STAY CALM …
… and keep investing
Investors would have been perfectly justified in throwing up their hands in despair at the beginning of the month. Pravin Gordhan had just been fired, and ratings agencies had downgraded the country’s debt to junk.
Not even 18 months prior, the firing of Nhlanhla Nene had sent markets into a tailspin, the rand had tanked and investors had panicked.
What fate awaited SA investors this time? Another rand plummet? How badly would the markets react? If all the predictions were to be believed, a bloodbath was due.
Except that it wasn’t. There was pain, but less blood than expected as the rand shed about 10% by the end of the first week in April. The JSE Alsi was actually up more than 1% in that same week.
The muted response to this latest crisis was surprising. But based on recent global events and outcomes, who can say what “normal” is any more?
“We shouldn’t have expected a bloodbath,” says Peter Brooke, fund manager of the Old Mutual Flexible Fund. “The reason for that is there is the possibility of a good outcome. Markets are looking forward and saying, actually this could result in change, and change is good news.
“If you look at Brazil as a case study for that, investors have learnt that buying Brazil ahead of President Dilma Rousseff’s impeachment was a very good investment.”
The muted market reaction is in anticipation of a “good” outcome. Brooke says we are at a crossroads, with the high road leading to change and prosperity, and the low road to decline and despair.
Should we spiral into greater fiscal and economic trouble, Brooke says it would be prudent to have maximum offshore exposure in inflationprotected assets. In the opposite scenario, the focus should be on local assets including bonds, property and banks.
While this advice makes perfect sense, it also illustrates the two extremes that investors face. Finding the right mix to achieve a balance is giving investors the jitters.
The popularity of balanced and multi-asset funds is evidence of the defensive shift. The Association for Savings & Investment SA says as at the end of 2016, multi-asset portfolios made up 51% of all assets invested in the local collective investment schemes industry. This was followed by equity portfolios (including real estate) 24%, money market portfolios 16%, and other interest-bearing portfolios 9%.
Mark Appleton, head of SA strategy and multi-asset management at Ashburton Investments, says the economy is currently vulnerable. So the firm has reduced its exposure to local fixed interest products from a previously overweight position, as a precaution.
“We’ve been re-emphasising our conservative approach because the event risks are still quite high,” Appleton says. “We have the ANC elective and policy conferences coming up, and there are global threats. So there’s still a lot of uncertainty.”
Investors’ reaction to this is marked by two distinct events. The first was the knee-jerk reaction after Nene’s firing that led to money being offloaded into offshore accounts or investments. The second is the steady shift to more defensive positions in the likes of balanced funds.
Izak Odendaal, investment strategist at Old Mutual Multimanagers, says this shift has been both clear and prudent.
“I think there is some evi- dence in the growth of multiasset funds that investors are taking the diversification message to heart,” he says.
This defensive approach is the correct one, though Odendaal says uncertainty of some sort has always been evident in the country’s history.
“It feels very uncertain now, but if you look at the returns of the all share index over the past 15 years and plot the big geopolitical events, it’s clear that uncertainty is not new. If you think this is bad, the 1980s were a lot worse. That is part and parcel of investing.”
He jokingly points out that investors have had their share of cataclysmic events over the past two years to gain some experience in dealing with the country’s current troubles.
This appears to be the approach his team is taking. Rather than making rash decisions in the wake of the downgrade, they have been mulling over the implications.
Investment professionals, he says, have this luxury (and the proven processes and analytical tools) to make a rational decision despite experiencing the same emotional reaction to events such as the downgrade.
“It’s a case of looking at the issues as coolly and rationally as possible. Individuals acting on their own don’t have the same framework or guidelines. But, hopefully, the message has sunk in that you need to take a long-term view and stick to your financial plan.”
This idea of sticking to a plan is echoed by PSG Asset Management CEO Anet Ahern. She says that having a diversified portfolio and acting calmly are the keys to riding out disruptive events
“For investors, diversification means they should have exposure to global markets, as well as across different asset classes, sectors and even across different asset managers,” she says.
Anet Ahern… riding out disruption
Mark Appleton … conservative