Without a very disciplined approach and philosophy when setting investment strategies, investors are likely to find themselves all at sea in the current volatile market conditions, says Mohini Naidoo, Investment Analyst at Nedgroup Investments.
Investors are still reeling from recent market volatility, which saw the local market plummet some 20% off its all time high to its low in January 2008. Billions of dollars were wiped off global equity markets in January 2008 alone. February saw the depreciation of the rand to a 16-month low against the dollar, and consensus is that the local currency will continue its downward trend through the year. The contagion effects of the sub-prime crisis were strongly felt in local financial markets, and inflation targets continue to be threatened by spiralling commodity prices. Power outages are commonplace and have dealt a severe blow to public and business confidence. In 2008 foreign investors disinvested R9.2bn in a single month, the biggest sell-off in about seven years.
Naidoo says, "In this doom-and-gloom scenario, we asked three of our asset manager partners whether these are unprecedented historical events, and what steps we should be taking with our investment strategies."
Rowan Williams-Short' (manager of the Nedgroup Investments Balanced and Equity Funds) perspective on the current scenario is refreshingly different to the prevailing negativity: sub-prime is not an economic reality for South Africa and financial contagion always drifts away; nor do we suffer power outages alone. As to the massive outflows of foreign investment, Rowan maintains that there is no correlation between the level of the JSE and foreign investors' activity on the JSE, so this should not be a factor in any investment strategy. Rowan advises that investment options should be viewed dispassionately and from a long-term perspective. He maintains that recent events are categorically not unprecedented. We are enduring another repeat of cyclical pessimism, a base from which equity investing has often been very rewarding. In his experience, when temperamental investors are too greedy or too fearful, taking contrarian action has always been a good idea. He also reminds us of the positives - the latest GDP figures show that the economy grew at 5.1% last year to the envy of most western nations, and the country's fiscal position is very healthy.
Market presents buying opportunities
For Eldria Wagenaar (manager of the Nedgroup Investments Flexible Income, Bond and Positive Return Funds), the volatility has presented opportunity rather than uncertainty. She remembers the equity market fall of some 30% from its high in 2002, at which time it was difficult to even give equities away. This point of deep pessimism was in hindsight a tremendous buying opportunity with markets rallying for the next four years. At the start of 2007, the opposite was true with many investors ready to take on more risk. The quarter ended January 2008 was the first negative three month period in four years, and suddenly panic and distress were very much in evidence, only to have the market turn around again and move up, close to the old highs. Eldria cautions that risk on the currency has increased and said that some offshore exposure is a good way to diversify the risk of further currency weakness. She said that in the current environment of uncertainty, it has become even more important for investors to understand both their risk and return requirements and invest accordingly.
Build margins of safety
Neil Brown, manager of the award-winning Nedgroup Investments Growth Fund, sees the current volatility as a return to normality. He considers South African investors to have been quite spoilt over the period 2003 to late 2007, in which they enjoyed a strong local equity market and low volatility. Neil explains that the current events in SA, (such as electricity power outages and political uncertainty) might be different in nature to previous problems and events, but what is more important is to analyse how much "margin of safety" there is in current share prices. Neil's own investment approach is to invest in shares offering a decent "margin of safety" in their valuations, and to adopt a sensible diversification approach. He considers rand hedges to be offering decent value with a good margin of safety as investors have become despondent about the economy, currency and socio-political issues.
Naidoo concludes, "The rules to successful investing are simple. Keep your head, let your investment actions be guided by your intellect and not your emotion, and the chances of developing the blueprint for a successful investment strategy increase exponentially."