Head­wind headaches

Mul­ti­ple fac­tors could af­fect the out­look for the year ahead, writes Jo­hann Barnard

Financial Mail - Investors Monthly - - Feature: Unit Trusts -

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.

Pi­eter Koeke­moer

Hannes van den Berg

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