Junk status … cash under the mattress?

Notes on surviving the current storms brewing.

Junk status for South Africa has been dominating economic news for months now and as it is increasingly looking inevitable; investors are jittery to the point of full scale anxiety about what this will mean for their investments.

The good news is the investment world is a big place and while the local market will most certainly take a knock – on a similar spectacular scale to what happened in the wake of the well publicised Nenegate of late last year – there are opportunities elsewhere.

The outlook for the local market has been rather bleak for years, not only since the most recent economic and political events, and savvy investors have started to move larger portions of their portfolios offshore. Brenthurst advised clients to do so five years ago and through this achieved some protection from the drama playing out in South Africa and the consequent decline in US dollar values across various local asset classes.

The key to surviving the current storms brewing is a balanced portfolio that includes a range of asset classes but with a focus on international exposure. A well balanced portfolio should provide exposure to equities, local and international bonds and the money market.

Although several leading economies are not growing at any impressive rate, there are sectors, industries and companies around the world with excellent future prospects and these will continue to deliver acceptable and in cases even impressive returns. This includes the healthcare and biotech sectors, supported by the significant ageing ‘baby boomer’ generation and their need for health care as they are living much longer than previously imagined. Selected technology stocks continue to do well, supported by the demands of the so-called millennials, and the many companies selling global brands in several countries and regions have experienced continuous growth. The world’s biggest brands like Apple, Sony, Nestlé, Nike, Samsung and others do experience lower demand in some countries but are so dominant that they continue to deliver smooth growth. A distinct benefit in times of market drama.

Moving more money to cash in the current heightened volatility is also a good strategy. This way in investor is well positioned to take opportunities when available.

Although some commentators are holding out slim hope that a downgrade to junk can be averted, consensus amongst 60% of CEOs surveyed – as mentioned in Business Day – is that it is a certainty. Alex Pestana, Portfolio Manager at Counterpoint Asset Management, agrees that the downgrade to junk status is highly likely but expects this only in the second half of the year and not in June as some have speculated. According to Pestana the downgraded growth expectation announced in the budget address, at a paltry 0.9%, was after S&P’s last grading. “Growth remains the challenge, and increasing debt levels to keep the economy going is just not a good plan.”

Pestana notes that the 2016 budget did not go far enough in raising taxes, mostly out of fear of the political fall-out should, for instance, VAT be raised. “A lot of what was expected did not materialise. The guarantees provided to state-owned enterprises is another big worry. Especially given the fact that South Africa does not save enough. If the junk status happens substantial amounts of capital will leave SA as it is a requirement of many institutional fund investors that investments not be held in countries with junk status.”

Another huge worry lying ahead is the so-called ‘strike season’. Rising inflation, driven especially by food inflation and higher electricity costs, have reduced spending power and there will be pressure for well above inflation wage increases. “If these are met, the situation will indeed be grave,” Pestana says.

History has shown there have been good and bad periods for investments and markets over very long periods of time. This is something that will always remain as a result of the many factors which impact and influence the direction markets take. The JSE didn’t fair too badly over the past six years post the crash of 2008, however there were other opportunities abroad which did considerably better which we could not get access to via the local markets.

In order to ensure successful long term investment strategies through good and bad times investors must review and adjust asset allocation as effectively and as efficiently as possible. This would include taking into account the current and expected future market environment as well as taking into account tax implications any adjustment will have on immediate and future investment capital. This is an ongoing process which is best attempted with the guidance of a professional financial advisor who can regularly review income levels, asset allocation, performance, impact on capital and current market environment based on personal circumstances, to mitigate risk and ensure successfully achieving investment objectives.

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