If you’ve read, listened to or watched the financial media recently you will have observed that…
• Our stock exchange has of late been at an all-time high, meaning that listed shares on the JSE are potentially overvalued.
• Our exchange rate has been weakening again, making our Rand worth less abroad.
• Global equity markets are reaching fuller valuations.
• Quantitative easing will likely be coming to an end in the US. Quantitative easing is a government adopted monetary policy to increase a country’s monetary supply, in order to further increase lending by consumer banks and consumer spending.
What does all this mean to us? What will the effect on global interest rates be? What about inflation in South Africa, which appears to be on the increase?
We are living in an uncertain environment with many unknowns. We don’t know what will happen next, but we do need to have a clear strategy to deal with these uncertain times. We believe your greatest strategy when investing in this environment is diversification. Diversification across asset classes, currencies and asset managers will give you the best chance of meeting your long term goals.
We recently attended a Morningstar conference where we got to hear a number of economists and fund managers discuss the current economic environment both locally and abroad. Delegates were asked to allocate weightings to the economic risks they were most worried about. The five choices were:
• Global debt levels and the end of US quantitative easing
• Geopolitical uncertainty (e.g. instability in the Middle East)
• Commodity prices
Quantitative Easing Rates High
Delegates selected quantitative easing (52%) as the biggest economic risk followed by geopolitical risk (18%) and inflation (16%). A panel of asset managers from Allan Gray, Foord, Investec and Momentum were then asked to comment on these findings. What was resoundingly clear from all the commentators was that we currently live in a very uncertain economic environment. A few of the asset managers gave equal weightings to the above risks saying that all were important.
What we found comfort in was when asked separately to comment on what they concentrate on most in the current uncertain environment, their answers were all in the same vein:
They said that your number one ally is Diversification:
• “Keep an even keel”
• “Don’t make any big bets”
• “Keep a close watch on the fundamental indicators.”
In summary, we don’t know what’s going to happen next in the world; nobody does. What we do know is that within your investments, we have a great deal of diversification, which is our best defence in these uncertain times.