and
constitutes about 65.25% of the secondary sector.
WHAT IF…..
• The global crisis continues for the next decade
 Printing of money by governments
 Government leadership changes in US, UK, Germany
- policy changes
• Euro zone members stuck into a prolonged recession
Greece, Italy and other EU members exit the union
• China growth trajectory falters
and leads to another global crisis
•
What if we are in for a decade of slow / low growth? Where
and how should funds invest?
WHAT IF….
• SA growth prospects remain subdued, as a result
 Other mining, e.g., platinum follows gold performance or
substitute for catalytic converters is found
 Local manufacturing (13.65% of GDP) slows – threat of imports
 SA does not become a gateway into the rest of Africa
(wholesale and retail trade contributes about 15% to GDP)
 The mining industry continue to loose its economic influence
• Equities volatility remain high and returns uncertainty
increases, interest rates remain low…..?
What if we are in for a decade of slow / low growth? Where
and how should funds invest?
Equities return over the last 17 years
7
6
5
4
3
UK(FT100)
2
South Africa (JSE)
1
Graph goes here
Japan (FJNK)
USA(S&P500)
0
01/06/95
01/06/96
01/06/97
01/06/98
01/06/99
01/06/00
01/06/01
01/06/02
01/06/03
01/06/04
01/06/05
01/06/06
01/06/07
01/06/08
01/06/09
01/06/10
01/06/11
01/06/12
-1
• If you had invested funds in SA, it would have multiplied 6 times in
Rand terms, & still outperformed most major global equities in $ terms
• USA would have given an investor 1.5%, and lost half in Japanese
equity market over the same period
Equities return over the last 12 years
3.50
3.00
2.50
2.00
1.50
UK(FT100)
1.00
0.50
0.00
South Africa (JSE)
Graph goes here
Japan (FJNK)
USA(S&P500)
-0.50
01/01/00
01/01/01
01/01/02
01/01/03
01/01/04
01/01/05
01/01/06
01/01/07
01/01/08
01/01/09
01/01/10
01/01/11
01/01/12
-1.00
• The story does not change, SA equities performed better, and
• Investors would have lost in Japan, UK and USA equities
• Rand/$ = R6.30/$ on 31 January 2000, and current levels R8.40/$
So where & how should funds in invest
…..in times of low growth prospects/
uncertainty?
What if we are in for a decade of slow / low growth? Where
and how should funds invest?
• Listed Equities
Choose sound business in production sectors, with high
growth opportunities & employment levels. Keep members
• Fixed Income
 High quality fixed income securities, and not junk
instruments promising high returns
 Returns in vanilla money market investments low – this might be so
for a long time as interest rates remain at record lows
What if we are in for a decade of slow / low growth? Where
and how should funds invest?
• Private equity investments (unlisted)
Three categories exist in this alternative assets class – Venture capital,
development capital and buy-outs
Choose sound business & invest as development capital . Funds are
needed for growth & expansion.
Limit exposure to maximum of Regulation 28 (Reg. 28) of Pension
Fund Act (SA)
• Participating employers .
In SA, Reg. 28 restricts this to 5%. Seek exemption to increase this
threshold (10%) where funds are needed for expansion & jobs are
secure with more to be created. Good position if company is listed
What if we are in for a decade of slow / low growth? Where
and how should funds invest?
•Private equity investments…. Yes, but NO investments in Micro–lenders
Consider this scenario
 A member of a retirement fund invests R1,000 (or $1,000) in a microlender through the retirement fund (trustees’ decision)
Member borrows R1,000 from the same or any other micro-lender and
pays 5% per month (60% pa) interest.
Member receives 15% pa from his retirement fund investment
Member’s net loss is 45%pa - trapped in poverty funding the business
that do not make communities sustainable
What if we are in for a decade of slow / low growth? Where
and how should funds invest?
• Private equity investments. Yes, but NO to micro-lenders / loan sharks
There are over 2,000 micro-lenders in SA
Retirement
Fund
$1,000
$1,000 +15%
Bank/
Microfinance
$1,000
Fund
Member
$1,000+60%
What if we are in for a decade of slow / low growth? Where
and how should funds invest?
• Finally…….
Sustainable economic growth rates, job creation and social
cohesion can only be achieved when both
Social and Financial returns
are obtained through any investment process. This requires
the right decisions, right teams of trustees, consultants and
investment managers. Let’s invest wisely.
What if we are in for a decade of slow / low growth? Where
and how should funds invest?
“The best interest or returns is achieved when we
care most about the interests of those we serve
because they will return to us”
Joseph Makamba Busha, 2 May 2012
What if we are in for a decade of slow / low growth? Where
and how should funds invest?