Ride out the storm
Old Mutual stats tell of high inflation, pointing to the need to adopt a long-term outlook
It is difficult to predict what the future will hold during times of great uncertainty – such as the recent credit downgrades meted out to South Africa by ratings agencies S&P Global and Fitch – but one thing is certain: it is imperative not to make short-term decisions.
This was the warning sounded by Graham Tucker, manager of Old Mutual’s Balanced Fund, on releasing the latest edition of the annual Long Term Perspectives report this week.
The publication, a summary of long-term data about asset classes, is compiled by Old Mutual Investment Group’s MacroSolutions Boutique division.
Tucker said South Africa’s young democracy was at a crossroads and that market uncertainty would be part of the investment scene for a while.
However, he added, it was in times like these that investors needed to adopt a long-term outlook and ensure that their investments were well diversified.
“The past has often shown us that bad news can sometimes be good news for investors,” he said.
“That is why investors should be careful not to react emotionally.
“Sometimes it is necessary to do the complete opposite of what your initial reaction tells you to do.”
Tucker referred to December 2015, when President Jacob Zuma fired finance minister Nhlanhla Nene as an example. The financial markets reacted by receding sharply.
The value of the rand decreased by 9%, the value of stocks fell by 10%, listed property ended up being 14% weaker and, on the JSE, bank share prices dropped by 19%.
But for investors who did not panic and who rode out the storm, the dark cloud had a silver lining: they realised losses at the time, but have since made tidy profits.
Tucker warned that investors should steel themselves for more market uncertainty in the short term, but he pointed out that this uncertainty often presented opportunities in markets that were not priced right.
Tucker expressed the belief that the stock market would deliver better yields in the future, although it was difficult to predict when that would happen.
“It is difficult to predict shortterm movement on the markets because it is driven by sentiment and not by fundamental factors. But the outlook for the international economy is improving, and the recent period of limited or no growth on the markets has meant that there is now value available on the markets again.”
He was confident that multiasset unit trust funds, such as Old Mutual’s Balanced Fund, would achieve real yields (after inflation) of 4% over the next five years – in line with the trust’s investment goals.
Although inflation was still an investor’s biggest enemy, Tucker said he expected the inflation rate to trend downwards for the rest of 2017. The rand rallied much more quickly after the most recent shocks – the Cabinet reshuffle and the subsequent credit downgrades – than it did when the currency collapsed in 2015.
“The biggest problem is still South Africa’s structurally high inflation rate in comparison with the rest of the world,” said Tucker.
The biggest challenge for investors remained trying to beat inflation.
Tucker said the solution to this lay in investing in growth assets, such as shares and property, instead of investing cash.
Cash might leave one feeling more secure because of current market uncertainty, he said, but history had shown that yields from cash investments only rarely beat inflation, especially when investment implications were taken into account.
The longer investors sat with cash, the less they would be able to achieve financial independence.
If the country’s credit ratings were further adjusted downwards, said Tucker, the rand could decline sharply, which could put even more pressure on inflation.
But South African pension funds should be hedged against this eventuality because of their high exposure to foreign assets.
Managers of the Old Mutual Balance Fund not only invested 25% of the fund’s assets overseas, but the portfolio also had extensive exposure to listed local shares such as Naspers and British American Tobacco.
These shares earn most of their income outside South Africa in foreign currencies as well as in other assets such as gold shares.
Assets like these benefit from a weaker rand and offer investors protection from a declining currency.
But Tucker said the data in the latest edition of Long Term Perspectives had again clearly shown that investors had to be patient (see adjacent story).
“You do not reach financial independence overnight. The old adage is true: ‘It is time in the market, not timing the market, that matters.’
“Short-term movement in the market is determined by sentiment and it takes time for fundamental factors to play a role,” said Tucker.
It is difficult to predict short-term movement on the markets because it is driven by sentiment and not fundamental factors
Graham Tucker, manager of Old Mutual’s Balanced Fund