A Cool Head in Hot Markets: effects of local and global forces on investments

You can never be too comfortable or too canny when it comes to investments. In a world that is ever-changing, there are going to be ups and downs, not to mention the occasional unexpected swoop one way or the other. Many factors affect the markets – which are built on speculation and perception – and your reaction may be just one link too many in a chain reaction that can unravel years of quiet progress.

So don’t let emotions govern your decisions. Despite disturbing events, keep a level head and analyse the facts. Upheavals, whether local or international, invariably have only temporary effect. Provided you have a well-considered, diversified mix of holdings that addresses your personal short and long-term goals, there are basic investment principles that can help you minimise risks while taking advantage of global opportunities.

Global themes

There are basic, everlasting themes that will remain essential and relevant to your individual goals and needs. Keeping global change in perspective, you may find you can actually benefit from this fluctuation through thematic investing. Maintaining a comfortable level of risk, you can still work towards larger objectives such as retirement, while investing in global themes – a key component in many of today’s personal portfolios in a transforming world.

“With the massive changes occurring today, there is no better time to think about how to implement big themes in your portfolios.” ~ Michael Hartlett, Chief Investment Strategist, Merrill Lynch Global Research.

Nenegate… Pravingate… Zupta… Downgrades… Brexit… Trump…

Recently in South Africa, we have had our fill of greed, corruption and disarray. Markets never like uncertainty and so the effects have been negative in many ways. Despite the comings and goings of finance ministers, the endless saga of the Guptas, and the punishment of downgrades, there have been signs of cool heads in a volatile market. In addition, we have had to process gloomy forecasts surrounding Brexit and the Trump presidency in the US.

However, despite initial ripples and wobbles around these local and global events, markets have maintained a reasonably steady course. Predictions of a wild rollercoaster ride have not as yet materialised. Globally, markets have steadied more quickly than expected, and in some instances have climbed. Many investors are either wisely waiting it out, or actively seizing the opportunities presented by these changing circumstances. The boat may list from time to time – but it has nowhere near sprung a leak.

The cool head view

Based on reactions of markets to these potentially damaging conditions, it’s clear that developing investment portfolios with sound fundamental building blocks is the vital key to coping with what are generally ad hoc irrational or even radical events. While local and global disruptions may draw attention and concern, reaction should remain measured with a consistent, well-considered long-term view.

United States: Signs of economic improvement in the US are continuing. February factory orders rose at the fastest pace in 2.5 years, auto sales are impressive and retail and internet sales indicate the consumer is spending. Manufacturing is coming back after being stalled for years. So for the moment, the economic outlook is still cautiously positive.

Brexit: Despite dire predictions, no recession bloomed in Britain in the aftermath of the vote. Instead, with British ‘stiff upper lip’, the nation has seemingly gone about its business. However, there are still many uncertainties around the actual implementation of Brexit and the ultimate effects of that. “UK growth will continue to surprise on the upside in 2017,” said Marian Bell, a former member of the Bank of England’s Monetary Policy Committee. “The economy is still benefiting from pre-referendum monetary stimulus, boosted by precautionary post-referendum policy loosening and the concomitant fall in sterling, while the impact of Brexit itself has not yet been seen.”

South Africa:
  • Results of the government reshuffle will mean that GDP growth forecasts are set to be lowered, and interest rates may rise later this year.
  • Downgrades mean that the cost of raising finance has risen – and government will see their cost of borrowing money for 10 years jump from 8.4% to 9%.
  • Rating agencies have downgraded their assessment of SA’s finances quite sharply since the changes. Without urgent reform in product and labour markets that allow greater entry by new firms and a reduction in impediments to job creation, there will be little in the way of confidence, investment and growth.
  • However, emerging markets remain the flavour of the year so far, and foreign investors bought R1.6bn of our bonds last week, raising the 2017 total to R35.3bn.
  • The IMF’s view on South Africa remains relatively positive, although they have some significant concerns. In particular, the IMF highlighted that SA’s near-term recovery remains insufficient to keep pace with population growth.
  • It all depends on how the politics play out in the next year. There is no doubt that investors (both domestic and international) will systematically re-assess their involvement in the country over the coming weeks and months, with a view to making longer-term strategic investment decisions.

A world view: The IMF released their April 2017 World Economic Outlook (WEO) last week, revising up their 2017 estimate of world growth by 0.1 percentage point to 3.5%. The IMF still expects the world economy to accelerate meaningfully over the next two years, helped by cyclical recovery in investment, manufacturing, and trade. This, according to the IMF, should be supported by reduced deflationary pressures, and buoyant financial markets.

An ear to the ground

At Foster Wealth we understand an investor’s concerns regarding instability and uncertainty. Keeping our clients’ trust in our good judgement is vital to effecting the kind of relationship where sound counsel helps investors to make the right decisions at the right time. Nobody can guarantee that a negative market may not be detrimental – but we have built the tools, systems and expertise to minimise risk as much as possible – not to mention the agility to dodge the slings and arrows of a nervous market. We’re the cool head and the clear vision you need to maintain confidence, seize opportunities, and steadily build wealth.

Find us at: www.fosterwealth.co.za

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