The last few months have been marked by significant turbulence with massive sales in markets around the world. This, coupled with domestic market conditions and economic constraints in South Africa (such as load shedding and rising input costs), has left even the experienced investor feeling surrounded by choppy waters without a life raft. Options that were once considered safe havens are no longer a safe bet.
Markets in the United States have been particularly turbulent due to many factors, including the Federal Reserve’s decisions to tighten monetary policy in response to rising and seemingly persistent inflationary pressures in recent months. What happens in US markets can often set the tone for markets elsewhere and is generally a concern for any South African investor whose portfolio includes international investments.
A June 10 report on US inflation resulted in one of the largest interest rate hikes in 28 years (0.75%) by the Fed. The hope is, of course, that the end of the recent era of free money, which has characterized the response to the pandemic in many countries, will calm demand-driven inflationary pressures.
Realistically, however, economies around the world are also all facing supply chain pressures, driving up prices, not least from China’s Covid-19 related lockdowns and Russia’s war. in Ukraine. Until these challenges ease the upward pressure on prices, including in South Africa, this will not be solved by interest rate hikes alone. This means that domestic and foreign markets could still remain unstable for some time.
With inflation, supply chain issues and tight money supply a reality in most parts of the world, investors are increasingly wondering if many economies are watching the barrel of stagflation ( stagnant economic growth with inflation) coupled, in some cases, with what appear to be deflating asset bubbles – with successive rounds of stock selling attesting to this.
There are two basic principles that investors, exposed to domestic and international markets, should keep in mind if they feel overwhelmed. These include having a well-diversified portfolio, which includes a good balance between domestic and international investments, and having a long-term view. While these sentiments seem obvious, investors don’t always know how these principles should be exemplified in the actions of their fund managers.
When considering the diversity of your portfolio, it’s important to look for a fund manager that can do multiple things. The first is being able to identify options that can provide some carry in a storm – in circumstances that have been described as leaving investors “nowhere to hide”. Part of this sentiment is caused by the turmoil in the US Treasuries market.
Long bonds were once the mainstay of “safe bet” but, in the current climate of high inflation and unprecedented and unpredictable Fed action, they are posting negative yields despite volatile but broadly rising bond yields (and that seems to reflect inflationary reality more than a positive longer-term economic outlook).
It is therefore imperative for a prudently diversified portfolio to have access to products that offer some degree of guarantee or certainty, at least in terms of protecting its capital investment. Although no investment is without risk, structured notes are an example of an investment product that can provide an important level of security in terms of capital protection (some products can protect your capital against losses of 40%, for example example).
And, while the yield on these notes may not quite exceed US inflation levels (most conservative structured note options offer an annual dollar yield of between 6% and 7%), they remain a relatively safe bet (especially when linked to developed market indices).
The second key aspect to assess is whether your fund management is selling you an “off the shelf” product or whether there is a multi-manager solution approach with the skills and network to provide your portfolio with diversity. bespoke and personalized. Fund management, today more than ever, should be about understanding an individual’s needs and risk appetite and creating a personalized portfolio accordingly.
And, in this environment, it’s important to look for an offering that goes beyond careful, individualized investing and includes financial planning (think estate and estate planning), which is even more crucial for investors holding overseas holdings where there are complex tax considerations, which, if not carefully planned, can wipe out any gains made. The addition of financial planning, a multi-manager approach and extensive networks also demonstrates a long-term view — that second principle.
It goes without saying that for the average investor with an appetite for risk, now is the time to seek investment advice that avoids speculation for options with apparent fundamentals. For a good fund manager, especially one that will help you invest overseas, it’s important to make sure they’re looking for stability and don’t confuse that with growth, and they’re buying in the same way companies and not countries.
That being said, while a focus on stable large-cap companies is essential, so is a macro view of the international political economy. While you want your fund manager to ensure there is company-level concentration, some markets will have too much inherent risk and are best avoided. Find fund management and investment advice that can help you look at a country’s economic and political outlook, and from a specific company-level perspective.
There are only a handful of companies that can execute all of these imperatives for South African investors with international holdings. But, in the current economic climate and with an uncertain outlook, fund management and financial planning that can provide “all terrain” type portfolios and solutions are worth pursuing.
Craig Featherby is the founder and managing director of the Carrick Group of Companies.