What to do in this uncertain market?

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Paul Leonard, CFP®, Regional Head: E Cape, Citadel

South Africa’s politics and markets are in turmoil. This is uncertainty; this is risk. Predictably, many investors are jittery and are now asking “What must I do? How should I be investing in this type of environment?”

The first – and most important – piece of advice that I can give is: don’t panic. There is no evidence that suggests that panic helps anyone, ever. The types of events that we have witnessed recently only serve to reinforce the importance of a sensible investment philosophy and process.

A well-diversified portfolio is particularly useful in times like these. But portfolios do need to be rebalanced from time to time.

If you have bonds in your portfolio, then this building block will be under pressure. It is, of course, South African government bonds that were downgraded to junk status so, hopefully, your asset managers have reduced your exposure to bonds.

The rand has already come under significant pressure and this is likely to continue, so the high conviction view for the balance of this year is to reduce exposure to rand denominated investments while raising exposure to rand hedge investments.

The shares of local companies which earn a large proportion of their revenue or profit in South Africa – such as local banks and local retail stores – are also probably not going to perform particularly well, so you want to reduce exposure to these types of companies in your portfolio as well.

Interestingly, and importantly, the good news is that some of the equity building blocks of your portfolio are likely to give you good returns. Our high conviction view is that overseas equities are likely to provide better investment returns than local companies in the coming year. So you will want to have greater exposure to international companies or those local businesses which are exposed to the global economy.

About two thirds of the income that is generated by companies listed on the Johannesburg Stock Exchange is generated outside of the country. Those businesses are likely to perform well if the rand devalues, so you want to have an increased exposure to those types of companies in your portfolio. For example a business which exports goods from South Africa and earns in foreign currency, or a foreign based retailer would be options to consider.

Hedge funds are often used to reduce the downside volatility of a portfolio and thus reduce the risk. It’s like an insurance policy. It may be expensive, but if you have a hedge fund strategy in your portfolio you probably want a higher percentage of hedge funds now.

Protected equity is a type of investment building block strategy where you do not share in the downside of the market so that if the market drops by, say, 5% your portfolio might only drop by 2%. That means that when the market starts going up again, your portfolio starts at a higher point. In uncertain times such as this you want more of this in your portfolio today.

As always though, do not get drawn into this blizzard of news and opinion. This is uncertainty and this represents a risk but if you have a well-diversified portfolio that considers uncertainty – it remains an appropriate strategy. In that case stick to it, avoid any knee-jerk reaction to market nervousness. And, as always get skilled advice.