Investors must accept lower return future


By Daniel Paperny

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Investors must brace themselves for further geopolitical uncertainty and market volatility as the sobering realities of a low growth economic environment and lower returns become a hard truth investors cannot escape from, according to Epoch Investment Partners.

Speaking at an investment briefing on global equities and investor returns in Sydney yesterday, Epoch portfolio manager John Tobin noted the increasing convergence of global gross domestic product (GDP) growth rates among mature economies would see this figure remain consistent at about 2 per cent for the foreseeable future.

These lower GDP levels, which were being driven by low labour force growth and productivity growth in the major developed economies, were a cause for concern as they would have a detrimental flow-on impact on global equity markets, he added.

“What we see over and over again is the same demographic headwind. Labour force growth is modest: 1 per cent is about where labour force growth is in the US today and in other developed countries around Europe it’s less than 1 per cent per annum [whereas] in China, it’s negative,” Tobin said.

“When you look at labour productivity growth, those rates aren’t impressive either.

“As long as you have the open-mindedness to admit it really does depend on those two things as the drivers of economic growth – how many people are working and how productive are those people – then you’re led inevitably to conclude that this is a low growth world, it’s likely to remain a low growth world … and this is a reality we have to deal with.”

According to Tobin, key market risks - such as the increased protectionism of the Trump presidency and China’s slowing GDP growth - could also pose implications for the Australian economy.

Tobin said it was important for local investors to remain prudent in their portfolio allocations and realign themselves to prepare for a future of diminished returns from global equities.

He said that the economic conditions underlined the importance of a fund manager that could help determine the correct investment strategy for investors in the future, measuring a company’s true value based on the free cash flow that it generates.

“Traditional valuation metrics based on accounting measures, such as price-to-earnings and price-to-book, provide no insight into a firm’s return on invested capital or its skill at capital allocation,” Tobin said.

“The focus needs to be on companies which return 6 per cent of their market capitalisation to shareholders on a regular basis, while still reinvesting enough in the business to grow operating cash flow at 3 per cent or more a year.

“Invest in these companies and you’ll find good returns.”

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