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Ok. Got itCurrent market conditions demand a cautious approach focused on global diversification
‘It’s only when the tide goes out that you learn who’s been swimming naked.’ Warren Buffett
This quote from the world’s most famous investor is a reference to when Buffett made specific mention of many larger insurance companies, who found that their reinsurance protection was inadequate after the devastation of Hurricane Harvey. It suggests that it is often in testing times that it becomes clear who has been sensible in their search for opportunities, diligent about their risk assessment relative to the returns on offer, and has made provisions for the bad times.
Focal points for internationally focused investors
The challenges investors face today are pivotal. To avoid unnecessary risk when there is a pause or indeed reversal of the current global growth trend across economies and financial markets, one should focus on:
Global growth has recovered
Global growth has arrived. Alongside improved growth, global trade has also picked up, supporting more synchronised global growth and benefitting many export-led emerging markets, including South Africa.
Source: IMF World Economic Outlook (July 2017)
Excess liquidity results in low interest rates and high valuations
The impact of the central bank stimulus of printing money to relieve the financial crisis and provide more liquidity in the monetary system is that – as with all things in markets – the more there is of something, the lower its value; money is cheap. As a result, interest rates and bond yields remain extremely suppressed, and this liquidity has supported valuations of risk assets like equity and property.
Global debt is at historic highs, and is more widespread
Central bank liquidity is someone else’s debt – global debt levels are at historic highs. What’s more, these high levels of debt are now more widespread geographically and across sectors.
Inflation isn’t rising as one would expect from increasing employment
Despite this massive monetary stimulus and a fall in unemployment, inflation has been slow to increase. This has created significant concerns for investors and policymakers alike as they try and understand the true strength of the underlying economy.
Geopolitics and protectionism remains a concern
The world remains a fragile place, with ongoing nuclear threats, Brexit, protectionism politics, terrorism and increased populism across the developed world causing tension and uncertainty.
What is the potential upside of a low-return environment? Innovation and new technologies are emerging
Lower funding costs and a lower return from cash balances encourage companies to access more of their capital and use it for growth. With powerful environmental, economic and technological drivers, this trend is likely to have a meaningful impact on what the world looks like 10 or 20 years from now.
Structural change versus cyclical opportunity?
Many role-players will be forced to evolve their business models or face extinction. Technology-driven change is now accelerating rapidly. This highlights the fact that one will have to very selective about which opportunities to pursue.
Prices are high and earnings aren’t keeping pace, so be careful of the price you pay
The prices of risk assets have risen, but over the last number of years earnings haven’t quite kept pace with the price increases. In fact, the difference between earnings and asset prices has widened. What you pay for an asset is critical to the long-term return potential of your investment. It should be fair for the projected earnings growth, confidence in these projections, and the anticipated ‘cash-in-hand’ through dividends that you can expect to earn.
So, when the tide goes out, what is the outlook and what should you do?
In summary, economic growth has remained steady. International opportunities continue to offer diversification and access to higher growth and risk-adjusted returns, not just protection against rand weakness. Markets are, however, looking expensive relative to history and we advocate being selective on opportunities and the price you pay for assets. We anticipate volatility from geopolitical tensions, commodity prices and central bank normalisation of their balance sheets – moving from quantitative easing to quantitative tightening. As South African investors, we also must remember that the rand is not the only reason to invest globally.
At Nedbank Private Wealth, we therefore continue to advocate for a long-term and globally diversified, considered approach, carefully selecting investments with our robust and disciplined valuation process.
Part 2. A local perspective Why South Africa is at a cross road, and what this means for investors. |
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Part 3. Optimise long-term returns and mitigate risk in the current environment Why the Nedbank Private Wealth balanced portfolio is an ideal opportunity for long-term investors who want a diversified, proven, top-performing fund in the current environment. |
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