Multiple factors could affect the outlook for the year ahead, writes Johann Barnard
Making accurate predictions on short-term economic and political events that could shape markets has become just about as futile as making longer-term predictions. The volatility in markets is matched only by recent seismic shifts in global geopolitics that has everyone scratching their heads.
What are investment professionals to make of the implications of North Korea shedding its pariah state mantle, or the US apparently intent on sparking outright military conflict in the Middle East?
“My biggest concern has been the geopolitical uncertainty, as well as the oil price,” says Hannes van den Berg, portfolio manager of Investec Equity Fund. “With what’s happening in Iran and the Middle East, if the oil price keeps going higher, that will filter through in various forms into our inflation numbers.
“So I’ve been trying to get my head around what this means for inflation, interest rate expectations and emerging market currencies.”
These are all factors that could materially affect the out-
If the oil price keeps going higher, that will filter through in various forms into our inflation numbers
look for the year ahead, and is likely to give fund managers more than a few headaches.
Coronation’s head of personal investments, Pieter Koekemoer, also flags the threats to inflation as a possible headwind in the near future. Higher valuations in US stocks also pose a threat for investors looking for value and growth.
“The big issue is we’ve now had several years of robust economic growth around the world. The US economy, especially, is getting to a stage where it’s starting to feel that maybe things are getting a little bit overheated,” he says.
“But what everybody is increasingly worrying about is what happens to asset prices as interest rates continue to normalise if inflation starts creeping back into the system. And that’s the big macro debate in the US.”
Koekemoer says this does not mean investors should avoid global equities. It is, however, prudent to reduce exposure to below strategic alloca- tion levels given current valuations.
Anchoring off your strategic asset allocation is more rational than shunning equities altogether, he says, as some investors have done in response to lower rand returns over the past two to three years.
“It is clear from the cash flows into the unit trust industry that investors are a bit despondent and some are giving up on taking risks. It is typically appropriate for more conservative investors to be invested in a portfolio that’s roughly 50% cash and bonds and 50% equity and a bit of property.
“Over the past three years, this conservative balanced portfolio produced a return of only about 5%/year, compared to a return of about 8%/year in an income fund with less risk and volatility.”
He says this situation in which the less risky assets have been outperforming equities and listed property is abnormal, but also one of the reasons behind the flow of funds into lower-risk assets.
Income funds may be lower risk, but investors are likely to regret the switch when risky asset performance returns to normal again.
As illustrated in an accompanying article in this unit trust feature, investors risk losing far more if they miss a pickup in equity markets should they try time the market by moving wholesale into safer assets.
“For understandable reasons, disappointed investors are derisking portfolios, but that is potentially not the best decision if they were appropriately positioned in the first place,” he says.
Van den Berg adds that there are equally good reasons for local investors to believe that the JSE still has lots of upside to deliver. He points to the continued appeal of emerging markets, especially with SA again looked on favourably.
“We were outside the window looking in to people having an emerging market party, but now we’ve been allowed back in,” he says. “The concern though is that this party has been going on for a while. As long as it continues we will participate, but there will come a stage when the party slows down and people start leaving.
“That is the balance investors need to strike to stay invested while things are looking constructive, but to position themselves correctly for when fears of a recession kick back in.”
The range of unit trust funds available on the market at least gives investors a wide range of choice to help diversify their portfolios.
Hannes van den Berg