Don’t get angry at your investments

Malcolm Charles (L) and Peter Kent are both portfolio managers at Investec Asset Management. (Picture: Supplied)
Malcolm Charles (L) and Peter Kent are both portfolio managers at Investec Asset Management. (Picture: Supplied)

Investors have had a lot to digest on the domestic front – the firing of two finance ministers, rating downgrades, state capture allegations, and various calls for President Jacob Zuma to step down, to name a few. Emotions are running high, and the uncertain environment has left many South African investors sitting on the sidelines holding cash.

While politics may leave you feeling angry or fearful, be careful not to let emotions steer your investment decisions.

A controversial president and an unpredictable political situation are not unique to us. There is political turmoil across the world.

Russia’s involvement in the US elections continues to dog President Donald Trump’s presidency. Turkey is in a permanent state of emergency, and North Korea’s missile programme is causing global anxiety.

Brexit has sparked massive uncertainty among consumers and businesses in the UK, while anti-immigration sentiment in Europe is casting a shadow over the continent.

Clearly, many countries across the world face political challenges. Understanding that we are not alone is key from an investment perspective.    

Economics – the common thread  

We believe economics is what underlies the political angst that is being felt across the globe. In response to the global financial crisis 10 years ago, central banks poured money into the financial system and asset prices skyrocketed.

The wealth of many asset owners has grown substantially in the ensuing 10 years, but the average worker’s standard of living has declined.

Of course, economic concerns manifest differently in each country. But, in our view, realising that economics lies at the heart of the political turmoil here and across the globe should help local investors to assess opportunities more objectively and help avoid emotional decision-making.

After all, foreign investors do not view South Africa through an emotional lens. They do not look at our country in isolation but carefully assess how we stack up against other emerging markets (EMs) when they seek investment opportunities.

Even though we face a tough political and economic environment, from a valuation perspective SA looks reasonable compared to its EM peers.

SA government bonds with a maturity of 10 years currently offer an attractive inflation-beating yield of 8.5%, with the inflation rate heading towards 4%.

While many local investors have shunned SA bonds, foreign investors have piled into our market to the tune of R100bn (in the six months to end June).

This year, the All Bond Index has already gained around 7%, while the rand has appreciated some 6% against the US dollar.

Foreign investors sponsoring our market also helped returns last year. Despite the negative news flow and political uncertainty, South African bonds returned 16% over 2016, while the rand outperformed the US dollar by 13%. Local investors who chose fixed deposits missed out on this opportunity. 

South Africans were fixated on the March Cabinet reshuffle. Widespread panic meant that many local investors couldn’t see beyond the political drama, unlike foreign investors who supported our bond market due to the favourable global backdrop.

Local market participants have now become fixated on the potential outcome of the ANC’s elective conference in December.   

We try to look beyond December and consider the fundamentals of SA in the context of a wider EM and global environment.

Weak economic activity and low inflation should drive the repo rate lower. Lower rates are normally very supportive of the bond market.

Of course, we take cognisance of the political situation, and we do have the option of buying protection for our portfolios when political risk is high.   

So how are we positioning the Investec Diversified Income Fund?

We have a high conviction position in investment-grade credit. A year ago, we forecast that SA would enter into a recession. But it was only in the middle of last year that we believed credit spreads were priced for a recession.

We have invested in good-quality businesses such as Santam, FirstRand, Growthpoint and Mercedes-Benz, which are giving us an attractive yield of close to cash + 2%.

Their robust balance sheets should show resilience in the face of economic and political headwinds. We have a small allocation to government bonds, and we favour those instruments with a maturity of less than 10 years.

These bonds are sensitive to interest rate moves and should benefit if rates decline more. Low growth means tax revenues could disappoint. We are concerned about the fiscus, so we have been avoiding longer-dated bonds.   

Our view on the rand is neutral. Over the past 18 months, China and the commodity upswing have been driving the local currency.

China is doing well, and its economy is pretty much at cruising altitude. We are maintaining a small offshore exposure to help protect the portfolio from political headwinds should conditions deteriorate.   

The local political and economic landscape will no doubt continue to be very challenging. And while political developments may make you upset, we urge you not to get angry with your investments – decisions on your savings require a clear head.

This article is from the September 2017 edition of FundFocus, which appeared in the 21 September edition of finweek. Buy and download the magazine here.

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