Keep calm and carry on – experts

JUNK AND CASH: NOT A GOOD LONG-TERM OPTION

In a new junk era, many retirement investors are feeling the urge to sell up and house their profits in cash. It might not be the best option.

The average South African pension fund is still seen delivering good returns in the long term, even if South Africa enters a ratings downgrade spiral. Graham Tucker, portfolio manager at the Old Mutual Investment Group’s MacroSolutions boutique, says a large portion of the South African equity market is geared towards a weaker rand. Shares like Naspers, Anheuser-Busch InBev and Steinhoff would likely benefit if the rand depreciates.

Offshore break

The average pension fund will probably have about 25% invested in offshore assets, which shouldn’t be bad news for an investor’s retirement hopes. It is important to understand the difference between the economy and the market, he says.

“We aren’t saying we will enter a downgrade spiral, but if we do, that will obviously have an impact on inflation, but your average pension fund should be able to still deliver good returns,” says Tucker.

Recent political developments have led many investors to re-evaluate their portfolio, with many increasing cash weightings.

“It [a cash investment] gives you that feeling of safety and security in the short term, but in the long term it doesn’t give you what you need in order to achieve your financial freedom,” adds Tucker.

This is heedless of the risk of being in cash over 10 years, adds Zain Wilson, portfolio manager at MacroSolutions.

“The real killer is inflation,” says Wilson.

Over the past 87 years, cash has delivered a return of 6.9% per annum on average. During the same period, inflation was 6.2% a year, while the local equity market delivered 14% per annum.

Tucker warns against selling equities in a knee-jerk reaction. It is important to assess the fundamental environment to determine if selling is appropriate.

The global environment is looking better with synchronised global growth coming from China, Europe and the US, he says.

“Generally that has been very good for South African equities and when you look at the South African equity market – 50% to 60% of it is linked to the global environment,” adds Wilson.

In the wake of the global financial crisis, the South African market was getting quite expensive, but it has taken somewhat of a breather over the last two years and some value has returned. An improved global outlook and better local value should support local equity returns going forward.

“Our market still looks somewhat expensive on the standard measures, but not as expensive as it has looked over the last two years,” says Wilson.

Despite recent ructions, Tucker does not believe investors should be sitting in cash.

Reducing risk

“What we are trying to do in the portfolio is manage our risk,” he says.

While they increased their exposure to property, banks and clothing retailers over the past 12 months, they also managed the risk by buying British American Tobacco and gold shares. – Reuters