Balancing a long-term investment view with short-term volatility

How can we navigate the squeeze while searching for the light at the end of the tunnel?

Marco van Zyl CFP®

Marco van Zyl CFP®

Senior Executive and Private Wealth Manager

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Balancing a long-term investment view with short-term volatility

Interest rates are at multi-year highs, economic activity is at long-term lows, and inflation is above 7%.

Additionally, the prime lending rate is at 11.5%, the highest level in almost ten years, while the Rand is at its weakest level versus major currencies - R19.75 to the US Dollar at the time of writing.

Add to this structural issues such as load shedding and a crumbling infrastructure and South African consumers and investors are feeling the squeeze from all sides and are left wondering what to do.

As custodians of our client’s finances, we are tasked with answering these questions. However, each client’s challenges are unique, and therefore each should meet with their financial advisor to obtain advice tailored to their specific requirements.


What are some of the scenarios we should consider?

With interest rates at a multi-year high, placing short-term funds is relatively easy, with money market funds currently delivering 8% or more. It is, however, important for taxpayers with a marginal tax rate above 18% to note that this return is below inflation on an after-tax basis. This may be acceptable for short-term funds waiting to be used for other purposes.

The conundrum for clients with a long-term investment horizon is this: short-term rates are attractive, while the JSE Alsi has delivered reasonable returns over the past 12 months, primarily because of the weakening Rand on the multinationals. SA-focused companies offer good value at current levels, and bond yields also look attractive. With a long-term view, you should place funds into the bond and equity markets at these levels.

However, the menacing dark clouds of the war in Ukraine, stubborn global inflation, and high interest rates continue to pose a risk to the local market, and if any of these surprise negatively, the results could be dire for the South African market.

There is also an ominous feeling that things could get a lot worse in South Africa, with the risk of more severe load shedding and the negative impact this will have on employment and inflation. These factors have seen the Rand at record lows against the major currencies, making it difficult for clients that wish to protect themselves against local risks to move funds offshore.


With what seems to be risks everywhere, what should we do now?

It is important to remember that you very seldom need to make significant, one-time decisions. In my experience, these usually lead to regret as invariably, after you have acted on these decisions, additional information comes to light that would have changed your decision, or some unforeseen event occurs and scuppers your plans. I recommend using the “iterative decision-making process”, where you decide on the overarching plan, proceed with a small action in this direction, re-assess the results, and then repeat. This enables you to start moving in the desired direction without feeling overwhelmed or taking the risk of dire consequences should the timing be wrong.

While there may be no perfect time to deploy capital into an investment, there is a strategy that can limit potential capital losses.

Instead of making a single, large investment, deploy the funds over several months. This strategy allows you to achieve an average of the market over the period. The potential negative, however, would be if the market does well while you are not fully invested. However, being partially invested would be better than not being invested at all. Similarly, follow the same process when moving money offshore; don’t try time foreign exchange rates.



This article features in the 2023 Issue 3 edition of the Proficio, NFB's bi-monthly financial update newsletter. Download the complete newsletter here.


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