Navigating the triple threat of elevated inflation, and high-interest rates and persistent uncertainty

The financial landscape in South Africa is currently grappling with a triple threat of uncertainty, high inflation, and elevated interest rates, posing challenges for investors to achieve their financial goals.

However, Izak Odendaal, Chief Investment Strategist at Old Mutual Wealth, emphasises that the return environment is not as bleak as some might assume.

Over the five years to end July Morningstar data reveals that the average South African balanced fund (ASISA MA High Equity) returned a respectable 7.5% per year. This figure stands almost 3% ahead of the average inflation rate of 5% over the same period, despite facing numerous challenges like the Covid pandemic, load shedding, and other unexpected events.

"While the current outcome is lower than the long-term real return expectations for balanced funds, it is essential to recognise that such returns are inherently lumpy. There are fat years and lean years, and investors should be invested during prosperous times to build a cushion for the leaner years," explains Odendaal.

Odendaal offers reassurance to investors, however, stating that market returns should improve in the years ahead. The real concern lies with clients drawing money from their investments as their income needs to keep rise with the cost of living, while returns have not necessarily kept pace. Inflation spikes and weak market returns can occur simultaneously since higher inflation puts upward pressure on interest rates, acting as a headwind for other asset classes. This can be a major headwind for market-linked income strategies in living annuities.

However, within this challenging environment, higher interest rates present opportunities for clients seeking steady income. Options such as money market and income funds become more appealing.

Odendaal further highlights that the current high inflation is temporary and already showing signs of decline, both at home and abroad. Lower inflation does not imply falling prices, but rather a slower pace of price increases. While high interest rates present a burden to borrowers, they provide opportunities for investors.

To structure robust portfolios in this uncertain climate, Odendaal emphasises three key principles: diversification, patience, and valuations. Diversification involves spreading the portfolio across different asset classes and regions to capture opportunities and mitigate risk. The allocation can be adjusted based on market conditions, where valuations play a crucial role. When an asset class appears cheap relative to history, investors can lean into it and reduce exposure when it becomes expensive.

Patience is vital in investment. Even if an investment appears cheap, it may take time to yield positive returns. Returns compound over time, making early investing crucial for investors' future financial comfort.

While there are no silver bullets to enhance returns or protect portfolios against lacklustre markets, tools such as hedge funds can improve outcomes. However, investors should exercise caution and thoroughly understand the role such funds can play in their portfolios.

Regarding global exposure, Odendaal expects that South African retirement funds will eventually move towards the 45% offshore allowance. However, considering the current weak rand and undervalued local markets, he advises against abrupt increases in global exposure. Incrementally increasing this exposure as valuations adjust locally and globally would be the opportune strategy.

Odendaal urges investors to remain calm amid economic and political fluctuations, emphasising that while returns may not meet expectations, outcomes haven't been catastrophic. The future will always be uncertain but focusing on factors under our control and adhering to sound investment principles will help investors navigate these challenges successfully.