By Ruan Jooste of Business Maverick
While no one can predict the outcome of what will transpire in the year to come, the best thing investors can do is to remain disciplined, focused on valuations and identify opportunities in unloved, well-priced asset classes. In this context, volatility in market prices should be welcomed.
It’s tough for South Africans to have an optimistic view of the economy, not to mention their local investments. Last year, weaker nominal growth led to disappointment in government revenue collections, while a sovereign downgrade by Moody’s is looking increasingly probable in 2020. Eskom continues to keep consumers and cash conservers in the dark.
Add the numerous global risks in trade wars, geopolitical threats and an overhang of debt, underestimating a sharper-than-expected slowdown could spell disaster in 2020.
So what are local investors to do, to weather this looming storm? Should investors be preparing for a light drizzle or a full-on hurricane?
Herman van Papendorp, head of investment research and asset allocation at Momentum Investments warns that financial market volatility is likely to rise in line with the ebb and flow of market sentiment across asset classes.
As strange as it may seem at the outset, van Papendorp notes that local equities’ recent lack of returns may be a good indicator of better future returns.
In a yield-deprived global environment, van Papendorp believes South African fixed-income investments continue to offer very attractive real risk-adjusted returns to more than adequately compensate investors for idiosyncratic local risks. “Decent-yielding fixed-income investments have become a scarce commodity globally, as there has been an ever-increasing proportion of corporate and government debt in the developed world trading at negative nominal yields and even larger negative real yields.
“Local fixed-income investments, therefore, appear attractive in comparison, with vanilla bonds offering real yields of 4% to 5%; inflation-linked bonds [ILBs] having yields of about 3.75%, and cash yields a real return of around 2.75%.”