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What the heck do we do?
Here are some of the more common question being posed (or at least resident in most
people’s minds), with the sort of rationale we think would be appropriate:
Q: Over the last year, South Africans have had the unenviable experience of having
both the weakest and the strongest currency in the world. What is the outlook from
here?
Given Government’s commitment to prudent monetary and fiscal discipline as well as
the macroeconomic health of the country (yes, it IS true !), last year’s currency
collapse should never have happened. It is unlikely therefore that this ‘abnormal’
event will be repeated. The converse, whereby this year the currency achieved
‘strongest global currency’ is merely a natural reversal from grossly oversold levels.
We believe that the rand will trade between R10 and R11.50 to the US dollar for the
foreseeable future (next 12-18 months). Whilst there might be brief periods of strength
below R10, this won’t be sustainable until we remove the forward book, which should be
gone by the end of the year, and foreign exchange controls, which hopefully will
follow thereafter. Once these two constraints are removed, throw in one or two big
privatisations and anything’s possible!
Q: The US dollar is the global currency of choice. Can it possibly be vulnerable?
Yes. There is a growing school of thought that maintains that the US dollar is one
of the last bubbles left to burst from the excesses of the late nineties.
The US dollar appreciated significantly during the late nineties as the world’s
investors poured their money into the US chasing a rampant economic and stock
market bull. This led to the US receiving an abnormal share of global capital
flows, which led to an extremely overvalued US dollar. Today the situation is
very different as foreign investors are leaving the US in the form of approximately
$1billion per day. This is largely the European investors reallocating their funds
elsewhere, if the US investors follow this trend, the impact on the dollar will be
significant. One thing is sure, the next 5 years will see a far more equitable
reallocation of global capital flows.
Q: Given that, should I switch out of the US dollar into another currency?
Whilst we don’t believe that the US dollar will collapse much more, given that
it has major psychological support, it is overvalued and the economic environment
is no longer favourable. If 100% of your offshore assets are in US dollars, then
we would advise that you diversify a portion of your portfolio into another currency
such as the Euro, Sterling or perhaps Swiss Franc.
The choice is yours, but do diversify. Do not view the US dollar’s strength over the
last 5 years as indicative of the outlook for the next 5 years!
Q: The outlook for emerging markets, according to most market commentators, is
more favourable than developed markets - for the next couple of years. Shouldn’t
I perhaps spread my offshore money from developed into emerging markets, or even
repatriate some funds back to S.A.?
Whilst the outlook for emerging markets (South Africa in particular), may well
be more favourable from a short to medium term perspective, they are not without
risk. Offshore diversification must be viewed from a prudency perspective in terms
of wealth ‘preservation’ rather than wealth ‘creation’. In addition, South Africans
are already overexposed to emerging markets through their investments in houses,
cars, pension schemes etc. in South Africa. In short, avoid other emerging markets,
stick to developed markets and continue to globalise a portion of your portfolio.
On that note, we have brought quite a lot of our offshore back to SA for the medium
term, but remember that we have the facility to move those funds out again much
quicker than the individual has. This move has benefited our clients significantly
over the past 3 months where we have seen the global markets drop by up to 25%,
whilst our portfolio’s, although not showing significant gains, have also not dropped
either.
Q: Commodities have had a great run, when will financials see some strength?
Whilst South African commodities have performed strongly over the last 5 years,
they have probably got a bit more steam on the back of a global recovery fuelling
global demand for commodities (i.e the US fund managers are looking for value, and
SA is still attractive). Financials have had a rough 4-5 years and are cheap, but
then they have been cheap for a very long time. The catalyst for a rerating of the
financial sector will probably be a sustainable end to commodity strength, which
will see funds being diverted away from commodities to cheaper financials and
industrials.
Q: Should I be switching out of commodities and into financials?
The important thing to remember here is that commodities and financials are sectors
of a stock market, as are technology stocks, small company stocks etc. These market
sectors all move according to cycles and are thus particularly prone to cycles of
under and out performance. The timing of these cycles is very difficult to determine,
as a result, sector funds should constitute no more than 10-15% of your portfolio.
