Asset allocations in a post-downgrade world

Before we chat about the current asset allocation environment, let’s quickly roughly describe the term for those of us who may be unsure of what this means. Asset allocations broadly refer to the actual investment options – ie. when you invest money, it needs to go somewhere, and some of these options are called asset allocations.

Since South Africa was relegated to ‘junk status’ by two credit ratings agencies, investors have witnessed some currency depreciation, a shaken local equity market and a jump in bond yields. However, the aftermath hasn’t been quite as apocalyptic as some may have feared. This is mainly because the downgrades didn’t come as a huge shock, and many people had followed advice to prepare in advance and structure their portfolios in a way that would handle an uncertain investment environment.

Negative investor sentiment is still a major issue in South Africa, but fortunately, most people’s long-term investment strategies remain relatively unscathed. An article by Moneyweb summarises the current situation well, and provides some interesting insight to asset allocations.

Here’s a brief overview of some interesting considerations:

1. Bonds
Since the downgrades, bond yields have seen a significant leap, but some investors see this as market overreaction and consider it as an opportunity to increase exposure to this asset class.

It may seem contradictory to buy bonds at a time when many people are concerned about the government’s ability to repay capital and service its debt, but some investors believe that the potential yield is still worth the risk.

2. Geography
Post-downgrade, the South African Rand has come under pressure, but many investors believe that the currency is still strong enough to justify moving some funds offshore. If you have limited international exposure, the window of opportunity is arguably still open to add to your offshore assets.

3. Equity
Share prices of companies that don’t have a significant offshore component to their earnings, such as banks and retailers, have come under severe pressure in South Africa. It’s, therefore, worth considering some exposure in your local equity portfolio to ‘safe’ Rand hedges that earn most of their income outside of South Africa.

Since the credit downgrades, pockets of potential value have emerged in the South African market. It is challenging to get the timing right on these cheap local shares but they may provide nice rewards in the long-term if you do.

In our post-downgrade society, it is important to not have emotional reactions to crises. Rather, you should maintain an active interest in your portfolio and stay true to your investment philosophy once you have ascertained your risk appetite and financial goals. Don’t hesitate to arrange a meeting to discuss your asset allocations and investment opportunities in this post-downgrade environment.

Posted in Blog, financial planning.