Four key philosophies for wealth creation in turbulent markets

By: Maarten Ackerman, Citadel Chief Economist and Advisory Partner

Maarten Ackerman

Amid buoyant equity markets and impressive returns, the prudent investor recognises the imperative of fortifying their wealth against a risk premium. As markets surge and fluctuate, the need for astute wealth management strategies becomes ever more important – particularly for South Africans who need to measure and manage their wealth in global terms. This is also a year that is marked by several significant geopolitical factors, as well as elections in more than 70 countries, including the US and South Africa.

While the markets have been strong going into 2024, given the expectation that rates could start to decline later this year, we remain on the cautious side as we think that fundamentally there are still a lot of challenges in the pipeline.

It’s unlikely that the markets can sustain these levels based solely on positive sentiment or a handful of Artificial Intelligence (AI) companies that are currently doing well – at some point, we have to look at the economic fundamentals and recognise the impact that elevated interest rates will ultimately have on consumers and businesses.

 While higher interest rates act as a natural handbrake for consumer activity, they can also provide a tool for investors. While we are cautious on equity valuations and believe that there are several headwinds still to be faced, instruments like cash and bonds are offering value that we have not seen in the last decade – as inflation slows, these instruments could deliver inflation-beating returns at lower risk than equity.

There are several strategies to manage the risk-reward trade-off. This includes higher exposure to fixed-income instruments, incorporating high-quality defensive businesses in their equity portfolios, and incorporating gold and managed volatility products that can assist with downside protection in a more volatile trading environment.

Citadel has used four key investment philosophies to preserve and grow client wealth over its 31-year history. The first is to recognise that the future is uncertain and therefore investors need to diversify into multiple asset classes that will behave differently under various economic scenarios.

The second is that valuations must make sense. Equity markets have seen outperformance by a handful of businesses, which have driven them to new highs. When one asset class is in favour – such as high-growth technology and AI – this often means that other strategies like fixed income and investing for yield are ignored. These out-of-favour sectors may offer superior returns in the coming years.

The third key philosophy is that investor portfolios require diversification of assets across a range of countries, currencies and companies. South Africa is an excellent example of this. For the 10 to 15 years post-1994, South African investors had an investment period where the JSE was one of the top-performing stock markets in the world and property prices were growing – in contrast, we have now had a decade of low growth in domestic property and the JSE has been a laggard.

Lastly, it is critical to understand the investment environment and ensure that your asset allocation is optimised to preserve wealth when risk is higher. This is often an under-appreciated element in the wealth management relationship – investors often focus too much on their returns and not enough on the preservation element.

By adhering to the four key investment philosophies outlined in this article, investors have a reliable compass for navigating the complexities of the financial markets. While the journey to building wealth may be filled with twists and turns, those who remain steadfast in their commitment to these principles are well-positioned to achieve their financial goals and secure a prosperous future for themselves and generations to come.

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