Expected annualised 10-year returns of different asset classes

We review some of the factors that may affect the 10-year annualised returns on different asset classes in South Africa and compare them with the global and regional averages.

Investors often look at the historical performance of different asset classes to estimate their future returns and risks. However, past returns are not always indicative of future outcomes, especially in a volatile and uncertain environment.

Equities

Equities are typically considered as the riskiest but also the most rewarding asset class over the long term. The performance of equities can vary significantly across geographical regions and industry sectors. According to the 10-year return forecasts by Schroders, the expected annualised return for global equities in local currency terms is 6.1% from 2022 to 2031, while the expected annualised return for emerging market equities is 7.8%. South Africa, as an emerging market, may benefit from the higher growth potential and lower valuation of its equity market, but it also faces some challenges such as political instability, social unrest, and structural constraints.

According to the South African Reserve Bank (SARB), the domestic GDP outcome for the third quarter of 2023 was weaker than expected, at a negative 0.2%. The operation of ports and rail has become a serious constraint, and, alongside electricity shortages, contributed to weak output growth and higher costs last year. These constraints are expected to persist, severely limiting potential growth of the economy. While the SARB expects electricity supply to increase gradually over the longer-term, its contribution to short and medium-term growth has not been revised after the upward adjustment made at the time of the November 2023 meeting. On the demand side, household consumption and investment have eased significantly, while government spending has been sustained. As the SARB highlighted throughout last year, commodity export prices have receded sharply from the highs reached in 2022, reducing the contribution of foreign demand to growth.

Given these factors, the outlook for South African equities is not very optimistic. The SARB’s forecast expects relatively weak domestic growth of 1.5% in 2024, compared to the global growth of 2.6%. The equity risk premium, which measures the excess return of equities over risk-free assets, is also expected to decline from the elevated levels seen in 2022 and 2023, as interest rates rise, and inflation expectations stabilize. Therefore, the 10-year annualised return on South African equities may be lower than the global and emerging market averages and may depend largely on the performance of specific sectors and companies.

Bonds

Bonds are generally considered as a safer and more stable asset class than equities, but they also offer lower returns over the long term. The performance of bonds depends largely on the level and direction of interest rates, inflation, and credit risk. According to the 10-year return forecasts by Schroders, the expected annualised return for global bonds in local currency terms is 1.5% from 2022 to 2031, while the expected annualised return for emerging market bonds is 3.8%. South Africa, as an emerging market, may offer higher yields and returns on its bonds, but it also faces higher risks such as currency depreciation, fiscal deterioration, and sovereign rating downgrades.

According to the SARB, the headline consumer price inflation averaged 4.9% in 2023, and is expected to average 4.6% in 2024. The Bank’s measure of core inflation, which excludes food, fuel and electricity, averaged 3.4% in 2023, and is expected to average 3.6% in 2024. The Bank’s inflation forecast is unchanged and remains within the target range of 3% to 6%. On 25 January this year, the SARB’s Monetary Policy Committee decided to keep the repo rate unchanged at 8.25%. Pundits expect the SARB to cut interest rates by a cumulative 100 bps across 2024, with a potential 25 bps cut during the May meeting. That said, the SARB could delay the first cut to July if the rand drops ahead of the elections, the USA eases its monetary policy later than expected and geopolitical tensions escalate further. If these events occur, the SARB is expected to cut interest rates by 75 basis points annually.

Given these factors, the outlook for South African bonds is mixed. On the one hand, the higher yields and inflation-adjusted returns on South African bonds may attract investors seeking income and diversification. On the other hand, the rising interest rates and inflation expectations may erode the value and returns of existing bonds. Moreover, the high public debt and fiscal deficit, which are expected to reach 81.8% and 9.3% of GDP respectively in 2024, may increase the credit risk and borrowing costs of the government. Therefore, the 10-year annualised return on South African bonds may be higher than the global average, but lower than the emerging market average, and may vary significantly across different maturities and credit ratings.

Cash

Cash is the most liquid and least risky asset class, but it also offers the lowest returns over the long term. The performance of cash depends mainly on the level and direction of short-term interest rates, inflation, and currency movements. According to the 10-year return forecasts by Schroders, the expected annualised return for global cash in local currency terms is 0.7% from 2022 to 2031, while the expected annualised return for emerging market cash is 2.5%. South Africa, as an emerging market, may offer higher interest rates and returns on its cash, but it also faces higher risks such as currency depreciation, inflation, and capital controls.

The rand remains volatile and vulnerable to external and domestic shocks, such as social unrest, climate catastrophes and power outages. The SARB expects the rand to depreciate by 3.9% against the US dollar and by 3.1% on a trade-weighted basis in 2024, reflecting the narrowing of the interest rate differential, the weakening of the commodity cycle, and the persistence of the structural challenges.

Given these factors, the outlook for South African cash is modest. On the one hand, the higher interest rates and returns on South African cash may appeal to investors seeking safety and liquidity. On the other hand, the depreciation of the rand and the inflationary pressures may reduce the purchasing power and returns of South African cash. Moreover, the potential imposition of capital controls or exchange rate interventions by the authorities may limit the access and movement of South African cash. Therefore, the 10-year annualised return on South African cash may be higher than the global average, but lower than the emerging market average, and may fluctuate significantly depending on the currency fluctuations.

Property

The property market in South Africa is expected to rebound in 2024, after a period of decline and stagnation caused by various economic and social factors. According to experts, the market will benefit from a mild improvement in the economic environment, possible interest rate cuts, and a change in the political landscape. However, the recovery will be gradual and uneven, depending on the type and location of the property.

One of the key drivers of the property market is the interest rate, which affects the affordability and demand for property. The South African Reserve Bank (SARB) has been on a tightening cycle since 2021, raising the repo rate by 475 basis points to 8.25%, and the prime lending rate to 11.75%. As mentioned above, the SARB is expected to reverse its course and cut the interest rate by 75 basis points in 2024, bringing the repo rate to 7.5% and the prime rate to 11% by the end of the year.

The property market performance in 2024 will depend on the interplay of the above factors, as well as the supply and demand dynamics, the type and location of the property, and the preferences and expectations of the buyers and sellers. The luxury and coastal properties will continue to attract wealthy buyers from abroad, who are looking for value and lifestyle, while the affordable and middle-income properties will benefit from the increased affordability and accessibility of credit, as well as the trend of semigration to smaller towns and rural areas. The low-income and informal properties will face challenges from the high unemployment and poverty levels, as well as the uncertainty around the land reform and expropriation policies.

Based on these projections, the expected 10-year annualised returns on property in South Africa in 2024 will vary depending on the type and location of the property, as well as the assumptions and scenarios used. However, a possible range of estimates, based on historical data and trends, is as follows:

Luxury and coastal properties: 8% to 12%
Affordable and middle-income properties: 6% to 10%
Low-income and informal properties: 4% to 8%

In summary, the 10-year annualised expected returns on different asset classes are influenced by various factors, such as economic growth, interest rates, inflation, the exchange rate, credit risk, and commodity prices. The expected returns and risks of each asset class may differ from the global and regional averages and may change over time in response to new developments and data. Therefore, investors should be aware of the assumptions and uncertainties underlying the return forecasts, and should diversify their portfolios across different asset classes, geographies, and strategies to achieve their long-term investment goals.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs.