What to do with your money in an uncertain mar­ket

First off, stay calm. Then, re­duce your ex­po­sure to bonds, and put your money into com­pa­nies earn­ing in for­eign cur­rency.

Finweek English Edition - - MARKETPLACE - Editorial@fin­week.co.za Paul Leonard, a cer­ti­fied fi­nan­cial plan­ner, is re­gional head at Ci­tadel in the East­ern Cape.

southAfrica’s pol­i­tics and mar­kets are in tur­moil. This is un­cer­tainty; this is risk. Pre­dictably, many in­vestors are jit­tery and are now ask­ing: “What must I do? How should I be in­vest­ing in this type of en­vi­ron­ment?”

The first – and most im­por­tant – piece of ad­vice that I can give is: don’t panic. There is no ev­i­dence that sug­gests that panic helps any­one, ever. The types of events that we have wit­nessed re­cently only serve to re­in­force the im­por­tance of a sen­si­ble in­vest­ment phi­los­o­phy and process.

A well-di­ver­si­fied port­fo­lio is par­tic­u­larly use­ful in times like these. But port­fo­lios do need to be re­bal­anced from time to time.

If you have bonds in your port­fo­lio, then this build­ing block will be un­der pres­sure. It is, of course, South African govern­ment bonds that were down­graded to junk sta­tus so, hope­fully, your as­set man­agers have re­duced your ex­po­sure to bonds.

The rand has al­ready come un­der sig­nif­i­cant pres­sure and this is likely to con­tinue, so the high-con­vic­tion view for the bal­ance of this year is to re­duce ex­po­sure to rand-de­nom­i­nated in­vest­ments while rais­ing ex­po­sure to rand-hedge in­vest­ments.

The shares of lo­cal com­pa­nies that earn a large pro­por­tion of their rev­enue or profit in South Africa – such as lo­cal banks and lo­cal re­tail stores – are also prob­a­bly not go­ing to per­form par­tic­u­larly well, so you want to re­duce ex­po­sure to these types of com­pa­nies in your port­fo­lio as well.

In­ter­est­ingly, and im­por­tantly, the good news is that some of the eq­uity build­ing blocks of your port­fo­lio are likely to give you good re­turns. Our high-con­vic­tion view is that overseas eq­ui­ties are likely to pro­vide bet­ter in­vest­ment re­turns than lo­cal com­pa­nies in the com­ing year. So you will want to have greater ex­po­sure to in­ter­na­tional com­pa­nies or those lo­cal busi­nesses that are ex­posed to the global econ­omy.

About two-thirds of the in­come that is gen­er­ated by com­pa­nies listed on the JSE is gen­er­ated out­side of the coun­try. Those busi­nesses are likely to per­form well if the rand de­val­ues, so you want to have an in­creased ex­po­sure to those types of com­pa­nies in your port­fo­lio. For ex­am­ple, a busi­ness which ex­ports goods from South Africa and earns in for­eign cur­rency, or a for­eign-based re­tailer would be op­tions to con­sider.

Hedge funds are of­ten used to re­duce the down­side volatil­ity of a port­fo­lio and thus re­duce the risk. It’s like an in­sur­ance pol­icy. It may be ex­pen­sive, but if you have a hedge fund strat­egy in your port­fo­lio, you prob­a­bly want a higher per­cent­age of hedge funds now.

Pro­tected eq­uity is a type of in­vest­ment build­ing-block strat­egy where you do not share in the down­side of the mar­ket so that if the mar­ket drops by, say, 5% your port­fo­lio might only drop by 2%. That means that when the mar­ket starts go­ing up again, your port­fo­lio starts at a higher point. In uncertain times such as this you want more of this in your port­fo­lio to­day.

As al­ways, though, do not get drawn into this bliz­zard of news and opin­ion. This is un­cer­tainty and this rep­re­sents a risk but if you have a well-di­ver­si­fied port­fo­lio that con­sid­ers un­cer­tainty it re­mains an ap­pro­pri­ate strat­egy. In that case, stick to it; avoid any knee-jerk re­ac­tion to mar­ket ner­vous­ness. And, as al­ways, seek ad­vice from a qual­i­fied per­son.

The first – and most im­por­tant – piece of ad­vice that I can give is: don’t panic.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.