SA Investors face rising uncertainty in 2008, but long-term fundamentals still solid

Going into 2008, South Africans are facing what could prove to be the most difficult investment conditions in many years, what with disposable incomes under pressure, highly uncertain local and global political and economic conditions and significant financial market volatility.

But Old Mutual Unit Trusts MD Anil Thakersee urges investors not to make hasty decisions based on fear but rather to remain focused on the long-term through the turbulent months that lie ahead.

“Around the world this year, political turbulence is making itself felt from the US and Russian presidential elections, Iraq, Iran, Pakistan and Kenya, to name but a few examples,” says Thakersee. “Just as worrisome is the extent of the US growth slowdown, the global slowdown, the threats of stagflation and inflation, recent equity market sell-offs and lingering fears in credit markets from the sub-prime crisis.”

In South Africa the situation is equally gloomy. “Consumers are faced with high inflation, high interest rates, high debt levels and high oil and food prices. At the same time, financial markets are volatile and there is a risk that political turbulence will add to this during the year.

“Investment returns are also deteriorating,” adds Thakersee. “Now that the long bull run in equities has slowed (the JSE returned just under 20% in 2007, about half of the returns of 2006), there’s no more ‘free lunch’ in which investors can get high returns for little risk. More conservative investment solutions are starting to deliver lower returns, so investors are confronted with difficult choices regarding what to do with their savings.”

He warns that individuals should avoid the temptation of saving less to maintain their high spending levels. because this would result in higher inflation eroding the value of their savings base. “It’s best to stick to your long-term financial plan and, if possible, redouble your efforts to save and cut discretionary spending elsewhere. Highly indebted individuals should consider paying off high-interest debt, like credit cards.”

With interest rates currently relatively high, Thakersee says it is a good time for retirees to lock in attractive yields from certain fixed income unit trusts. “It’s important to remember that we’re in a short-term up-cycle in what is part of a longer-term structural inflationary and interest rate downtrend in the economy,” he points out. “Older people should take advantage of this.”

Meanwhile, individuals who are two or three years from retirement should consider absolute or targeted return unit trusts, which aim to provide inflation-beating returns, while also preserving capital. “These types of funds make sense in a higher-risk, lower-return environment,” notes Thakersee. “However, make sure you choose your solution carefully, as there is an extremely wide array of investment strategies within the absolute return category. Some funds have as little as zero exposure to equities, while others have equity exposure of up to 96% and thus more risky.”

Finally, investors with longer time frames should be brave and ride out the turbulence, he says. ”Don’t abandon your equity exposure – over the longer-run equities will continue to outperform other asset classes and offer better real returns. Investors could also consider asset allocation funds; relying on the experts to determine the best asset allocation for a given risk profile. Ironically, these funds have proved popular during the bull market, so some people are already positioned correctly for turbulence.”