17 Nov Global Assets – Now is the Time
Global Assets are Calling
No time like the present to diversify into global assets
Increased volatility in the financial markets, heightened risk aversion, depreciation of the dollar, the possibility of a US recession, and increasing oil and gold prices are just some of the issues making the headlines of business newspapers. It is easy for investors to become unsettled with all the noise around.
Many of these developments are a direct consequence of the collapse of the US subprime mortgage market. Banks became reluctant to lend each other money, causing a broader credit crunch. Investors also withdrew funds from banks with subprime exposure, placing further pressure on banks. The crisis spilled over into other credit markets. Weakness in the US housing market, and the credit crisis, sparked fears of a US recession. This led to investors becoming increasingly risk-averse and leaving share markets.
Let’s take a look at the commodities markets and global assets costs.
Crude oil prices hit record levels two weeks ago on concern about tight global energy supplies. Oil prices have increase almost 50% over the past year and some economists are suggesting that prices may break the $100 a barrel by the end of the year.
High oil prices and sustained dollar weakness have resulted in a very bullish environment for gold. Gold benefits from a weaker dollar because it is priced in dollars and it allows buyers with relatively stronger currencies to buy the precious metal cheaply. Higher oil prices also lead to concern about inflation, while gold has traditionally been regarded as a safe haven in times of uncertainty.
In SA the rand has been very strong against the major currencies. There are various factors contributing to rand’s recent appreciation. One is the global commodity boom. Speculators wanting a piece of the global commodity boom have sought exposure to the rand. Investors have been piling into South African assets – especially equities – which has resulted in an appreciation of the currency.
The practice of “carry trade” may also have led to rand appreciation. This refers to speculators borrowing at a very low interest rate and then investing in stronger currencies that have higher interest rates. SA has been a destination for carry traders as it has higher interest rates. By increasing interest rates, the South African Reserve Bank has acted contrary to other central banks, which have lowered interest rates to ease the global credit squeeze.
The announcement of the R36.7bn cash purchase of a 20% stake in Standard Bank by the Industrial and Commercial Bank of China would also have supported the rand. It is interesting to note that this deal surpasses the R33bn that Barclays paid for about 50% of ABSA a few years ago.
If you do not have offshore exposure, or do not have sufficient offshore exposure within your portfolio, now may be a good time to purchase global assets. However, remember that the decision to invest offshore now must not be an attempt to time the market but must be an asset allocation decision – an attempt to have the right global asset mix between onshore and offshore assets.
In times of uncertainty, it is essential that you remain focused on your long-term investment objectives. Attempts by investors to time the market usually result in higher risk and lower returns. You should have an investment strategy devised in consultation with your financial planner. Your investment strategy should be developed specifically to meet your needs, with a recommended time horizon and an asset allocation that is reviewed on a regular basis.
Prudent investors will remain fully invested in their diversified portfolios over the long term, review their needs on an annual basis and make investment decisions based on changes in their requirements – not on the behaviour of the markets.
However, Global assets may not be the best investment for YOU. It is advisable to consult with your financial planner to determine the appropriate investment strategy for your portfolio. Visit the website of the FPI on www.fpi.co.za to select a qualified certified financial planner if you do not have one.
Netto-Jonker, CFP, is founder of Netto Financial Services and was financial planner of the year in 2001. Her colleague and business partner Ian Beere BCom BCompt (Hons) CA (SA) CFP was awarded the financial planner of the year in 2007.