The current state of the local and global economies makes a compelling case for the ‘old adage’ of diversifying one’s investments. This is according to Eric Enslin, CEO of FNB Private Wealth and RMB Private Bank.
In the second half of 2015, economies around the world had to deal with challenges such as poor growth, currency volatility and inflation, amongst other factors. Emerging markets, in particular, were worst hit as a result of the flight of capital to more developed economies, the heavy reliance on commodity prices which have come under pressure and a depreciating currency.
South Africa, forming part of this grouping, has its fair share of similar challenges, exacerbated by concerns around the long-term impact of the current drought. Reviews by ratings agencies and the increase in US interest rates also forecast a tough outlook for the country.
Enslin says in light of all these factors, investors have to consider diversifying as part of their long-term investment strategy, and in the process, minimise the risk associated with the current economic adversities.
“Investors with high exposure to equities would have already seen the need to diversify their portfolios as the local market has come under severe pressure over the last year. The main aim of diversification is to limit volatility or risk within your portfolio and thereby smooth returns over time.”
He says it is important to have a planned diversification strategy in order to achieve your stated goals. Random diversification could lead to uncertainty with regards to what the outcome will be. Diversification also needs to take place over asset class, sector, geography and currency, amongst others.
In South Africa, investors will have a lot to ponder due to the number of adverse factors which continue to weigh heavily on the local economy.
“Compared to global norms where investors often explore opportunities in foreign countries; South African investors predominantly invest locally. On one hand, this shows confidence in one’s domicile country but it can be limiting in terms of maximising investment opportunities and one’s investment strategy.”
Enslin says it’s important to have a holistic investment approach because every region or country offers a unique opportunity.
“For instance”, he says, “some analysts have questioned whether emerging markets can deliver on their potential amid the challenges. However, emerging markets are hard to ignore as a source of return in a diversified portfolio.”