The ‘right’ investment strategies in an evolving macro environment

Izak Odendaal, Investment Strategist of Old Mutual Multi-Managers.

In an investment landscape that is constantly delivering new highs and lows as macro-economic conditions continue to evolve, it is key for investors to ignore excessive noise in the markets and avoid making rash emotional decisions which can turn a minor market hiccup into a real loss, impacting long-term returns.

This is according to Bruce Fleming, FPi Financial Planner of the Year in 2016 and a Financial Planner with Old Mutual Private Wealth Management, who says that in this environment investors need to focus instead on their long term financial goals, diversify appropriately and be guided by valuations. “As investors cannot predict markets, diversification is key in achieving investment returns.”

In general, successful investment strategies in 2016 were the strategies that were unsuccessful in 2015, says Izak Odendaal, Investment Strategist of Old Mutual Multi-Managers. “The listed resources sector was the worst performer in 2015, but the best performer in 2016. Although domestic bonds had a historically bad year in 2015, a 15% return was delivered in 2016, making it the top performing local asset class. Emerging market equities were pummelled in dollar terms in 2015, but outperformed in developed markets in 2016,” explains Odendaal.

Reflecting further on 2016, Odendaal says that although it was a challenging year, in many respects circumstances didn’t turn out as bad as expected, given the inauspicious note on which the year kicked off. “2016 started with global market turmoil, plunging commodity prices and emerging markets taking an especially hard hit. While there was heightened political uncertainty locally due to the conflict at the highest levels of government, South Africa emerged from 2016 with its investment grade credit rating intact.”

He says that in contrast, 2017 has kicked off better, with markets generally in an optimistic mood. “December was a strong month for global equity markets, with the MSCI All Countries World index returning 2% in US dollar terms, and global growth has improved. January similarly saw a return of more than 2% for global equities. The local economy is also expected to improve as the impact of the shocks of the past few years – including the commodity price slump, load-shedding, devastating drought, disruptive strikes and rising inflation – fade,” says Odendaal

Fleming says that while political and macro events can affect short term volatility, investment fundamentals and a sound, long term investment framework will essentially drive returns and performance. “In the short term, emotional decisions have a tendency to erode wealth, which can take years to correct. Instead it’s all about having clear short, medium and long term investment goals.

“The important thing to remember is the longer the time period of the goal, the more risk an investor is able to accept. However regardless of the timeline, any underlying investment should be part of a well-researched, diversified portfolio which can map returns against the investor’s financial objectives,” says Fleming.

The second rule to investment strategies, according to Fleming, is to develop a financial portfolio and investment framework that reflects the investor’s ultimate required financial outcome, as this will prevent knee jerk investment decisions. He points to offshore allocation as an example.

“Investors have become accustomed to the offshore component of their funds performing well as the rand depreciated by an annual average of 18% from the beginning of 2011 to the end of 2015. However, investors who panicked after ‘Nenegate’ and transferred their wealth offshore at the time – when the rand slumped to a record low of R 16.90 per US dollar –found that they lost more money as a result of this short-term investment decision, as the rand strengthened by 13% against the US dollar during the course of 2016. With that said, from a diversification and valuation point of view, it does still make sense for investors to have offshore exposure,” says Fleming.

Odendaal concludes: “There is no crystal ball, at least one that works consistently, and therefore appropriate diversification should be the foundation of any successful investment strategy. Investment returns will depend on an investor’s capital and ultimate lifestyle objectives, and by setting clear financial goals and constructing a well-diversified portfolio, investors can reach their financial goals regardless of the volatility in the market.”