Euro crisis highlights emerging markets as safe havens

The current debt crises that are unfolding in both the US and Europe are continuing to unsettle markets worldwide. However, while it is important to be aware of such events, it is critical that investors do not respond by making rash decisions to restruct

According to Felix Ubogu, Head of Asset Consulting at Liberty Corporate, one of the consequences of the current crises is that investors may be considering new investment havens. “Emerging markets may be a valid consideration because they are not at the epicentre of the current European uncertainty; however, investors should keep in mind the reduced transparency, higher investment costs and significantly reduced liquidity when investing in these markets. The ongoing crisis provides cause for concern but while investment strategies should be reviewed regularly (at least annually), this does not mean that they should be significantly altered.”

“Emotions tend to kick in when one is making key investment decisions. People have potentially destructive behavioural biases, which can have a major effect on the decision-making process. As a result, it is important to develop an appropriate investment strategy whilst in a calm emotional state and ensure that it takes cognisance of the fact that markets will move up and down over time.”

Ubogu says a sustainable investment strategy should have a long-term focus that can weather market volatility. “If there is bad news happening in the market, investors should try to understand the source of it, and then review their investment strategy to assess whether it remains robust enough to endure through any market cycle.”

“Investment advisors are able to help clients come to terms with all of the uncertainty that has occurred in the market over the past four years. In fact, locally investors have reacted reasonably well by making prudent adjustments to their portfolios where necessary.”

He says one tool to help try and prevent investors making rash investment decisions is to construct a balanced portfolio. “A balanced investment portfolio is designed to ensure that in times of uncertainty, safe haven asset classes such as fixed interest and cash can to a certain extent defend the portfolio. Conversely, when markets pick up, the more growth-inclined asset classes, such as listed property and equities, will help to accumulate growth.”

“A balanced portfolio should also be managed by someone else to bring a measure of objectivity to the process. Even an educated investor or trustee may have certain biases in which emotions could come into play. A qualified third party may help to ensure that the client’s emotions do not negatively affect the investment.”

“An investment decision can often involve a judgment on which asset class is the ideal one to be in at any point in time. However, having a balanced portfolio in place, reduces the risk of a rash move and a wrong decision being made in the process,” concludes Ubogu.