Property offering best bet of inflation-beating returns

With the mainstream asset classes appearing more and more unlikely to provide above-inflation returns, Grindrod Asset Management has made a strong argument for rotating into property investments.

Local equities as well as the US’s S&P 500 are at high levels historically. The JSE is bumping against record levels and has outperformed all major developed and emerging market indices this year.

The other star performer this year, the S&P 500, has eased back recently following a fall-off in US third-quarter corporate profits. Whether or not that is the start of a sustained downward trend on the benchmark index remains to be seen. US companies will continue to enjoy access to cheap cash at least until 2015 in terms of the third round of quantitative easing. However, in the latest reporting season, companies reported strong domestic sales but foreign income was down sharply because of recessionary conditions in Europe and slowing demand from China. Those two areas are not likely to enjoy a resurgence anytime soon, so it seems unlikely that the S&P 500 will rebound with any degree of authority.

Equities, then, seem to be offering more on the downside, while cash in SA still offers real negative returns with interest rates remaining below inflation.

Bond yields are not much more attractive, says Paul Stewart, who heads Grindrod’s asset management business. Bond yields in the US are below its consumer inflation index and in SA they are slightly above it. “Corporate bond yields are slightly more attractive, but are still insufficient to offer a meaningful improvement in the outcome. Unless bond yields decline futher, investors are going to struggle to deliver CPI-matching returns from bonds, let alone CPI plus 5%.”

He says investors are going to have to focus their attention on asset classes that at least have a fighting chance of beating CPI in the future. “Investments in listed equity, listed property, private equity and hedge funds may provide the potential inflation-beating return solution.

“While this approach may be somewhat more volatile in the short run, it is the only sensible course of action looking forward three years and beyond in a world starved of yield and increasingly exposed to unintended consequences of aggressive policy risks.”

| IM | November 28 – February 27

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