In times of uncertainty, consider the long term

4 May 2017

South Africa’s recent sovereign rating downgrades to sub-investment grade or ‘junk’ status highlights the crossroads that our young democracy finds itself in and at this point it is hard to predict the direction that we will end up taking.

This is according to Old Mutual Balanced Fund Manager, Graham Tucker, speaking at the launch of the annual Long-term Perspectives publication, a summary of long-term asset class data compiled by Old Mutual Investment Group’s MacroSolutions boutique. Tucker says the resultant market volatility is going to be with us for some time to come, and in such times of uncertainty it is crucial to take a long-term view and be well diversified.

“When it comes to investments, sometimes bad news can become good news and one should be investing in exactly the opposite way to your initial gut reaction. Past and recent political events have taught us this,” he explains.

“When the President fired Finance Minister Nene in December 2015, markets fell sharply over the next few days. The rand depreciated 9 percent, bonds fell by 10 percent, listed property by 14 percent and within equities, banks fell by 19 percent. Importantly, however, investors who remained invested in these assets have since retraced and recouped these losses and more,” he says.

“The current market performance we’re seeing following recent political and economic events might not even feature as a significant event on a long-term graph,” Tucker points out. “And while we could face a significantly volatile time in the short term, with potentially divergent outcomes, volatility may create opportunity within a mispriced market.”

Tucker believes that the local equity market could deliver better returns going forward, although it is not possible to say when that will happen. “Short-term movements are extremely difficult to forecast as they are driven more by sentiment than fundamentals. However, given that the global economic environment is improving, the recent period of low or no returns from equities has allowed the market to regain some value,” he says. “This should enable multi-asset funds like the Old Mutual Balanced Fund to deliver a real return (after inflation) of four percent over the next five years in line with the performance objective,” he says.

Tucker highlights that inflation is the investor’s enemy. Turning to the inflation outlook, he expects inflation to continue to move lower through the remainder of 2017. “Despite the Cabinet reshuffle and recent downgrades, we have seen a relatively muted currency reaction and a very different environment to what we saw in December 2015 when the currency plummeted,” he says. “The real problem is South Africa’s structurally high inflation rate compared to the rest of the world.”

The Long-term Perspectives review sets out how inflation erodes spending power. So how does one counter this, Tucker asks. “Investors need to be invested in growth assets like equity and property, rather than cash. Cash might make you feel safe in an environment like the one we’re currently in, but history has shown us that it is poor at fighting inflation, especially after taking tax into the equation. Your likelihood of achieving financial freedom decreases the longer you are sitting in cash,” he explains.

Tucker believes that a rating downgrade spiral could result in a sharply weaker currency, thereby putting upward pressure on inflation. “In this environment South African pension funds should be relatively secure given the high exposure to offshore assets. For example, the Old Mutual Balanced Fund, in addition to a 25 percent offshore allowance, has significant additional exposure to rand hedges, including locally-listed equities like British American Tobacco and Naspers, as well as to other assets like gold. Taking this into account, this kind of investing will benefit from rand weakness and this will provide investors with considerable protection.”

Nonetheless, Tucker says that Long-term Perspectives data illustrates the critical need for patience as an investor. “Financial freedom isn’t achieved overnight and the old adage holds true that its time in the market, not timing the markets, that counts. Ultimately, sentiment drives shorter term market movements and investment fundamentals need time in order to play out,” he says.

  • Perspectives
  • MacroSolutions
  • Graham Tucker