Despite a lengthy period of low short-term interest rates, South African economic growth has remained stubbornly stagnant in recent years. According to Saliegh Salaam, Portfolio Manager at Old Mutual Investment Group’s Customised Solutions boutique, this extended period of slower economic and market growth has significant implications for investors and investment managers, all of who need to ensure that their investment and stock selection strategies remain correctly positioned to capitalise on the limited growth opportunities that do arise while still offering them full protection against downside risk.
And with noise levels rising around the likelihood of increasing interest rates in the near future, any significant stimulation of economic growth, particularly in South Africa seems unlikely for the foreseeable future. All of which points to investors having to make peace with the fact that they will be operating in a slow growth environment for some time to come.
“While some market commentators took hope from the recent calls by the International Monetary Fund on the US Federal Reserve to delay interest rate hikes in that country, “Salaam explains, “the longer-than-expected low interest rate environment is still unlikely to significantly stimulate global or domestic economies and markets for now.”
Against this backdrop of still low and potentially declining levels of economic growth, Salaam emphasises the importance of an appropriate investment strategy. “While limited growth-driven investment opportunities still exist in the current environment,” he explains, “these are typically bid up fairly quickly by investors who are prepared to pay a premium for high-quality companies with good growth prospects.”
He argues that the potential that this ‘competition’ for growth companies creates for sudden and sharp share price moves - in either direction - makes thorough assessment, due diligence and appropriate entry and exit strategies crucial for anyone considering investing in these opportunities.
“In South Africa, particularly, sector effects can have a massive impact, with sharp corrections often coming very swiftly,” he explains, “and this makes any attempt at pursuing a sector-based strategy to counter low growth a dangerous undertaking.”
Instead, Salaam recommends that investors maintain an investment strategy that is built on the cornerstones of risk management, yield potential and growth visibility.
“It’s vital, in times of high uncertainty, that investors seek out a measure of certainty by selecting sectors, industries and companies that offer good visibility in terms of their growth prospects,” he explains, “and that they approach their investments with flexibility and capital protection top of mind.”
For investors who entrust their portfolios to professional asset managers, Salaam is adamant that this type of considered approach can still deliver steady growth.
“While investors in funds may feel like they have no control over the strategies applied to their portfolios, this isn’t the case,” he explains, “because most of the time they do, in fact, set their strategy simply by the investment manager or fund they choose.
“Provided that the chosen asset manager has a flexible investment mandate and is unconstrained in terms of diversifying and rotating exposures according to growth opportunities,” he concludes, “the potential for any investor to still enjoy steady, albeit somewhat measured, returns should never be limited by a slow economic growth environment.”