The first – and most important – piece of advice that I can give is: don’t panic. The types of events that we have witnessed recently only serve to reinforce the importance of a sensible investment philosophy and process.
A well-diversified portfolio is particularly useful in times like these. But portfolios do need to be rebalanced from time to time.
The rand has already come under significant pressure and this is likely to continue, so you should consider reducing exposure to rand denominated investments while raising exposure to rand hedge investments.
The shares of local companies which earn a large proportion of their revenue or profit in South Africa are also probably not going to perform particularly well, so you want to reduce exposure to these types of companies.
The good news is that some of the equity building blocks of your portfolio are likely to give you good returns. Our high conviction view is that overseas equities are likely to provide better investment returns than local companies in the coming year. So you will want to have greater exposure to international companies or those local businesses which are exposed to the global economy.
About two thirds of the income that is generated by companies listed on the Johannesburg Stock Exchange is generated outside of the country. Those businesses are likely to perform well if the rand devalues, so you want to have an increased exposure to those types of companies in your portfolio.
If you have bonds in your portfolio, then this building block will likely come under pressure. It is, of course, South African government bonds that were downgraded to junk status so, hopefully, your asset managers will look to reduce your exposure to bonds.
Hedge funds are often used to reduce the downside volatility of a portfolio and thus reduce the risk. It’s like an insurance policy. It may be expensive, but if you have a hedge fund strategy in your portfolio you probably want a higher percentage of hedge funds now.
Protected equity is a type of investment building block strategy where you do not share in the downside of the market so that if the market drops by, say, 5% your portfolio might only drop by 2%. That means that when the market starts going up again, your portfolio starts at a higher point. In uncertain times such as this you want more of this in your portfolio today.