Our initial response to the cabinet reshuffle last week, has been to remain calm and avoid any panicked decision making given the heightened levels of political uncertainty, and how this has historically resulted in unnecessary loss of capital. What gave us confidence to stay calm, is our deep seated belief that our strategies are currently diversified enough to enable us to ride through this local political risk.
This week, our investing discipline is again brought to the test, after Standard & Poors announced that South Africa’s credit rating has been downgraded to junk status!
Investors should, however, be very careful not to panic and take steps that could damage their portfolios in the long run. The political situation is very fluid and if the current political direction is reversed in the months ahead, as some believe it could be, we could be closer to an excellent buying opportunity than the start of the descent.
How the Downgrade impact your investments:
Because more than half of the JSE is made up of non- Rand assets, the equity market typically rises when the Rand falls. What we are experiencing right now is exactly that, with Rand hedges rising and domestic shares (industrials, banks and retailers) falling. We expect more of the same, unless there is change in direction. We are well positioned for this this, but retain some balance as politics can change overnight and this could see a strong bounce back in the shares that have suffered in the last week.
Local Property shares
Local property shares are likely to remain under pressure, while those with foreign properties or earnings are likely to rise in Rands. The local shares tend to move in line with bond yields.
We believe that junk status is probably priced into bonds, but some further negative moves could follow.
While the Rand has weakened by 11% in the last week, it is at similar levels to the beginning of the year. We sense that it is still pricing in some hope that there will be opposition to the events of recent days. If the current path is maintained we expect it to weaken further.
We are currently maximum offshore exposure in our portfolios and any Rand weakness will increase the value of the investments in Rand Terms
We also need to acknowledge that we have a global backdrop that is supportive of strong returns from many South African assets, should the political situation stabilize. Commodity prices have recovered sharply over the past year and the drought in the north has been broken. The weak rand has underpinned strong improvements in the trade balance and the tourism sector has been booming.
On this basis, our response to the rising political uncertainty remains the same. We remain calm, and place a lot of trust in our highly diversified investment strategies to balance out short term performance outcomes in the face of these shocks and whether this will be a positive or negative change for the SA economy.
Diversification, is indeed the only “free lunch in investments”.
Bovest Investment Committee