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Investors urged to look abroad even as era of cheap money nears its end

22 September 2021 Novare Holdings
Jacobus Brink, Head of Investments at Novare Holdings

Jacobus Brink, Head of Investments at Novare Holdings

Jacobus Brink, Head of Investments at Novare Holdings, encourages South African investors to stay the course on building an offshore portfolio as a buffer against mounting economic and political risks at home

A deep sense of angst has gripped international markets as the Federal Reserve and other major central banks consider gradually unwinding stimulus measures that helped propel asset prices to record levels.

Investors are also worried that the potential failure of China's second-largest property developer could spill over into the broader economy, the effects of which would reverberate across the world. Then there's Europe's energy crisis, lingering inflation concerns and fears that a resurgence in Covid-19 infections could upend the global economic recovery.

For investors here at home, the risk of moving money abroad may suddenly look much more daunting, primarily as the end of the era of cheap cash draws ever closer.

Wall Street strategists are hardly helping, with investment banks like Morgan Stanley warning of a plunge of more than 20% in U.S. stocks should the economy decelerate and company earnings get the squeeze. On top of that, China -- already locked in a worsening diplomatic spat with the U.S. amid questions of its human-rights track record -- has been cracking down on technology and education firms, resulting in a $1.5 trillion selloff in Chinese stocks.

Even so, diversification is the pillar of any portfolio and opportunities to grow your wealth abroad far outweigh those available in the South African market.

Besides, Africa's most industrialised economy is engaged in its own struggles. Internal strife within the ruling party and upcoming local elections will further stifle progress on structural reforms, deepening inequality and unemployment and extinguishing any hope of a catalyst to pull the economy out of its low-growth trajectory. The universe of available shares on the continent's biggest stock market has also been on the decline.

The World Bank expects South Africa's gross domestic product to expand 2.2% in 2022, well below the global average of 4.9%, trailing all other major economies except Brazil. While GDP numbers alone don't make or break an investment case, smart money follows growth, and South African policymakers have been caught flat-footed on almost all fronts compared to more advanced countries, or even their emerging-market peers, in providing the fiscal support needed to bolster the economic recovery.

Fed Chairman Jerome Powell is expected to provide clues this week on when the U.S. central bank could begin reducing bond purchases and how soon borrowing costs need to rise. The Fed has kept interest rates near zero since the onset of the coronavirus pandemic in March last year. It has also been buying $120 billion of government-backed debt each month to keep long-term interest rates low to stimulate the economy.

At the end of August, Powell said that bond purchases could start tapering off by the end of this year. A Bloomberg survey of 52 economists foresees that the Fed will probably indicate on Wednesday that it is moving toward scaling back monthly asset purchases and make a formal announcement in November. The survey also predicted the U.S. central bank would hold interest rates near zero through 2022 before delivering two quarter-point increases by the end of the following year.

Last week, the European Central Bank announced that it is slowing down asset purchases amid faster price gains and more robust economic growth. The Bank of England's monetary policy committee meets Thursday and must contend with surging inflation and a slowing economy, while dozens of policymakers from China to Switzerland and Japan to South Africa are also gathering to decide the course on rates or stimulus programs.

The S&P 500 is down about 4% from a record high on 2 September 2021, which, if sustained, will mark the first monthly decline in seven. European shares are near two-month lows, while South Africa's benchmark index is trading close to levels last seen in January. On Monday, the VIX Index, a popular gauge of stock market volatility, climbed to the highest since May.

A return to normal monetary policy is inevitable.

Tapering by the Fed will have far-reaching consequences for capital markets, especially vulnerable emerging countries like South Africa. On Monday, a global stocks selloff saw investors flee riskier assets to U.S. investments like Treasuries. While this demand is likely to soften the blow of any potential reduction in the Fed's bond-purchasing program, it's also an indicator of where money in a higher interest-rate environment is headed.

While a sustainable portfolio doesn't depend on market timing, it does hinge on proper asset allocation and diversification, and the current gyrations in international markets provide an excellent opportunity to get the balance right.

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Do you believe this is the toughest period for financial advice in many years?

ANSWER

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