Leslie Tilley looks at whether there are
any safe bets left when it comes to investing
Forget previous investment strategies: the world economy has entered a new era and in the process pushed aside the financial tenets of the past. The September 11 attack on the United States has caused a paradigm shift in Western economies and the potential for an escalating war and further terrorist attacks will cause the market to move into a new phase of volatility.
Regardless of whether we are entering a world recession, central banks have moved from a hands-off stance regarding the economy to one in which governments will intervene to ensure the perceived aim of the terrorists to strike at the heart of the global financial community is thwarted.
Many economists are upbeat that this sort of boost to stimulate the economy may have positive repercussions on global markets. An analyst at NIBi, Nedcor Investment Bank’s multi-manager division, points out that recent funds allocated to bailing out the troubled US airline industry coupled with recent interest cuts are positive for economic growth.
Jeremy Gardiner, Investec’s director of asset management said: “We don’t see the world plunging into a massive recession. While we might get a technical recession in the US [and elsewhere] that is two- to three- quarters of negative growth, it should be limited beyond that.”
Stock markets were already in deep water before the attack and things have only got worse. Stocks, as measured by Standard & Poor’s (S&P) 500 index, have posted their biggest quarterly drop since the crash of 1987. Financial news agency Bloomberg reports that the market’s 18-month slide accelerated after the attacks and the index is heading for its second consecutive yearly decline. The index hasn’t fallen for three consecutive years since 1941.
Of course there are going to be some winners in this scenario: defence, security and arms manufacturers will see earnings rise. But other industries, such as airlines and insurance firms, are facing massive losses and the net will spread wider. The United Kingdom’s Financial Services Authority (FSA) has warned, somewhat unnecessarily, that “there is a risk of companies collapsing”.
On September 10 the FSA changed its rule requiring insurers to keep a reserve big enough to withstand a 25% drop in equity markets, dropping the level to 10% after the UK’s FTSE 100 stock market index fell 18% on the year. This meant that life insurers could decide for themselves how much they needed to reserve against future liabilities instead of the regulator forcing them to keep to fixed levels. This led to one large company, SVB Holdings, selling its equity portfolio and switching the money into bonds and cash.
If major life companies are dumping stocks, what should the wary South African investor do?
One thing is certain: the rand will continue to be hit as global investors move further towards so-called safe havens. Emerging markets are once again going to suffer a period of weakness. With the rand hitting new record lows on a daily basis and shattering the R9-to-the-dollar and R13-to-the-pound barrier it makes even more sense to invest a tidy portion of funds offshore or in rand-hedge stocks. Some analysts are predicting that gold will march through $300 an ounce and that it could be worth investing up to 30% of one’s portfolio in gold stocks.
William Meyer, treasurer for the Shareholders Association and CEO of Fenestra Asset Management recently pointed out that “over the past 30 years the rand has depreciated by an average of 12% a year”, while the JSE Securities Exchange’s Alsi 40 has given a compound growth rate of 13% a year over the past 20 years.
He adds that over the past 11 years the Alsi 40 rose about 167% while the Dow is up around 257% over the same period. “If you had invested in US dollars you would have made another 240% in currency gains.”
“Currency is the key”, agrees Gardiner, but he warns against investing purely in dollar funds. (See sidebar).
While the perceived wisdom has been to hedge against the continuing fall of the rand by investing overseas, the massive fall in international stock markets points to this being a strategy being overtaken by events.
Is a silver lining for debt-heavy South Africans? New York investment adviser Suze Orman said that local investors should forget the stock market for the time being and “put your money where it will get a guaranteed return”.
Paying off credit-card debt at about 21% effectively gives one a guaranteed return at that rate while investing surplus funds in a bond account would give a return of around 13%; effectively by saving the interest one would pay on these accounts if one did not pay the debt.
While that’s fine for investors with debt, what about those who do not have these problems? In this case the money market could be very attractive according to Gardiner.
“The money market is a good place to be now. We are going to see significant volatility over the next six months, so if you can’t cope then sit it out [of equities]”.
If you feel the need to diversify your investment, he recommends a balanced managed fund where the investment can be switched between equities, bonds and cash, depending on the market.
Bear in mind that one doesn’t have to invest in equities offshore; one can also place the funds in a money market account. In fact, according to Piet Viljoen, Chief Investment Strategist, Investec Asset Management, this would have been the best strategy.
“Equities have been the preferred destination for a lot of these outward-bound flows, and in retrospect, this has not proven to be a great success. The average investor would have been a lot better off by staying invested in SouthAfrican equities, rather than buying offshore equities.
“The best place to have been over the past few years has been in offshore money market investments or cash, as it is more commonly known. Those investors who resisted the siren call of the new economy have profited handsomely from a combination of preserving their offshore capital and rand depreciation. In contrast, investors in offshore equities have seen their capital eroded by falling markets, well in excess of the rand decline,” says Viljoen.