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Making investment decisions in uncertain times

Business confidence is necessary for growth, but it takes a bit of growth to boost confidence.

Despite the world being in its 10th straight year of economic growth, many investors are feeling anxious about the current environment. Even though the US market continues to lead global stocks upwards, investors are having to deal with a lot of bad news.

“One just has to flick on the TV to see that there is no shortage of negativity out there,” says Reza Hendrickse, portfolio manager at PPS Investments. “Uncertainty is not new phenomenon – it’s a defining characteristic of markets – but at the moment there are certain key events that cause one to be a little bit cautious, mostly on the geopolitical front.”

The most pressing issue is what is currently happening in the Middle East after the attack on oil fields in Saudi Arabia. This has raised tensions in an already volatile region.

“In the US, you also have Donald Trump following a very unorthodox script,” Hendrickse adds. “And in the UK you have the ongoing Brexit saga.”

Historically stable countries under pressure

For decades these have been two of the most stable countries on the planet, but they are both experiencing significant political uncertainty. This is something South Africans are very familiar with as well.

“People are concerned about local politics and that is reflected in the levels of confidence,” Hendrickse points out. “Business confidence is back at the levels it was in the early 1990s – levels similar to some fairly dark periods in our history.”

The difficulty for South Africa is that confidence is self-reinforcing, both on the positive and negative side.

“So you have a bit of a chicken-and-egg situation,” Hendrickse says. “You need confidence to see a bit of growth, but you need to see some growth to shift confidence. South Africans tend to be fairly positive, but there isn’t a lot out there that is obvious to be positive about.”

To change that, Hendrickse believes there has to be an improvement in the country’s governance.

“I think that in order to see a resurgence in confidence, people need to see better governance in terms of more productive allocation of resources,” he argues. “That is what we need to lift the overall performance of the country.”

Without certainty of that happening, however, investors face a conundrum.

What is the long-term outlook for their local investments given the current malaise?

Local equities

“It’s easy to look at the levels of growth and unemployment locally and translate that into believing that equity returns on the JSE won’t be that good,” says Hendrickse. “But if one looks at valuations, there is certainly a lot to be said for there being better value in South African equities than we have seen for some time.”

This doesn’t mean that one should necessarily be pouring money into the JSE, but it does suggest that there are opportunities worth exploring. This is particularly the case at a time when other markets around the world are also facing their own challenges.

One of the particular fears that many investors have expressed lately is that we may be running into a global recession. Hendrickse, however, believes that this is not imminent.

“We don’t think recession is looming because China is stimulating its economy, the consumer is still fairly strong in the US, and central banks globally have moved into easing,” he points out. “Against that backdrop, even though growth has been slowing, we think a reacceleration is on the cards.”

Nevertheless, investors need to be prudent. Hendrickse believes they should focus on two strategies.

“The first is to have exposure to different asset classes, different regions and different parts of the market, and be prepared for more than one possible outcome,” he says. “Given how quickly things can change, one never wants to have a concentrated bet in favour of one particular thing, whether that is regionally or in terms of a style or asset class.”

Secondly, investors should not be scared out of growth assets, even when there is so much uncertainty around.

“Over the long term equities will give you the best long-term real returns,” Hendrickse says.

“So if you are looking for growth, you want to have exposure. The times to be underweight equities are when the market is outrageously expensive or when you see a looming recession coming. We believe that neither of those is currently the case.”

Brought to you by PPS Investments.

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