Recent months have seen significant turbulence with selloffs in markets across the globe. This, paired 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 such a sure bet.
Markets in the United States have been particularly turbulent off the back of numerous factors, including the Federal Reserve’s decisions to tighten monetary policy in response to increasing, and seemingly persistent, inflationary pressures in recent months. What happens in US markets can often set a tone for markets elsewhere and is usually a concern for any South African investor whose portfolio includes international investments.
A June 10 report on inflation in the US led to one of the most significant interest rate hikes in the last 28 years (0.75%) by the Fed. The hope is, of course, that ending the recent era of free money, which characterised the pandemic response in many countries, will cool demand driven inflation pressures.
Realistically, however, economies around the world are also all facing supply chain pressures, which drive up prices, including from Covid-19 related lockdowns in China and Russia’s war in the Ukraine. Until these challenges abate the upwards pressure on prices, including in South Africa, this won’t be solved by interest rate hikes alone. This means markets at home and abroad could remain choppy for a while yet.
Because inflation, supply chain problems and tightening monetary supply are a reality in most parts of the world, investors are increasingly asking if numerous economies are staring down the barrel of stagflation (stagnated economic growth with inflation) paired with, in some cases, what seems to be asset bubbles deflating — with successive rounds of equities sell offs testament to one aspect of this.
There are two core principles that investors, with exposure to both the domestic and international markets, need to keep in mind if they are feeling overwhelmed. These include having a well-diversified portfolio, which includes a good balance between domestic and international investments, and taking a long view. Although these sentiments seem obvious, it’s not always clear to investors how these principles should be exemplified in the actions of their fund managers.
When considering the diversity of one’s portfolio it is important to look for fund management that can do several things. The first is being able to identify options that can provide a bit of a port in a storm — in circumstances that have been described as leaving investors with “nowhere to hide”. Some of this sentiment is caused by the turbulence in the US treasury bond market.
Long bonds were once the “safe bet” mainstay but, in the current climate of high inflation and unprecedented and unpredictable action by the Fed, they are showing negative returns despite unsettled yet overall increasing bond yields (and this seems more reflective of the inflationary reality than a positive longer-term economic outlook).
This makes it imperative for a prudently diversified portfolio to have access to products that provide a degree of guarantee or certainty — at least in terms of protecting one’s capital investment. Although no investment is risk free, structured notes are an example of an investment product that can provide a significant level of surety in terms of protecting capital (some products can protect your capital against 40% losses, for example).
And, while the return for these notes may not quite be beating US inflation levels (with most of the prudent structured note options coming in at an annual dollar return of between 6% and 7%), they are still a relatively secure bet (particularly 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 if there is a multi-manager solution approach with the skill and network to provide your portfolio with bespoke, personalised diversity. Fund management, now more than ever, should be about understanding the individual’s needs and risk appetite — and building a personalised portfolio to match.
And, in this environment, it’s important to look for an offering that goes beyond prudent, individualised investment and includes financial planning (think estate and succession planning), which is even more crucial for investors with offshore holdings where there are complex tax considerations, which, if not carefully planned for, can wipe out gains made. The additions of financial planning, a multi-manager approach and broad networks also speaks to taking a long-term view — that second principle.
It goes without saying that for the average risk appetite investor, now is the time to seek investment advice that eschews the speculative for options with apparent fundamentals. For a good fund manager, especially one who will help you invest offshore, it is important to make sure they are looking for stability and not confusing this with growth, and similarly buying companies and not countries.
With that being said, while focusing on stable, large cap companies is key, so too is a macro view of the international political economy. While you want your fund manager to be making sure there is a focus at firm level, some markets will have too much inherent risk and are best avoided. Seek fund management and investment advice that can help you peer down at a country’s economic and political outlook, and up from a specific firm level view.
There are only a handful of firms that can execute against 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 deliver ‘“all-terrain” type portfolios and solutions are worth pursuing.
Craig Featherby is the founder and chief executive of the Carrick Group of Companies.