Personal-Finance

How major events can affect our wallets

2017-09-18 17:37

Brexit, hurricanes in the Caribbean and US President Donald Trump signalling to North Korea that the gloves could soon come off are quite far removed from your reality here in South Africa, so you would be forgiven for thinking that they cannot affect you.

However, natural disasters, international politics and threats of war could affect your investments in ways that you may not have thought of because everything is linked in one way or another.

For example, war between North Korea and the US, or increased tensions between the US and China, could result in the Chinese buying less gold. China is the world’s biggest consumer of gold – according to the South China Morning Post, the country consumed 975.38 tons of the precious metal last year.

A slowdown in China’s gold consumption could have a major effect on South Africa’s economy, considering that the metal is one of our major exports.

“If China went to war, there would be a different mind-set altogether,” says Floris Slabbert, country manager at Ecsponent Financial Services.

“If no one is buying our gold, it will depreciate and mine workers will go on strike because there will be massive job losses. Anything that happens there, good or bad, will also have an impact on our local currency.”

If you think that you do not have international exposure because your investments are mainly in JSE-listed companies, you’d be wrong.

“Sixty percent of our stock exchange has exposure to the US and UK markets,” says Slabbert.

“So, any interest rate changes can have an impact here if the companies are listed abroad.”

For instance, Naspers has exposure to China through its stake in online giant Tencent Holdings, which it paid $33 million (R432 million) for in 2001. Currency changes, interest rate hikes and any political changes or threats to China could have dire consequences for your finances if your funds have exposure to Naspers.

If things are going well for South Africa, this could also have a negative effect.

John Orford, portfolio manager at Old Mutual Investment Group’s MacroSolutions Boutique, says: “For South African investors, a large part of the JSE is made up of companies that derive earnings and revenue outside of the country.

“With regard to companies such as British American Tobacco, Mondi Group and Naspers, their rand share price will go up because they benefit when the rand weakens as they are earning outside of South Africa.

“It is a double-edged sword. What we saw in 2016 was that the stronger rand created a bit of a headwind for equity markets.”

Local disruption 

We have also suffered some shocks locally. The firing of then finance minister Nhlanhla Nene in December 2015 resulted in the rand spiralling downward and investor confidence declining. Many believe this was a contributing factor in the country being downgraded by international ratings agencies.

This, coupled with political inertia and corruption, has resulted in a great deal of uncertainty in households as well as businesses.

“Companies and households have been crying out for certainty so that they can decide how to spend their money,” says Orford.

“Long-term purchasing decisions, such as buying a house or a car, can be affected. If you are a company, you do not invest in a new plant or store unless you think that you can make a return on that investment.

“Companies are either holding off on investments or looking for opportunities abroad, and this is unlikely to change until they have more certainty. This has a negative effect on job creation and job opportunities.”

What can you do?

As explained above, major events can cause havoc locally and abroad. You never know when disaster may strike and, often, few can prevent or predict it.

But if something major were to happen, here are some tips you should follow:

1. If you’re in it for the long term, stick to your guns “Over the long term, the best strategy for investors is to remain invested in a long-term strategy. The funds we run have gone through tough times,” says Orford.

2. Consider your international exposure carefully

You may think that you want to protect your money by investing abroad because you don’t agree with the local status quo, but you have to be careful about how much you are exposing yourself to events that could happen abroad.

“Depending on your portfolio, 35% to 45% of it could have exposure to international markets – but this would also depend on your risk profile. Check your current exposure before you decide to take more money abroad,” says Slabbert.

3. Make sure you can afford the financial hit

If you want to invest in cash investments because of their potential safety, consider whether you can afford to do so. Equities may provide you with more income and interest.

“If you have more exposure to bonds, your yield will be low. If you have a short-term investment goal – say, one to three years – then invest in the money markets,” says Slabbert.

4. Don’t have knee-jerk reactions “The problem with any market decision is that you have already missed it,” points out Slabbert.

5. Get advice “Talk to your financial adviser and find out what your best strategy is,” says Orford.

“If you are approaching retirement, you need to invest in more conservative funds. Remember, though, that if you retire at 60 or 65, you will still need some exposure to growth assets – particularly at a time like now, when investors have been burnt by a period of low returns.

“The risk currently is that interest rates will fall, so switching into cash right now may not be the best thing.”

What are black swans?

In business terms, a black swan refers to an unpredictable or unforeseen event that has extreme consequences, often on a global scale.

We have had several black swan events throughout history, including the Wall Street crash in 1929, the dotcom bubble collapse in 2000, the September 11 attacks on the US in 2001, the fall of Lehman Brothers in 2008 along with the 2008 financial crisis, and the Japanese earthquake in 2011.

Black swans may happen once in a lifetime or every few years. They can occur at any time. The key is to be prepared and diversify your investments. If you are invested in only one asset class – property, for example – you could lose
all your money if a black swan event results in a property price crash.

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December 10 2017