After the widely expected firing of the Minister of Finance and his deputy in the dead of night by President Zuma, there is a high level of disbelief and despondency amongst most South Africans this morning.
Zuma’s actions are not dissimilar in substance to the infamous “Night of the Long Knives” in Germany in 1934 when Hitler’s regime carried out a series of political assassinations to consolidate his power. There will be plenty of political analysis this morning, but at this point most of it will be speculation although the motivations for these political changes should be clear to any logical person. It is unclear whether the ratings agencies will implement an immediate credit downgrade at this time, but the market will nonetheless react to the uncertainty with the biggest immediate impact being felt in the financial shares and the currency.
One must be careful not to give into total despondency and rather be proactive and forward-thinking. The vast majority of our portfolios have at least 25% direct overseas exposure, and in many cases much more, which will benefit from the rapidly weakening Rand. Furthermore, we have substantial exposure to the large local Rand hedge shares which will also be beneficiaries of the weakening currency. Despite the excellent recovery in the bond market since the axing of Finance Minister Nene in December 2015, we have resisted the temptation to increase our bond exposure and the existing holdings are therefore all of short duration which will be better protected against the expected freefall in bond prices.
Property shares will move in unison with the bond market. However, as a result of our concerns over the high capital volatility inherent to this sector, we have again limited exposure to this sector despite its exceptional performance over the last year. There will also be some mitigation in that many of the property shares that we hold have international exposure which will be buffered by the weaker Rand.
Our cash holdings are well represented in all the portfolios and will continue to provide capital stability.
For a number of years now our investment strategy has been to diversify internationally as much as possible in order to protect our investors against the weak local economy and political uncertainty. In these harrowing times, these protection measures will start to shine with a possible surprisingly muted capital movement in our portfolios. Relative to our peers we have therefore been more conservatively positioned over the last year in anticipation of a possible hostile attack on the financial sector.
It is far too early for us to make substantial knee-jerk changes to the portfolios, but the next few days will be telling. However, rest assured that the carefully selected underlying funds in the portfolios will already be positioning for the changed political landscape. It is also certainly true that during times of extreme uncertainty, investment opportunities will emerge which must be utilised.
We therefore want to emphasise to our clients that our very conservative investment outlook will provide protection until more reliable information is available on which to base future long-term decisions. We will continue to closely monitor the situation and are fully prepared to take any additional measures to protect our investors’ wealth.