Therefore, if you caught the commodity cycle near the bottom (which very few investors
did!), then commodities probably constitute 50%+ of your portfolio, in which case you
must trim that figure back to ± 10%. Similarly, if you have no financials at all,
start building a position.
Q: When should I have a general equity fund and when should I have a sector fund?
Essentially 50-75% of the equity portion of your portfolio should be in a general
equity fund. Your portfolio manager, who has been trained in this discipline as well
as having access to a tremendous amount of information, will decide on your behalf
which sectors of this market to go over or underweight. You may have noted over the
years that we have traditionally researched the fund managers, and not necessarily
the fund or the house per se. in other words, we are looking for specific managers
to perform these tasks of selecting the correct sectors at the correct time.
This will remove a lot of stress for you in terms of trying to predict turns in the
market. Then add a sector fund or two if particular sectors look very cheap or
oversold. However, be aware of the risks of holding onto sector funds once they turn
out of favour, as they are particularly prone to hype and often collapse once
sentiment turns (as was evidenced in the small cap and technology sectors recently).
Q: How do I know when to buy and when to sell?
You buy when the market is cheap and you sell when it’s expensive – simple huh ?
Again, just be aware that there will be time, like now, when the markets look cheap,
but may still have a way to go before they bottom out, in that instance, you have to
be patient and see it through. Jumping in and out will do more damage that good.
Q: How do you know this?
Read the financial press (or the weekly Brantam “UPDATE” which you can subscribe to).
Investors can generally pick up a broad trend from the mainstream financial press.
Investors knew small caps were expensive in 1998, as they knew technology was
expensive in 2000, yet ‘greed’ ensured that not only did people not sell, but also
that they carried on buying! Similarly, when markets are cheap, ‘fear’ prevents people
from buying at the right time.
These two emotions are largely responsible for most incorrect investment decisions.
Investing must always be a rational, not an emotional affair. Incidentally, small-mid
caps, financials and industrials are currently very cheap in SA and equities in the US
are generally overpriced.
Q: OK, so the market is reasonably cheap, but I’m still worried about global
markets impacting negatively on our markets. Should I invest now or should I
wait a while?
Both. When in doubt, phase the money in. Just because markets are cheap, it doesn’t
mean they can’t get cheaper! Phase your funds in over a 3-6 month period.
Q: Should I be in equities, cash or bonds?
This is probably the most important investment decision you need to make, because
it means that you have to honestly look at yourself in terms of your risk appetite.
I say honestly, because unfortunately most people, having traditionally believed that
an aggressive portfolio (i.e. more equities) will generally outperform a more
conservative portfolio (i.e. more cash and bonds), fool themselves into believing
that having an aggressive portfolio increases your chances of making money, but they
forget that it also significantly increase your chances of losing money.
Q: If I am horribly exposed to global equities, and have taken a bath, do I hold or do I sell ?
Good question. The belief is that you should not sell out at the bottom. I
challenge this: my rationale is that, if you have taken a 30% hiding over the
past 6 months, the one thing you obviously want to do is recover that (duh !).
How are you going to do this – by staying where you are, especially when you know
that there is a good chance that they could drop further, or do you select another
asset class that will, at worst protect you from dropping or even help you start
to climb back up ?
So, my advice, for what it is worth, is to actually move out of that fund into
something more conservative, and one can always go back into a more aggressive
position once we see that the markets are starting to correct.
So what is the bottom line to all of this ? Basically...
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Avoid global equities like the plague for the next 6 – 12 months;
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If you are diversifying offshore, try to spread your currency risk so that you are not totally invested in Dollars;
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Try to balance your portfolio so that you
hold approximately 30% offshore, largely in fixed interest such as
cash or bonds, and 70% locally, with the greater proportion in
fixed interest and a small JSE exposure, leaning towards general
equity funds;
...and how does one achieve this ? Why, use Brantam of course !!
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