Positive macroeconomic outlook for developed markets - CNBC Africa

Positive macroeconomic outlook for developed markets

Special Report

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Bullish and bearish markets. PHOTO: Getty Images

“In terms of the equity market, the outlook has deteriorated, and the simple reason for that is because we had such a good year last year, the market re-rates the Price Earnings ratio [and it] got a lot higher, and therefore our expected returns fell,” Old Mutual Investment group head of macro solutions Peter Brooke told CNBC Africa.

“The interesting thing in terms of asset classes at the moment is this turmoil is causing fixed income to get cheaper, so both bonds and listed property, in terms of our expected real returns.”

The weak rand, talks of continued tapering and the emerging markets exist story have added to a bleak picture for markets such as South Africa, Brazil and India.

Brooke added that while there were significantly negative valuations a year ago, much of the world has been boosting expected returns from property and bonds. The further selloff of these bonds has additionally started to increase the expected returns even more.


Quantitative easing could however create large amounts of debt, will have to be repaid or heavily reflated, and paint a different picture for bonds in emerging and developed markets.

“There’s a difference between global bonds and South African bonds. If you think back, we’ve always had a real return in terms of our inflationary bonds. Those have actually just increased dramatically in the last month. Inflationary bonds sold off by four per cent, so if we do get inflation, those assets are still protected and will still give you a real return,” Brooke explained.

“The point is where we had negative real returns on global bonds. We’ve now pulled that up to probably nothing, which is still an attractive investment. On South African bonds, we’ve now increased that from an expected real return of one and a half per cent to two per cent. The next move will be increasing that to two and a half per cent.”

Since the meeting of the World Economic Forum last week in Davos, Switzerland, much of the sentiment emerging from the meeting is of America’s recovery and economic confidence as it continues to grow more rapidly.

Europe, Greece, Portugal and Ireland are also out of economic intensive care, and other developed markets of world are also adopting a positive outlook. This could open up an opportunity for renewed interest in equities.

“We have cut our expected returns from global equities because they’re also re-rated. In terms of expected real returns from here, I still think you’ll get a decent real return and on a relative basis,” said Brooke.

“You’re competing with negative to nothing on cash and bonds overseas. I think equities will still have the edge. In South Africa, it’s a little bit trickier because our market has re-rated quite materially and unlike the rest of the world, where their [macroeconomic outlook] is getting a lot better, we’re starting to get rate hikes.”