By now all our clients should know that we believe in a diversified portfolio of assets. This diversification should not only be between the different instruments like shares, bonds, property and cash, but also between different geographical regions. Our clients should also know by now that we do not believe you should invest the money that you will require over the next two to three years in equities, bonds or property, because of the unpredictability of the markets. The one point that we do stress every time we engage with our clients, is that longer-term money – for seven, eight to nine years and beyond – should not be in cash, but fully invested in equities.
As we listen to the multitude of webinars hosted by the various fund management houses, we get a very clear message that the South African equity market is the place to be now. This is due to the fact that we have seen very little return out of South African shares over the last five years, making many good-quality companies very cheap. When we talk about South African shares, we exclude Naspers, which has delivered the same stellar returns we have seen from other international technology companies. The companies we refer to apart from Naspers, are the banks; retailers; and hospitality, food and beverage, insurance and other companies relying for their turnover predominantly on the South African consumer. The other sector in SA shares that is performing very well and should continue doing so, is the Resources sector. China is still the big driver of commodity demand and should continue to be so for some time to come.
The case for South African shares relies on a limited number of good-quality companies with cheap valuations and their ability to generate good returns even in the tough economic conditions we have seen over the last few years.
The case against investing in South African shares was discussed by us previously. It boils down to political will, or lack of it, towards making tough austerity decisions like cutting public spending; lowering taxes; getting rid of bankrupt SOEs; and working with the private sector. The elephant in the room is a possible debt default due to the increase in the debt-servicing cost (see graph below). Our currency remains highly vulnerable and given the desperate state of our economy, we would argue that the best risk-adjusted investment is still international equities for the longer-term investor.
