South African equity markets have gained in line with global peers. Our real (after-inflation) return expectations from global equities are reasonable (about 5percent a year over five years), although this is not comparable with historical levels. Lower interest rates can keep equities more supported than otherwise, which is what central banks intended. But what about the unintended consequences?
Economic growth remains a challenge, and lower rates are unlikely to improve the prospects dramatically, because the global economy is saturated with debt. Will people really be emboldened to save and invest at low rates of interest? This question is important, because savings and investments are the real drivers of long-term growth. If we're unable to generate savings and investments, the global economy needs to question whether these unorthodox economic policies are achieving the desired outcomes.
South African equities have also benefited from the lower interest rates in the developed world. Long-term South African equity return expectations are lower than those from developed and emerging markets because of the weak economic growth prospects offered by South Africa (as well as more expensive valuations).
South African equities have barely produced positive real returns over the past five years, highlighting the challenge for South African funds. Private markets can extract pockets of economic outperformance and contend against the volatility we expect in listed financial markets.