Ride out the storm

Old Mu­tual stats tell of high in­fla­tion, point­ing to the need to adopt a long-term out­look

CityPress - - Business & Tenders - DAVID VAN ROOYEN careers@city­press.co.za

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

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