In­vest­ing in Post-down­grade SA

Premier Magazine (South AFrica) - - Contents - Text: Paul Leonard, CFP®, Citadel Re­gional Head Im­ages © istockphoto.com

The pol­i­tics and mar­kets in South Africa are in tur­moil. This is uncertainty; this is risk. Pre­dictably, many in­vestors are jit­tery and are ask­ing, “How should I be in­vest­ing in this type of en­vi­ron­ment?”

The first – and most im­por­tant – piece of ad­vice that I can give is: do not panic. The types of events that we have witnessed over the past year only serve to re­in­force the im­por­tance of a sen­si­ble in­vest­ment phi­los­o­phy and process. A well-di­ver­si­fied port­fo­lio is par­tic­u­larly use­ful in times like these. How­ever, 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 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 rand­de­nom­i­nated in­vest­ments while rais­ing ex­po­sure to rand hedge in­vest­ments. The shares of lo­cal com­pa­nies which earn a large pro­por­tion of their rev­enue in South Africa – such as lo­cal banks and lo­cal re­tail stores – are most likely not go­ing to per­form par­tic­u­larly well, so you want to re­duce ex­po­sure to these types of com­pa­nies in your port­fo­lio as well.

The good news is that some of the eq­uity build­ing blocks of your port­fo­lio are likely to give you good re­turns. The high con­vic­tion view of Citadel 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 Jo­han­nes­burg Stock Exchange 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 that ex­ports goods from South Africa and earns in for­eign cur­rency would be an op­tion to con­sider.

Hedge funds are often used to re­duce the down­side volatil­ity of a port­fo­lio and thus re­duce the risk. It is 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. For ex­am­ple, if the mar­ket drops by five per­cent, your port­fo­lio might only drop by two per­cent. That means that when the mar­ket starts go­ing up again, your port­fo­lio starts at a higher point. In un­cer­tain times, you want more of this in your port­fo­lio.

Un­cer­tain times bring about risk, but hav­ing a well-di­ver­si­fied port­fo­lio that con­sid­ers uncertainty re­mains an ap­pro­pri­ate strat­egy. Avoid any knee-jerk re­ac­tion to mar­ket ner­vous­ness, and, as al­ways, get skilled ad­vice.

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