HOW MA­JOR EVENTS CAN AF­FECT OUR WAL­LETS

Any lo­cal or global news­wor­thy oc­cur­rence can re­sult in a profit or loss. Guard against un­cer­tainty by mak­ing care­ful in­vest­ment de­ci­sions, writes An­gelique Ruz­icka

CityPress - - Business -

Brexit, hur­ri­canes in the Caribbean and US Pres­i­dent Don­ald Trump sig­nalling to North Korea that the gloves could soon come off are quite far re­moved from your re­al­ity here in South Africa, so you would be for­given for think­ing that they can­not af­fect you.

How­ever, nat­u­ral dis­as­ters, in­ter­na­tional pol­i­tics and threats of war could af­fect your in­vest­ments in ways that you may not have thought of be­cause ev­ery­thing is linked in one way or an­other.

For ex­am­ple, war be­tween North Korea and the US, or in­creased ten­sions be­tween the US and China, could re­sult in the Chi­nese buy­ing less gold. China is the world’s big­gest con­sumer of gold – ac­cord­ing to the South China Morn­ing Post, the coun­try con­sumed 975.38 tons of the pre­cious metal last year.

A slow­down in China’s gold con­sump­tion could have a ma­jor ef­fect on South Africa’s econ­omy, con­sid­er­ing that the metal is one of our ma­jor ex­ports.

“If China went to war, there would be a dif­fer­ent mind-set al­to­gether,” says Floris Slab­bert, coun­try man­ager at Ec­spo­nent Fi­nan­cial Ser­vices.

“If no one is buy­ing our gold, it will de­pre­ci­ate and mine work­ers will go on strike be­cause there will be mas­sive job losses. Any­thing that hap­pens there, good or bad, will also have an im­pact on our lo­cal cur­rency.”

If you think that you do not have in­ter­na­tional ex­po­sure be­cause your in­vest­ments are mainly in JSElisted com­pa­nies, you’d be wrong.

“Sixty per­cent of our stock ex­change has ex­po­sure to the US and UK mar­kets,” says Slab­bert.

“So, any in­ter­est rate changes can have an im­pact here if the com­pa­nies are listed abroad.”

For in­stance, Naspers has ex­po­sure to China through its stake in on­line gi­ant Ten­cent Hold­ings, which it paid $33 mil­lion (R432 mil­lion) for in 2001. Cur­rency changes, in­ter­est rate hikes and any po­lit­i­cal changes or threats to China could have dire con­se­quences for your fi­nances if your funds have ex­po­sure to Naspers.

If things are go­ing well for South Africa, this could also have a neg­a­tive ef­fect.

John Or­ford, portfolio man­ager at Old Mu­tual In­vest­ment Group’s MacroSo­lu­tions Bou­tique, says: “For South African in­vestors, a large part of the JSE is made up of com­pa­nies that de­rive earn­ings and rev­enue out­side of the coun­try.

“With re­gard to com­pa­nies such as Bri­tish Amer­i­can To­bacco, Mondi Group and Naspers, their rand share price will go up be­cause they ben­e­fit when the rand weak­ens as they are earn­ing out­side of South Africa.

“It is a dou­ble-edged sword. What we saw in 2016 was that the stronger rand cre­ated a bit of a head­wind for eq­uity mar­kets.”

LO­CAL DIS­RUP­TION

We have also suf­fered some shocks lo­cally. The fir­ing of then fi­nance min­is­ter Nh­lanhla Nene in De­cem­ber 2015 re­sulted in the rand spi­ralling down­ward and in­vestor con­fi­dence de­clin­ing. Many be­lieve this was a contributing fac­tor in the coun­try be­ing down­graded by in­ter­na­tional rat­ings agen­cies.

This, cou­pled with po­lit­i­cal in­er­tia and cor­rup­tion, has re­sulted in a great deal of un­cer­tainty in house­holds as well as busi­nesses.

“Com­pa­nies and house­holds have been cry­ing out for cer­tainty so that they can de­cide how to spend their money,” says Or­ford.

“Long-term pur­chas­ing de­ci­sions, such as buy­ing a house or a car, can be af­fected. If you are a com­pany, you do not in­vest in a new plant or store un­less you think that you can make a re­turn on that in­vest­ment.

“Com­pa­nies are ei­ther hold­ing off on in­vest­ments or look­ing for op­por­tu­ni­ties abroad, and this is un­likely to change un­til they have more cer­tainty. This has a neg­a­tive ef­fect on job cre­ation and job op­por­tu­ni­ties.”

WHAT CAN YOU DO?

As ex­plained above, ma­jor events can cause havoc lo­cally and abroad. You never know when dis­as­ter may strike and, of­ten, few can pre­vent or pre­dict it.

But if some­thing ma­jor were to hap­pen, here are some tips you should fol­low:

1 If you’re in it for the long term, stick to your guns “Over the long term, the best strat­egy for in­vestors is to re­main in­vested in a long-term strat­egy. The funds we run have gone through tough times,” says Or­ford.

2 Con­sider your in­ter­na­tional ex­po­sure care­fully You may think that you want to pro­tect your money by in­vest­ing abroad be­cause you don’t agree with the lo­cal sta­tus quo, but you have to be care­ful about how much you are ex­pos­ing your­self to events that could hap­pen abroad.

“De­pend­ing on your portfolio, 35% to 45% of it could have ex­po­sure to in­ter­na­tional mar­kets – but this would also de­pend on your risk pro­file. Check your cur­rent ex­po­sure be­fore you de­cide to take more money abroad,” says Slab­bert.

3 Make sure you can af­ford the fi­nan­cial hit If you want to in­vest in cash in­vest­ments be­cause of their po­ten­tial safety, con­sider whether you can af­ford to do so. Eq­ui­ties may pro­vide you with more in­come and in­ter­est.

“If you have more ex­po­sure to bonds, your yield will be low. If you have a short-term in­vest­ment goal – say, one to three years – then in­vest in the money mar­kets,” says Slab­bert.

4 Don’t have knee-jerk re­ac­tions “The problem with any mar­ket de­ci­sion is that you have al­ready missed it,” points out Slab­bert.

5 Get ad­vice “Talk to your fi­nan­cial ad­viser and find out what your best strat­egy is,” says Or­ford.

“If you are ap­proach­ing re­tire­ment, you need to in­vest in more con­ser­va­tive funds. Re­mem­ber, though, that if you re­tire at 60 or 65, you will still need some ex­po­sure to growth as­sets – par­tic­u­larly at a time like now, when in­vestors have been burnt by a pe­riod of low re­turns. “The risk cur­rently is that in­ter­est rates will fall, so switch­ing into cash right now may not be the best thing.”

WHAT ARE BLACK SWANS?

In business terms, a black swan refers to an unpredictable or un­fore­seen event that has ex­treme con­se­quences, of­ten on a global scale.

We have had sev­eral black swan events through­out his­tory, in­clud­ing the Wall Street crash in 1929, the dot­com bub­ble col­lapse in 2000, the Septem­ber 11 at­tacks on the US in 2001, the fall of Lehman Broth­ers in 2008 along with the 2008 fi­nan­cial cri­sis, and the Ja­panese earth­quake in 2011.

Black swans may hap­pen once in a life­time or every few years. They can oc­cur at any time. The key is to be pre­pared and di­ver­sify your in­vest­ments. If you are in­vested in only one as­set class – prop­erty, for ex­am­ple – you could lose all your money if a black swan event re­sults in a prop­erty price crash.

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