“What does a Ukrainian victory look like?” we ask him. He raises his eyebrows, winces and takes a full seven seconds before speaking – realising, it seems, that millions of people depend on his answer: “Victory is being able to save as many lives as possible.”
Oliver Carroll of The Economist, recounting an interview with President Zelensky on 28 March 2022
Dear Clients
Last year brought some much-welcome growth to investment portfolios, but the first quarter of 2022 has seen us take a few steps back, with markets reacting to both the war in Ukraine and inflation concerns.
As you will see from the above chart, South African equity markets have faired better than global equity markets – buoyed primarily by the resources sector. The Rand has surprised us, having strengthened relative to the US Dollar and running at an inflation rate that is below the global average.
For South Africans, investing offshore should form part of a sensible diversification strategy. The events of the past quarter have been a healthy reminder that moving a very high percentage of your portfolio offshore comes with risks, particularly for retirees who are drawing an income from their investments.
In a recent presentation to advisors, Coronation estimated that, at a minimum, investors should have 20% of their wealth offshore. For those living in South Africa and drawing an income from their investments, an offshore allocation in the range of 20% to 40% is considered optimal.
Of course, each investor’s circumstance is unique, and this will ultimately determine the appropriate offshore allocation for that individual.
What do we mean by “offshore investments”?
When we say “offshore investment”, you might interpret this to mean a direct investment offshore in a foreign currency. But many South African Unit Trust-linked investments also include offshore exposure. This level of offshore exposure is carefully constructed by the portfolio managers, who ensure that your asset allocation is in line with the fund’s mandate. For this reason, many local Unit Trust portfolios have been impacted by the global market downturn of Q1 2022, but often to a lesser extent than direct offshore investments.
What should you do? Nothing. Sit tight and wait for offshore markets to recover.
The question with no answer
How long will the war in Ukraine last? Some say months, perhaps years. Putin is aiming for an 09 May victory, to mark the anniversary of Russia defeating the Nazis in World War II. But the odds are not stacked in Russia’s favour to secure a military victory within this time frame. A protracted war will harm both the West and Russia, as sanctions eventually take their toll on global trade.
There is however one absolute certainty: Russia’s political and economic position on the global stage has been irrevocably damaged, and as a consequence the people of Russia will ultimately pay the price of Putin’s war. Or, as the Financial Mail’s “Finance Ghost” puts it:
“We’ve crossed the Rouble-con. The relationship between the West and Russia probably won’t be the same again for decades, if ever.”
Since offshore markets are currently letting us down, can we rely on South African markets for growth?
The JSE All-share Index was up 4.4% in the first quarter, but it has had a bumpy ride. The factors that have buoyed us up (e.g. demand for resources) are anticipated to remain in place while the war wages on. The recent Moody’s upgrade of SA from “negative” to “stable” was off the back of government managing to successfully contain debt for the past two years. This bodes well for investors. However, the build-up to the ANC elective conference in December will become increasingly noisy and may spook investors as politicians wage their war on the public stage.
As always, we lean on portfolio diversification as a tool to manage your investment risk in the midst of uncertainty. We love Carl Richards’ sketches, included above, which capture the essence of what is meant by investment diversification.
Kind regards
The Team at HMA