2015 was a tough year, and things aren’t letting up. In fact, recession remains a very real possibility.
“While it may be too early to anticipate the South African economy slipping into a recession, the economy struggled in 2015, with a second-quarter contraction of 1,3%, followed by third-quarter growth at merely 0,7%,” says Autus Fund Managers analyst Francois Roux.
“Drought conditions could continue to hurt the economy over the next few months, especially the agricultural sector. The tumbling oil price has helped local consumers and businesses that use oil as a production input, although much of this benefit has been offset by a depreciation in the rand.”
In the second half of 2015, economies around the world had to deal with challenges such as poor growth, currency volatility and inflation, amongst other factors.
Emerging markets, in particular, were worst hit as a result of the flight of capital to more developed economies, the heavy reliance on commodity prices, which have come under pressure, and a depreciating currency.
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South Africa, forming part of this grouping, has its fair share of similar challenges, exacerbated by concerns around the long-term impact of the current drought. Reviews by ratings agencies and the increase in US interest rates also forecast a tough outlook for the country.
Eric Enslin, CEO of FNB Private Wealth and RMB Private Bank, says, in light of all these factors, investors have to consider diversifying as part of their long-term investment strategy, and in the process, minimise the risk associated with the current economic adversities.
“Investors with high exposure to equities would have already seen the need to diversify their portfolios as the local market has come under severe pressure over the last year. The main aim of diversification is to limit volatility or risk within your portfolio and thereby smooth returns over time.
“It is important to have a planned diversification strategy in order to achieve your stated goals. Random diversification could lead to uncertainty about the outcome. Diversification also needs to take place over asset class, sector, geography and currency, amongst others.
“Local investors will have a lot to ponder because of the number of adverse factors that continue to weigh heavily on the local economy.
“Compared to global norms where investors often explore opportunities in foreign countries, South African investors predominantly invest locally. On one hand, this shows confidence in one’s domicile country but it can limit the maximising of investment opportunities and one’s investment strategy.
“You need to have a holistic investment approach, because every region or country offers a unique opportunity. For instance, some analysts have questioned whether emerging markets can deliver on their potential amid the challenges. However, emerging markets are hard to ignore as a source of return in a diversified portfolio.”
Indeed, with the current state of the local economy, investing offshore is looking increasingly canny. At the same time, though, it is also looking expensive. So, is it a good idea?
“The rand, which was down 25,9% against the US dollar over the course of 2015, will continue to be a big theme in 2016. Depending on the investor’s view of the local currency, it might be worth considering global equities as a prospective asset class. If the rand loses further ground against its global counterparts, investors will see gains in their offshore holdings,” says Autus’s Roux.
“There’s always a temptation to think that everywhere else is safer than here when it comes to investing. This obviously isn’t the case, and, moreover, investing overseas is expensive now,” says Saville.
“However, I still believe that global diversification is a good idea. You should invest in things that you identify as working well — you need to look at a company’s dividend yield, quality, size and momentum. There are high-value opportunities that simply aren’t available locally.”
Galileo Capital executive director Warren Ingram agrees. “I wouldn’t suggest that people rush to get their money out of the country. We faced the same scenario in the early-2000s. The rand lost a lot of value quickly, and then slowly drifted back. I think there’s a good chance that we will see the same thing happen again,” says Ingram.
“Still, I would recommend having about a quarter of your total wealth outside of the country. And it would be a good idea to feed your money into the market over a period of six to nine months.”