With the current state of the country’s politics and the economy top of mind for most investors, local investors need to be mindful of the potential impact on their investments and make sound investment decisions based on their appropriate risk-profile.
“While investors recover from the shock of a downgrade by two rating’s agencies earlier this year, just recently, the Consumer Price Index (CPI) annual inflation rate lowered from 6,1% in March to 5,3% in April 2017 – a 17-month low. This bodes well for future rate cuts, which will, in turn, be positive for economic growth and the strength of the Rand. However, given that the vote of no confidence in President Zuma is looming, the outcome of this could potentially push the markets in either direction, says Nick Brummer, Director at Investonline.co.za.
But while many investors are justifiably concerned about recent developments, Brummer says that the relative strength of the bond and equity markets, as well as the Rand, means the market is telling us ‘all is not lost’. “It seems apparent that investors, particularly foreign investors, are not fleeing the country, and when looking at the actual facts, this is not really surprising.
“Looking at South Africa’s recent ratings agency downgrade, a change in the local debt rating is the critical class that will have the major negative effect on the economy. In this regard, only Fitch downgraded this class to junk, while S&P left this class at investment grade, with a negative outlook. Moody’s has yet to review, but is still two levels above junk status, which is positive. For there to be a major negative effect on disinvestment and a major slide in the Rand, S&P and Moody’s would both need to be at local debt junk status,” explains Brummer.
Another reason investors aren’t disinvesting is due to consistent inflows into global emerging markets, from which South Africa benefits.
“Relative to most other emerging markets, South Africa is, politically, fairly stable when compared with Brazil, Russia, Turkey, China, South Korea, Thailand and Vietnam. Our major negative is our economic growth outlook is weak.
“The South African public is also fighting back politically with mass action – such as the vote of no confidence – which demonstrates to the world that the country will stand up and fight for what is right. This is another major positive for investor confidence.”
As recent market movements have taken investors by surprise, with the potential for more surprises in the pipeline, Brummer advises that it is important to remember that responsible investing requires adequate diversification with the appropriate risk-profiled investment, whether it’s aggressive or conservative.
“With an investment strategy, comes ups and downs of a financial market and it is difficult, if not impossible, to time markets and certain asset classes. Therefore, constructing the right diversified investment portfolio that suits an investor’s risk profile is imperative to achieving investment goals.
“For example, younger investors have the ability to embrace high growth assets and the associated risk and volatility as they can tolerate capital loss over the short-term given they have a longer-term investment time frame. On the other hand, older investors may avoid taking on too much risk in order to avoid potential losses to their retirement savings during an economic downturn close to their retirement age.
“This means that, with diversification, investors can balance their risk amongst asset classes and either maximise their returns, or reduce investment portfolio risk – depending on an investor’s specific investment goal.”
Brummer adds that in light of recent economic events, many investors are seeking more exposure to offshore markets, however he stresses that such a decision should also be dependent on an investor’s particular lifestyle and goals.
“These goals include factors like where they plan to live in retirement, and how often they travel outside of South Africa and for how long. Should an investor plan to retire overseas, then it is both prudent and logical to hold some currency in the country where they plan to live, or visit for periods of time.”
“Given the current uncertainties and fluctuating currency, we believe that now is not the time to make irrational decisions, but to ensure that investors have appropriate offshore exposure to suit their risk profile. We are constantly monitoring the levers affecting the Rand and when there is clearer direction, we will recommend the necessary changes to investment portfolios,” concludes Brummer.