President Jacob Zuma’s decision to fire former finance minister Pravin Gordhan and the subsequent downgrade of the country’s sovereign credit rating by S&P and Fitch have raised fears that South Africa could enter a downgrade spiral. Under such a scenario, many foreign investors would become forced sellers of local bonds, money would leave the country and the rand would depreciate. With the currency a key driver of inflation, the inflation rate would accelerate and South Africans’ wealth would erode a lot faster.
Graham Tucker, portfolio manager at the Old Mutual Investment Group’s MacroSolutions boutique, says a large portion of the South African equity market is geared towards a weaker rand. Shares like Naspers, Anheuser-Busch InBev and Steinhoff would likely benefit if the rand depreciates.
The average pension fund will probably have about 25% invested in offshore assets and while a weaker rand will probably lead to inflation moving higher, it shouldn’t be bad news for an investor’s pension fund. It is important to understand the difference between the economy and the market, he says.
“We are not saying we are going to enter a downgrade spiral, but if we do, that will obviously have an impact on inflation, but your average pension fund should be able to still deliver good returns going forward.”
Recent political developments have led many investors to re-evaluate their portfolio positioning and have arguably increased the perceived attractiveness of cash investments.
“It [a cash investment] gives you that feeling of safety and security in the short term, but in the long term it doesn’t give you what you need in order to achieve your financial freedom.”
Investors are generally very aware of the risk of losing money in the short term, which is why they consider a cash investment, but they are very unaware of the risk of being in cash over ten years, adds Zain Wilson, portfolio manager at MacroSolutions.
“The real killer is inflation.”
Over the past 87 years, cash has delivered a return of 6.9% per annum on average. During the same period, inflation was 6.2% a year, while the local equity market delivered 14% per annum.
Tucker says selling equities because the asset class is not performing exactly as expected or due to a knee-jerk reaction often leads investors down the wrong path. It is important to assess the fundamental environment to determine if selling is appropriate.
