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Keep Calm and Spread Your Investments

Dec 18, 2014 | Market & The Economy | 0 comments

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We need to recognise something about ourselves: we South Africans are a passionate bunch.
Our reaction to the Springboks or Proteas wins or losses, our economic data, the state of the Rand, the movements in the stock markets or house prices all send us into a state of hysteria, whether it’s linked to elation or despair. When it comes to finances, these ‘mood swings’ can be unfounded, particularly if people are acting on emotion alone.

Then there’s the disparity in the way we think about market changes. Remember that a Nobel Prize for Economics was won around 15 years ago by an economist who proved that investors were one unit of happy if an investment rose from R100 to R110 and were three units of unhappy if R100 fell to R90. We can all benefit from regularly checking ourselves against this study.

There are a number of instances over the past 20 years when overreaction has led to some very poor financial decisions. We remember in the late 90’s when a prominent South African wealth management firm turned to its client base and said: since South Africa represents only 1% of MSCI world index, why are we holding so much of your portfolios in SA stock? Its strategy of going totally offshore ended up being a disaster, and only in the last 18 months would it have started to come right for investors.

We remember the Zimbabweans who came to SA in the early 2000’s, who did not want to have any assets in Africa after what they had experienced. They too have had a very rough 10 years, during which offshore markets went down in pounds and dollars before the Rand strengthened significantly. With all their liabilities in South Africa, this created a problem, and their situation is a reminder of why it’s always important to keep some of your investments in the currency of the country you live in.

Beware of one way bets

South Africa has its fair share of problems at the moment. Yet, just when you think that the Rand is a one way bet, something happens elsewhere in the world which makes the Rand look good again. Remember choosing where to invest your money is a relative game. This is not a good time to be transferring all your money offshore. Yes there may be worse news of a downgrade for us as a country around the corner, but again we will recover from that. You may think that the Rand reflects Eskom, water, lack of service delivery, Nkandla and the Russian Power deal, but look at the graph below which we are borrowing from an article Warren Ingram wrote about looking at South African investments contextually. It shows that the Rand is actually moving in unison with other BRICS countries, with the exception of China, where the currency is manipulated by the government.

Emerging Market currrencies
Source:compiled by Nedgroup Investments

How do you deal with the bad news?
Have a well diversified portfolio, which includes offshore. You must learn the lessons from the late 90’s and early 2000’s. If you want to live in SA then you are exposed to South African inflation. The best way to fight the real enemy, which is inflation, is to have enough assets close to you which have offshore exposure within them; then you can seek even more offshore exposure with the remaining assets. Remember the rest of the world’s balance sheets are significantly weaker than ours. Let’s acknowledge that our leadership isn’t the best in the world but look around with the exception of Germany’s Angela Merkel, there aren’t many shining examples.

Oh and you may have noticed … I didn’t even mention the Irish victory over the Springboks!

Barry O’Mahony



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