South Africans are more optimistic than at any point in the past five years, expecting their future investment returns to average 15.2% per year for the next five years, an increase of 2.5% since last year. Their expectations are substantially higher than global investors’ expectations of 11.3% over the same investment period.
The findings are part of the Schroders Global Investor Study (GIS) 2021, an annual survey which highlights savings and investment trends based on the answers and opinions of more than 23,000 savers around the world.
Investors’ optimism set against rollercoaster background
Kondi Nkosi, Head of Schroders South Africa, says: “It’s striking that South Africans have such lofty return expectations. While financial market returns generally performed well over the last 18 months, investors should be wary about extrapolating that this performance will continue into the future.”
All the more surprising is that this optimism comes at a time of extreme uncertainty as global economies continue to recover from the seismic shock of the pandemic. Previous studies in this series have shown annual global return expectations creep up by around a tenth in four years, from 10% in 2017 to this year’s 11.3%, as shown in the chart below. This is despite the fact that actual investment values have followed a much rockier path.
Chart 1: Rising Confidence
As the green data series shows, real-life stock market returns during this period proved highly volatile, ranging from 28% growth in 2019 to a drop of 8% in 2018.
Last year encapsulated this volatility in an even shorter timeframe: spooked by the spread of Covid-19, global share prices fell 34%, but regained – and then exceeded – their previous level all within nine months.
“Few predicted how quickly global share prices would recover following their initial Covid-induced falls. This just goes to show how very unpredictable markets are, especially in the short term”, says Nkosi.
Professional forecasts are far more modest
He points ou In January 2021 Schroders’ economists put annual long-term stock market returns for major markets such as the US, the eurozone, UK and Japan at 5.3%, 5.6%, 6.8% and 3% respectively.
This is less than half the hoped-for returns of investors whose responses make up the Global Investor Study. And the economists’ predictions relate only to shares, which typically return considerably more than other components of a saver’s portfolio such as bonds and cash.
Similarly, while the surveyed investors’ expectations of returns have been rising year after year, Schroders’ economists’ predictions for returns in most developed markets have fallen over the past 12 months.
What could account for the divergence in these views?
Stuart Podmore, behavioural investment insights specialist at Schroders, suggests one explanation lies in investors’ emotional response to recent events and market movements. He reckons the pandemic’s upheaval has created anxiety, resulting in a less long-term mindset among investors, which is manifested in our need to monitor holdings’ performance more frequently. The study found that 34% of South African investors check on their investments several times a week.
“The pandemic, the lockdowns and all the associated disruptions might also have affected investors’ ability to process risk,” he says – with the potential result that “expectations of future returns become less realistic”.
Nkosi warns against adopting too short-term a mindset. “While keeping an eye on your investments is a good idea, checking on them too frequently can lead to a short-term mindset and as we’ve seen, short-term returns can be highly volatile,” he adds.
The “expert” effect: have strong overall returns boosted investors’ confidence?
One fascinating aspect of this year’s study is that those investors that categorise themselves as “expert” or “advanced” in financial knowledge also have the highest expectations of future returns.
South African investors that identify themselves as “expert” expect on average 52% higher returns each year than investors classing themselves as “beginners” or having “rudimentary” knowledge.
Chart 2: Forecast by investor category
Interestingly, playing into Podmore’s theory, the proportion of investors classifying themselves as “expert” has also grown over recent years.
Looking back to earlier versions of the study shows that in 2018 – the first year in which investors were asked to categorise their knowledge – just 4% of South African investors termed themselves “expert” and 21% “advanced”. By 2021, of the tens of thousands of respondents, the proportion self-identifying as “expert” had grown to 12% and “advanced” to 35%.
“What we may have here is an illustration of hindsight bias and over-confidence,” said Podmore.
“Markets have been volatile in recent years but overall returns have been unusually strong. Because the outcome has been good, in that investors’ portfolios have risen in value, it’s only human to make the assumption – incorrectly as it happens – that all your personal decisions have been good, too. You start to feel that it’s your judgment calls which have worked out so well, rather than external factors which you can’t control. This in turn encourages people to feel more confident both about their own knowledge and to believe they will outperform others in the future.”
What is the danger? By succumbing to a cognitive error, such as hindsight bias, the risk is that savers lose sight of the long-term goals and plans which should underpin their investing. If circumstances change and outcomes appear less favourable, there is then a risk of responding irrationally.
“A positive trend arising from the pandemic and its uncertainty is a stronger interest by investors in the state of their finances,” Podmore said. “But the past 18 months have taught us that the future is difficult to predict. A measured approach to investing based on long-term objectives is likely to stand investors in better stead.
“We need to be cautious over investment return expectations. The outlook shared by many investors – those who see themselves as experts – is exceptionally optimistic.”