with international equities sitting in negative territory over the past 18 months in real terms, South Africans that invested internationally have benefited from the exchange rate weakness
The effects of the 1997 Asian crisis, the 1998 market crash, weak international markets in 2000 and the recent attacks on the US have impacted on the accumulated savings of the average South African, along with investors worldwide.
Nonetheless, in world terms, the JSE Securities Exchange has been the best 12-month performer after Russia and it has weathered the World Trade Center attacks better than most, with an overall fall of only 5%-6%.
Furthermore, according to the S&P index, only 8% of world equities grew by more than 15% per annum between 1951 and 1999. South African equities have been notching up growth in the region of 25% pa.
And with international equities sitting in negative territory over the past 18 months in real terms, South Africans that invested internationally have benefited from the exchange rate weakness.
There is no denying, of course, that many South Africans have seen the value of their investments taking a knock of late. But equally it is clear that the JSE has demonstrated more resilience than most bourses and it was seen to be undervalued even before the Trade Center attack, whereas international equities were clearly overrated.
Also, the fundamentals of the SA economy are good: the deficit as a percentage of GDP is down from 8% in 1994 to 2%. Inflation which hit a high of 20% in 1986, is now 5%-6%, exports as a percentage of GDP, which were 38% in 1992, are now 60%, and so on.
Which is not to say that SA will not be hit along with all other trading nations by the world recession, but local bottling, packaging, short-term insurance and food companies are seen as good prospects. Value stocks in these sectors look good bets. On the other hand, small caps are also predicted to be in for a run.
Volatility is the order of the day, however, and in a climate of market turbulence such as this, the role of the investment adviser becomes even more important as investors seek direction, predictions and recommendations.
The difficulty is that conventional parameters are no longer reliable and naturally there are as many men as opinions.
Nor does it help that investors themselves in the current climate are often not clear on their quantifiable goals and objectives, which leaves them with a short-term view of any investment and a tendency to base their decisions on sentiment, rather than sound and fundamental investment planning.
Notwithstanding all these issues, the South African equity markets are seen to have selective upside potential in the medium term, arguably more so than many overseas bourses and there is a valid argument for including SA, to a small degree, in a diversified portfolio.
Typically South African advisers prepare a risk profile questionnaire for each client to assess the ground rules, for example, tolerance to risk, the effects of any market volatility, years to retirement and so on, prior to formulating any plans to create or restructure an investment portfolio.
Similar approaches are used internationally of course, but they need to be applied unfailingly to the South African market where selectivity is the order of the day.
Other considerations of note for advisers on SA investments would be the impact of local taxation on each type of investment, the need for updated information in a volatile, rapidly changing market and monitoring of values to ensure that any investment strategy continues to tie in with portfolio structures.
The majority of investment portfolios available to South Africans are either based on a single manager approach, or a fund of funds approach. Investors requiring access to their capital, but wishing to hedge their investments against the rand should do so via currency funds.
The most prudent basis for South African investment is generally via Financial Service-registered (FSB) operations.
There were at one stage many unscrupulous operators offering some very shady deals to the unsuspecting public. The majority of the FSB-registered operators are tied to branded household banks or finance houses in South Africa.
Moreover, South Africans have become wary of scams, rip-off artists and dodgy investment schemes due to the amount of coverage the local press has given to these matters.
The market is therefore far cleaner in this respect and recent changes to the Financial Advisory Bill have tightened up disclosure issues and provided investors with greater transparency.
Even though investment markets have been decidedly weak over recent years it remains prudent not to attempt to call equity markets by jobbing asset allocation, but rather to invest according to your client's tolerance to risk and volatility and place priority on selecting a fund manager to manage markets and the associated risks.
In recommending products, we tend to look to investment managers with an established track record, quality teams with a high level of people skills and depth, specialist skills in managing specific asset classes, providers with a broad product offering and companies that are able to negotiate their fees and commission structures.
Local investors were shaken by the 11 September debacle, taking their cue from international investment markets, but there has been something of a rebound from the markets.
Given these factors, we are advising our clients that this is probably the most inopportune time to sell off equities and put the depleted proceeds into cash and bonds.
We are also advising a broad-based investment strategy with a roughly 50:50 split between value style investment managers and those that are growth orientated, always providing that there is a fit with the client's risk profile.
Even in stable times, we take the view that investors cannot accurately predict regional or global markets and economic cycles on a 'buy at the bottom, sell at the top' basis and certainly the best approach in current conditions is to spread risk and to accept that it will be something of a roller coaster ride before markets settle down again.
A further factor is that South Africa continues to be lumped together with emerging economies, whereas it is more accurate to describe the country as a mix of first and third world and this tends to influence, incorrectly in my view, overseas investors' attitudes towards the market.
In fact, while once heavily gold and commodities dependent, the economy is now far more broadly based, South African exports are now diverse and the manufacturing base more extensive, in some instances extremely sophisticated and definitely less commodity orientated, thus providing considerable investment choice.
That has generated a sophisticated unit trust market and associated bond and derivatives markets.
South Africa also has to overcome a number of common, erroneous perceptions among international investors including: AIDS will destroy the labour force, the South African government is not delivering, SA will follow Zimbabwe, SA labour is expensive and uncompetitive, the economy is not growing and so on.
In fact the economy has proved repeatedly to be extremely resilient and South Africans are highly adaptive.
Also, contrary to common perceptions, the government is committed to a mixed economy with a capitalism tempered by benign socialism aimed at uplifting and empowering the previously disadvantaged.
In short, the country could be something of a safe haven for a portion of a diversified investment portfolio during turbulent times, always subject to selectivity.
In the medium term, South African equity markets are seen to have selective upside potential.
The JSE has proved more resilient than most bourses.
The South African Government is committed to a mixed economy aimed at uplifting and empowering the previously disadvantaged.
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