Structurally higher inflation poses increasing threat to investors, shows Old Mutual Investment Group report
21 May, 2024

Graham Tucker, Portfolio Manager Old Mutual Investment Group



With inflation expected to be structurally higher over the next few decades, relative to the average inflation observed in the 21st century, the threat that inflation poses to investors’ real wealth and purchasing power is growing.


This was one of the key insights unpacked at the Old Mutual Investment Group’s (OMIG) recent launch of its 2024 issue of Long-term Perspectives, which highlights that investors need to plan carefully and ensure they are investing in assets that can deliver inflation-beating returns in the long run.


The publication, an annual study based on 94 years of data, looks at the returns from various asset classes and inflation movement over this period to draw insights and derive investment lessons which are considered in the company’s investment process and made available to financial advisors and planners.


OMIG portfolio manager, Graham Tucker, warns that in an environment of structurally higher inflation, interest rates are likely to be higher than they have been in the past two decades, as central banks focus on bringing inflation under control. He cites demographics, deglobalisation, and decarbonisation as three broad, long-term themes that will drive inflation higher over the coming decades.


Tucker emphasised the material impact inflation has on investors and savers because “In a higher-inflation world, your wealth is being eroded faster, every year.” The OMIG publication contains some stark illustrations of the erosive impact of inflation on a ‘cash under the mattress’ savings strategy over 30 years. At the South African Reserve Bank’s lower inflation target of just 3%, an amount of R10 000 at the start of 2024 will buy R4 000 worth of goods in 2054; and at the 6% higher inflation target level, one would be able to purchase less than R2 000 worth of goods 30 years from today.


Carefully considered investments in South African asset classes – many of which are attractively priced and positioned to deliver fantastic returns as the country chips away at its structural growth constraints – stand out as a potential source of future returns. But the warning to investors is clear,


“Without much needed progress on growth-enhancing reforms, the returns these South African asset classes will deliver will most likely disappoint versus the returns implied by their current valuations,” Tucker said.


The current investment landscape may be among the toughest for investors to navigate. But all is not lost. There are diversified, risk-managed solutions in the form of multi-asset class portfolios that suit a range of risk profiles.


While equities have delivered strong inflation-beating returns in the long run, being invested in the right equities has been a crucial decision for investors over the past decade, with global equities outperforming South African equities by a significant margin. “The variation in returns from different asset classes and different regions creates an opportunity to add value through active asset allocation decisions. This is especially true as some developed market bonds are offering positive real yields for the first time in many years, providing a real alternative to equities,” said Tucker.


One of the best defences in terms of managing the shorter-term risk in the form of volatility, is diversification.


“Building a balanced portfolio of assets lets you have a smoother ride, as the negative performance of one asset is counterbalanced by the positive performance of others.”


Investors who take care to diversify their investment portfolios and remain invested through periods of uncertainty typically weather the storm of market downturns better than those who disinvest for fear of suffering short-term losses.


Time in the market, rather than timing the market, emerged as another impactful investment principle highlighted in the Long-term Perspectives publication. There are countless statistics to support the ‘time is your friend’ promise, not least of which are charts included in the publication that compare the returns of investors who remain in equity markets over the long term with those who miss out on the best return days.


OMIG Investment Analyst Sehrish Khan pointed to the huge uncertainty posed by the upcoming local elections, with many investors following a wait-and-see approach. She warns that the market reaction could be significant and swift, and even without a strong sense of which way the result could go, missing out on a positive market reaction could adversely impact an investor’s portfolio.


History shows us that, particularly during periods of high uncertainty, the worst days on the market are usually followed by the best days on the market. In fact, it is very rare that the best days in the equity market occur when the seas are calm. “If you leave the market during the downturn, not only will you lock in those losses, but you will likely lose out on any potential recovery”.


The returns data compiled in the publication clearly shows the return variances of short-term versus long-term-focused investors. “Investors are often overcome by the fear of losing money in the short term, which is why they stay on the sidelines or decide to disinvest; but once you extend your investment horizon, that range of outcomes substantially narrows, softening the impact of market volatility,” said Khan.


The time in the market effect is demonstrated by considering the impact of a delayed savings plan. Khan explained that investors who invest R1 000 per month, earn a real return of 5% and increase their investment by inflation of 5.5% each year will accumulate roughly R4 million over the next 30 years. If they delay the start date by 10 years, they will accumulate less than R2 million by the same end date.


“To make up the shortfall,” Khan said, “they would either have to save much more or go in search of risky and unsustainable returns – in this example, as much as 16% per annum”.







@Graham Tucker, Old Mutual Investment Group
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