South Africa

Positioning your retirement portfolio to beat inflation

If the past year has taught investors anything, it is the cost of ignoring risk assets when market circumstances change so dramatically. But with a period of rapid global economic growth expected this year, risk assets such as equities remain set to benefit.

We believe investors near or in retirement, specifically those who have derisked their portfolios in recent years, need to ensure their retirement savings are positioned to capture the long-term inflation-plus returns that are on offer, as they do not come through in a straight line.

Here’s what you need to consider:

A macroeconomic boom is under way

The stage has been set for a period of rapid global economic growth. The IMF expects global growth at 6% this year (up from its previous forecast of 5.2%), with growth in the US leading the way. Albeit off a low base, this global economic recovery is expected to continue in 2022 at a somewhat slower pace, but still above the long-term trend.

This optimistic outlook is premised on the release of pent-up demand as economies start to reopen, further assisted by fiscal stimulus and low interest rates.

In SA we expect a decent recovery, with the local economy expected to grow at 4% or more this year — the highest number in some time, but also off a low base. Looking ahead, we however expect the economy to remain under pressure due to severe and systemic risks, though improved revenue collection by the SA Revenue Service and strong policy signals from the National Treasury should see us moving in the right direction.

Growth assets are set to benefit

There is no doubt that growth assets, including global and local equities, have had a good run since March 2020. With the global backdrop remaining favourable, we believe both global and local equities still offer upside potential and we expect these asset classes to continue delivering inflation-beating returns in the next three to five years.

Inflation-beating returns are finite

Income-drawing investors need reasonable exposure to growth assets to support long-term capital growth, and for that they need to capture inflation-beating returns when they are on offer. But it is important to know that inflation-beating returns are finite. There will be abundant years and lean years, and it is important for a retirement portfolio to be positioned to capture those returns during the abundant years as is now the case.

Retired investors may be concerned about taking on undue risk

Investors in or near retirement would be wise to seek funds that allow a meaningful portion of the overall portfolio to be invested in growth assets. But to be appropriate to sustain retirement income the funds would also need a strong focus on risk to reduce the likelihood of potential negative returns over shorter time periods. This is important because the investor would be drawing a regular income from the fund. 

Funds that provide a balanced solution that include allocations to equities and global assets, but that also manage downside volatility in line with the needs of those in retirement, are appropriate choices to successfully navigate the challenges of post-retirement investing.

• Ambekar and De Kock are portfolio managers at Coronation.

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